Essays on the proposed monetary integration in the southern African development community

Abstract

The objective of this thesis is to evaluate the readiness of SADC economies to complete the process of monetary integration in the region and to form a monetary union and adopt a common currency. This is done against the backdrop of optimal currency area (OCA) theory. Given this objective, the study hypothesizes that the majority of SADC economies in the region are potential candidates to bring the proposed monetary union into existence sometime in the future, if not in 2018 as proposed by SADC secretariat. The study uses a mix of different methodologies ranging from developing a conceptual framework to empirical investigation in order to answer the research questions and to test the hypotheses. In addition to theoretical reviews and discussions, four findings emerge as fundamental from the four essays. First, from the Triples test the study has not found significant evidence to reject the null hypothesis of „structural symmetry‟ among ten SADC member countries. 10 out of 15 members (i.e.66.67 percent) have exhibited structural symmetry in their real business cycles over the study period. However, close to 50 percent of the member states have weak cyclical co-movements with a low relative intensity. Taking the experience of the EMU where just five countries are able to create havoc in the entire union, we can safely say that the findings from the combined three tests from the first essay confirm that there is still work that needs to be done to coordinate economic policies in the region to improve real economic integration before entry into the proposed monetary union in 2018. In Essay 2, the study finds that the generalised purchasing power parity (GPPP) hypothesis holds for SADC economies given the stationary panel of RER series with one cointegrating relationship as exhibited by trace statistics and the existence of a long run co-integrating relationship amongst the system of real exchange rates. This implies that there is potential for relative prices to converge in the region in the long run, hence SADC is a potential OCA, based on the criteria of price convergence. However, the slow speed of adjustment towards GPPP long run equilibrium should be a warning for the possible ineffectiveness of policy to defend these countries against external shocks. In Essay 3, the Brock, Dechert, and Scheinkman (BDS) test and Fourier approximation confirm the non linear nature of real exchange series in SADC economies. This finding further supports an OCA in the region comprising those countries included in the study. The findings in this essay further strengthen the findings from the previous two essays that claim that member states could constitute a monetary union in the region at some future date. Lastly, the fourth essay, using a long run dynamic panel model finds that there are common policy variables determining the real exchange rate (RER)/ the real effective exchange rate (REER) series of SADC economies. The RER/REER equilibrium analysis reveals that SADC economies are characterised by persistent misalignment. This calls for further policy coordination and policy harmonisation in the region. By considering findings from all the four essays the study finds that nine SADC countries can potentially constitute SADC-OCA namely; Botswana, Madagascar, Malawi, Mozambique, Seychelles, South Africa, Swaziland, Tanzania and Zambia. Angola and Mauritius disqualified from a SADC-OCA at least for the sample period considered in this study. Lesotho, DRC, and Zimbabwe are not included due to data limitations, otherwise Lesotho could join the qualifying group of countries given long experience with the Common Monetary Area (CMA). To reap benefits SADC economic integration initiatives, it requires realistic time span, political will, common understandings and awareness, commitment and self-disciplined policy actions from member states and their fellow citizens.