By Jared Osoro
Don’t we all love Dr Pangloss, a key character
in Voltaire’s 1762 satirical classic, Candide, who had an incurable
sense of optimism?
Dr Pangloss touted his credentials as a
self-professed optimist by espousing to all who cared to listen a thesis
that they lived “in the best of all possible worlds” and that “all is
for the best” in this best of all possible worlds.
That is why when the five East African Community
heads of state appended their signatures to the Protocol for the
Establishment of the East African Monetary Union during their November
30, 2013 Summit in Kampala, it was Pangloss that was on our minds, not
Greece.
It is easy to understand why. This was an act
beyond symbolism. For a bloc whose integration has moved steadfastly to a
Common Market, a framework towards the penultimate level of the EAC
integration agenda is clearly as logical as it is an opportunity for
introspection.
The ambition of the EAC partners to have a
monetary union has been obvious for as long as their integration agenda
has existed. What passes as credible debate so far regarding the
monetary union has been its cost-benefit analysis.
This is an old debate, pioneered by Economics Nobel Laureate Robert Mundell five decades ago.
The key advantages underlying the EAC’s zeal for a
single currency are lower transaction costs and the elimination of
exchange-rate volatility among the partners.
The overwhelming conviction is that these
advantages will more than compensate for the disadvantages — loss of an
independent monetary policy and the use of the exchange rate as an
economic policy instrument.
The proof of the pudding is in the eating, so it
will take an economic jolt for one to determine the extent to which the
advantages surpass the disadvantages.
If the shocks are symmetrical among the economies
in the monetary union, then it will be able to counter them and the
economies adjust to desirable positions.
The opposite is when the shocks are asymmetrical
and unrelated, a scenario where the cost of adopting a monetary union is
much higher given that each economy needs a different monetary policy
response. It is reasonable to assume that at the core of the protocol
are areas of co-operation aimed at addressing asymmetrical shocks.
Granted, asymmetric shocks cannot be avoided. If
such shocks are small, then the loss of an independent monetary policy
may not be too costly. But if they are not, then the task is to ensure
that the economy in question is able to adjust quickly and smoothly to
return to stability.
How do you ensure that there is quick and smooth
adjustment? Take a scenario where two EAC partners are hit by adverse
shocks with unemployment rising in one and falling in another.
More flexibility in both labour and wages will
facilitate adjustment. I can only assume that this aspect has been taken
care of under the EAC Common Market that allows for free labour
movement within the bloc. I use the word assume advisedly because there
have glitches on the labour movement front thus far.
What of supply disturbances? It is here that
fiscal policy enters the equation. The economies subjected to supply
disturbances will obviously not sit on their hands and watch but will
exercise their sovereign mandate of restoring a desirable economic order
by way of expenditure and tax measures
No comments :
Post a Comment