Analysis of the convergence in West and Central Africa:Cluster analysis of the economic performances.

Details

Supervisors

Béreau, Sophie

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

The choice of the exchange rate regime implies trade-offs between different values. There do not exist a perfect regime as such and all of them has their positive and negative effects on the economy. It is thus important that politics choose the exchange rate regime that has a significant effect on the welfare of all the economic agents in a country. A currency union is an exchange rate regime in which all members in the union share the same currency and the monetary policies, for the whole union, is jointly determined. A currency union give more currency credibility to its members especially to those that have low historical fiscal performances. Nevertheless, a currency union can be costly to its members. It deprives them of their monetary sovereignty and exposes them to severe external shock. In order to reduce the cost of a membership in a currency union, the union should exhibit an important characteristic. The economic shocks in the union should be asymmetric so that monetary policies in the union has the greatest impact on the monetary region as a whole. To make the shock asymmetric, regional integration should thus be promoted. In this thesis, we analyse the monetary unions in West and Central Africa to estimate the cost and benefit of these unions for their members. First, we analyse the gravity model of trades and FDIs (Foreign direct investments) to determine the effect that a currency union can have on bilateral trades and investments. Then, we run a cluster analysis on the economic performances of the different countries in the unions. Cluster analysis enable us to group objects (countries) into groups (clusters) based on their homogeneities. These homogeneities will be assessed via multiple variables that find their root in the theory of optimum currency area. Results of our cluster analysis show that WAEMU countries (West African Economic and Monetary Union) show the highest convergence among the three regions (WAEMU,CEMAC and WAMZ). This high convergence may reflect the pack of convergence criteria that has been impose to the economy of the different members. CEMAC (“Communauté Économique et Monétaire des Etats de l'Afrique Centrale”) countries do not group well together, some CEMAC countries were located in the WAEMU cluster meaning that they show a greater similarity with WEAMU countries than they do with CEMAC countries.