By Adamu Muhammad Hamid, PhD
Brazil and Argentina, giants of Latin America, recently finalized arrangements to adopt a single currency. According to reports, this move came as their strategy to strengthen regional economic cooperation and reduce the reliance of Latin America on dollar. Simply put, a single or uniform currency is when a number of countries join their currencies into one currency operational in their territorial domains. The main example of this is the introduction of the Euro by the European Union. The common currency was conceived for trade in the two countries, and it is hoped to be adopted by other countries in the region. Though the two countries have decided on the move, details about the methodology are blurry. Argentine President Alberto Fernandez said it was not yet clear how the sole currency could function in the region but Brasil’s President Lula da Sylva and he agreed that depending on foreign currencies for trade was harmful.
Brazil’s Finance Minister Fernando Haddad said the adoption of a common currency was not designed to replace the Brazilian real or the Argentine peso. And he reportedly added that the conceived currency is yet to have a name or deadline, nor would the two countries seek a monetary unification that is of euro-style. One wonders what these statements mean.
Experts highlight that it took European countries decades to reach a point where member states became satisfied that they were ready to proceed with a common currency. And even after adopting the common currency, the process went through a sustained period of coordination and high level alignments in macroeconomic policies. There are arguments for and against the adoption of single currency in a region, and below are some of the issue which the two countries may grapple with.
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When the common currency is finally adopted, the participating countries in South America would reap enormous advantages. For example, the costs of converting currencies will be Eliminated. Inter-currency conversion between real and peso or between both currencies and the dollar has a cost for individuals and firms. A single currency for the two countries will remove these costs, thereby easing and increasing volume of trade. The move will also increase price transparency. Prices in different currencies are usually difficult to compare. Common example is that individuals often travel around with a calculator to check the price of something in another country. If everything is in the same currency, price comparison is straightforward. This would promote economic cohesion between the countries. The adoption of common currency will also increase competition and efficiency. A single currency encourages greater competition as there is greater transparency in prices; they are made to go down, thereby increasing efficiency as firms are forced to remain competitive.
Other relative advantages are that single currency leads to increased inward investment. Europe had the greatest story to tell when they adopted the Euro. As countries adopt a single currency, it adds up to the possibility of increased inward investment from the rest of the world into Europe. They had less need for investment outside of their territories. Common currency has also the capacity for the elimination of exchange rate uncertainty.One of the problems associated with trading with other countries is that you never know which way the exchange rate will move. It may move in your favour, and sometimes negatively against you. A single currency gets rid of all this uncertainty within the single currency zone, and should encourage trade (within the zone). As uncertainty reduces, associated risks are also lessened. Further, single currency promotes trade Improvements. When transaction cost in cross-border businesses are eliminated in using a single currency, this leads to increased trade among nations. Going by these benefits, Brazil and Argentina would realize an economic potential against external forces on their economies never experienced before.
The above attendant advantages cannot just be considered as given. The two economies must work hard and persevere associated teething problems. They must also work against the following odds which are some of the dysfunctionsof common currency adoption. First, the two countries are likely to lose financial autonomy. Loss of financial autonomy by individual countries is imminent and both countries will have to be subjected to one monetary policy, which would likely lead to policy decisions capable of benefiting one country at the expense of the other. Again, one policy may have different effects on the individual countries. Differing policy effects result even when countries are uniform. It is possible that a single policy will have different effects on different countries. For example, a much larger proportion of people own their own houses in the UK than the people in many other European countries. This makes the UK much more reliant on mortgage lending. A change in interest rates may then have a different effect on the UK from other countries. Single currency may also result in External Shocks. External economic shocks may have adverse effect on countries. A close example could be a rapid rise in oil prices or the adverse effect of corona pandemic. This may affect different countries in different ways, depending on how strong a country is. There is also the tendency for Transition costs – moving into a single currency economic union involves short term transition costs (which would disappear once the new currency was fully established). For example, new money has to be issued and the old withdrawn. As experienced in Europe, uniform currency led to loss of jobs. Foreign exchange departments may shrink in some financial institutions and other related businesses. If this happens many citizens are going to lose jobs.
Having discussed briefly the pros and cons of the adoption of a single currency by Brazil and Argentina, the question that comes to mind is, is the move likely to succeed? First, it is difficult to believe Argentina and Brazil would actually move in the direction of common currency given the discrepancies in their economies at the stage now. Blanco, head of Americas at risk consultancy Verisk Maplecroft, described the talks on unifying the currency as “a “flamboyant” announcement designed “to bring major attention to an otherwise inconsequential” regional summit. As it is now, neither Brazil nor Argentina is enjoying the political or economic conditions necessary to provide smooth ground to such a fundamental shift, which would accordingly take decades to roll out effectively.
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Despite the seeming accompanying advantages, it is rather difficult for Africa to contemplate single currency. It is difficult for Africa or any region in the continent to implement common currency majorly due to poor institutional quality or weak institutions. In Europe where common currency was implemented, it is a region characterized by strong institutions that work. Institutions able to provide conditions conducive for a major shift such as adoption of common currency would have to be strong and virile. Financial institutions in Africa literally serve the whims and caprices of strong individuals. Majority of African countries lack functional systems. Their central banks aren’t capable of developing and pursuing currency policies that work. The Central Bank of Nigeria is currently battling with the systemic failure of the implementation of currency redesign.
Another important factor on the way between Africa and the implementation of single currency is poor democratic principles. The weak democracies are emasculated and asphyxiated of producing the right leaders to develop policies and implement them. The weak democracy has just been producing inept rulers who think of themselves as bigger than the institutions of their countries. Examples abound where leaders do not respect agreements within their countries, much less of agreements or pacts among countries in a regional cooperation or policy. The regional volume of trade which is the major purpose of common currency is also likely to be a mirage because of African countries’ over-dependence on import from Europe and Asia. In addition, most of the economies in Africa are unstructured. The changing balance of output, trade, employment, etc. are not drawn from different economic sectors (primary, secondary or tertiary). Common currency does not flourish in monolithic economies. So, though there are lessons to learn from Argentina-Brazil’s bold attempt at unifying their currency, in Africa we must first address the overweening weakness in our system before contemplating anything economically dramatic but useful.
