By Amath Ndiaye, Associate Professor University A. Diop Dakar
In the current debate on the CFA franc, the argument of an overvaluation of the CFA is often invoked to say that it harms the economic competitiveness of African countries in the franc zone.
First of all, for the sake of clarity, it is necessary to distinguish between two notions of economic competitiveness: price competitiveness and structural competitiveness. As you can guess, the first is related to price developments while the second relates competitiveness to structural effects.
Price competitiveness is the ability to produce goods and services at lower prices than competitors for equivalent quality. It is based on the ability to produce at lower costs than those incurred by companies in the same sector. Price competitiveness therefore depends on the relative levels of production costs, producer margins and nominal exchange rate levels. The nominal exchange rate is nothing other than the price of a currency in relation to other currencies.
Structural competitiveness is the ability to sell one’s products or services independently of their price, but with other arguments (quality, innovation, after-sales services, image of the brand, delivery times, ability to adapt to diversified demand, etc.). This type of competitiveness takes time to build because it is based on customers’ perception of the offer, a perception that is itself built over the long term according to the satisfaction obtained in the past. It also requires a lot of investment to develop and maintain the specificity of the offer. Thus, the structural competitiveness of an economy depends on infrastructure, public governance, the business environment, the quality of human resources, macroeconomic performance, among other factors.
The countries of the CFA zone have a good price competitiveness
To measure the evolution of the price competitiveness of an economy, contrary to the detractors of the CFA, one must refer to the real exchange rate and not to the nominal exchange rate. Indeed, the real exchange rate is the indicator that takes into account both prices and the nominal exchange rate. In view of data provided by the World Bank between 2000 and 2017, the real exchange rate, countries in the CFA zone such as Côte d’Ivoire and Togo have experienced gains in competitiveness. Indeed, the real exchange rate index has dropped from 100 to 99 for Côte d’Ivoire and from 100 to 93 for Togo (1). At the same time, it increased in China and Nigeria, from 100 to 120 and from 100 to 105, respectively.
China, which has lost in price competitiveness, its index has risen from 100 to 105, still continues to flood the African market with all kinds of products. Through it, we realize that competitiveness is determined by several factors outside the price or nominal exchange rate (currency rate).
What African countries outside the CFA zone gain in price competitiveness with the depreciation of their currencies, they can lose with the inflation induced by this same depreciation. They are victims of what economists call inflation through the exchange rate or « exchange rate pass-through prices ». This phenomenon may explain why, over the period 2000-2017, Togo and Côte d’Ivoire have better price competitiveness than Nigeria.
In addition, for a sub-Saharan Africa economy that specializes in the export of primary commodities, depreciation of the currency does not often translate into market share gains, for several reasons. The first is that commodity prices are fixed in dollars on the international market and that their fluctuations make the producing countries vulnerable. In an upswing in prices, export earnings increase more by the effect of price improvement than by the effect of a growth in the volume exported. In fact, highly constrained production capacities often do not make it possible to increase production. In a phase of declining prices, often as a result of declining global demand, export earnings and export volumes fall. A double dip that often leads to depreciation of the currency, higher imports, high inflation, an increase in debt service and a deterioration in the balance of current account. Venezuela and Sudan, which are currently struggling in a crisis, economic and socio-political, are illustrious examples. When South Sudan seceded, the country was cut by 75 percent of its oil revenues. A shortfall accentuated by the fall in the price of a barrel. In 2018, the value of the currency collapsed and inflation rose by 70%, commodity prices exploded; such a disaster scenario could have been avoided if the country had a more stable currency. The CEMAC countries, with a more stable currency, the CFA, have been more resilient in the face of falling oil prices.
Limiting oneself to nominal exchange rate or real exchange rate indicators does not take into account the many determinants of economic competitiveness.
For a more comprehensive analysis of competitiveness, it is necessary to take into account all of its structural determinants. The aim is to assess the competitiveness of the institutional (property rights, public governance), economic (macroeconomic stability, labor market) and social (health and education) sectors. To this end, structures such as the « Forum World Economic « (WEF) offers composite indices. For example, the Global Competitiveness Index (GCI), or Global Competitiveness Index, is refined in the light of expert testing and feedback. This index takes into account more than a hundred indicators grouped into different axes to assess the economic conditions of countries, whatever their stages of development. These indicators are considered as key drivers of productivity and competitiveness. (2)
An analysis of the data provided by the WEF in its 2018 report shows that African economies in general are cruelly lacking in competitiveness, which is particularly true in sub-Saharan Africa. While the world average is 60 (showing that no country in the world is 100% competitive), the competitiveness index in sub-Saharan Africa is 45.2 out of 100. In addition to ranking the region as last world ranking; this score indicates that sub-Saharan Africa does not even reach the minimum threshold of half of the maximum score, ie 50 out of 100.
According to the statistics provided, 17 of the 34 sub-Saharan African economies studied in the report are among the 20 worst performing. While no African country is among the top 10 most successful economies in the world, eight countries in the region are among the 10 least competitive countries. Note that only two countries in the continent (Mauritius, South Africa) have a competitiveness index higher than the world average (with respectively 63.7 and 60.8), while Chad occupies the bottom of the continental and global table (140th). out of 140 countries) with an index of 35.5.
The lack of economic competitiveness of Africa south of the Sahara is therefore structural; which explains why it can not take advantage of the opportunities offered by AGOA and the « Everything But Arms » Agreement (3)
AGOA’s in-depth review found that while trade flows between program beneficiaries and the US have almost tripled by 70% through AGOA, they reflect the lack of competitiveness. African economies. They continue to export primary products and are unable to offer manufactured products. The situation is the same with regard to the « Everything But Arms » Agreement, which gives African LDCs the possibility of exporting their products to the European Union without paying a customs duty. This under-utilization of AGOA and the « Everything But Arms » Agreement is, in large part, due to supply-side problems in Africa: capacity constraints, lack of diversification of production, lack of infrastructure, institutional weaknesses, economic difficulties, inexperience in marketing and marketing, political risk and problems related to the requirements of the US and European and US markets, among others.
In conclusion, economic competitiveness basically consists in setting up a dynamic of structures capable of adapting to changes in production processes and global demand. Exchange rate developments can only have cyclical effects, and for African economies heavily dependent on the export of primary products, stabilizing the currency provides greater resilience to exogenous economic shocks.
Source: Data Bank World Bank, https://data.worldbank.org/indicator/px.rex.reer.
The real effective exchange rate for a given country is an index that expresses the relationship between its national prices and the prices of its main trading partners. When it goes up (down) it means that the country wins (loses) in price competitiveness.
The global Competitiveness Report 2018. World Economic Forum / World Economic Forum.
AGOA: African Growth Opportunities Act, is an American law passed and promulgated in May 2000 by the US Congress, under the aegis of President Bill CLINTON.