Welfare gains, risk-sharing and Africa’s monetary union projects

Abstract

Purpose – The purpose of this paper is to investigate the welfare gains from risk sharing among African countries and regional groupings in Africa that are planning to establish monetary unions either in the short or longrun. Design/methodology/approach – The paper empirically tested two hypothesis; potential welfare gains and unexploited welfare gains. It uses a utility-based measure to quantify the gains that would accrue from joining a risk sharing arrangement such as a monetary union. The regional groupings considered include the African Union (AU), the Economic Community of West Africa (ECOWAS), the Southern African Development Community (SADC) and the East African Community (EAC). Findings – The results provide support for both hypotheses. Overall, the average potential welfare for AU, EAC, ECOWAS and SADC groups under full risk sharing are found to be 1.9, 2, 3.4 and 1.6 percent, respectively, each higher than the 1 percent estimated for the OECD countries and 0.6 percent for the 14-EU countries. The average unexploited gains are, however, even bigger for AU at 3.5 percent, ECOWAS at 8.6 percent and for SADC at 2.6 percent. Practical implications – The finding of enormous potential welfare gains could partly reinforce the desire of the African countries to establish monetary unions. On the other hand, the paper provides insights to policy makers in designing policies to promote risk sharing given the finding that the unexploited welfare gains are on average still too low – implying that many African countries or groups still have very low risk sharing. Originality/value – Previous studies on welfare gains and risk sharing have basically left out the African regional groupings and never related the issue of gains to the monetary union projects. Besides, previous studies focus on unexploited welfare gains at the expense of total potential welfare gains. Considering the two types, however, presents a more complete picture of total gains from joining any risk sharing arrangement such as a monetary union.