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Monetary Dependence in Africa: the Case of Sierra Leone

Published online by Cambridge University Press:  11 November 2008

S. R. Dixon-Fyle
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Extract

The exchange rates of several African countries have historically been specified as units of certain ‘master currencies’ of former imperial powers, notably the pound sterling and the French and Belgian francs. The fact that these countries might notionally be said to have belonged to ‘common currency areas’, the Sterling Area and the French and Belgian franc zones, has variously been commended and criticised. To some observers, the break-up of such monetary groupings, following the establishment of national currencies by some African governments shortly after independence, was a retrograde step. This process had offered no alternative basis for rationalising regional monetary and economic co-operation. Others have emphasised the limitations under such arrangements as regards national freedom of initiative in managing exchange rates – even though they would accept that some restrictions may not be inconsistent with the logic of common currency arrangements.

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Articles
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The Journal of Modern African Studies , Volume 16 , Issue 2 , June 1978 , pp. 273 - 294
Copyright
Copyright © Cambridge University Press 1978

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References

page 274 note 1 G. K. Galbraith, in reviewing tradition in contemporary economic analysis, observed that ‘The most commonplace features of neo-classical and neo-Keynesian economics are the assumptions by which power, and therewith political content is removed from the subject [economics]’; ‘Power and the Useful Economist’, in American Economic Review (Providence, R.I.), LXIII, 1, March 1973, p. 2.

page 275 note 1 See Lall, Sanjaya, ‘Is “Dependence” a Useful Concept in Analysing Underdevelopment?’, in World Development (Oxford), III, 11 and 12, 11 1975, pp. 799–810.Google Scholar

page 275 note 2 ‘Aidcon’ and ‘Tradecon’, the measures of economic dependence used by Barbara Stallings, are simple ratios of aid or trade flows from or to a major source or destination to total aid and trade, while her ‘Commcon’ is the percentage of the value of a country's three main exports to its total exports; Economic Dependency in Africa and Latin America (Beverly Hills, 1972). Patrick J. McGowan has correlated these measures with selected indicators of economic performance in Africa in an ‘empirical’ test of ‘dependency theory’ ‘Economic Dependence and Economic Performance in Black Africa’, in The Journal of Modern African Studies (Cambridge), XIV, 1, March 1976, pp. 25–40. Using no less rudimentary measures of ‘dependence on trade’, ‘dependence on private foreign investment’, and ‘dependence on foreign technology’, Little, I. M. D. arrived at the surprising generalisation that ‘poor countries tend to be large, relatively strong, unspecialised, and independent’ ‘Economic Relations with the Third World: old myths and new prospects’, in Scottish Journal of Political Economy (Edinburgh), XXII, 3, 11 1975, pp. 226–7.Google Scholar More constructive measures of dependence do exist; see, for example, Weisskoff, Richard and Wolff, Edward, ‘Development and Trade Dependence: the case of Puerto Rico, 1948–1963’, in The Review of Economics and Statistics (Cambridge, Mass.), LVII, 4, 11 1975, p. 472.Google Scholar

page 276 note 1 Of the more interesting studies, see Reynolds, Clark W., ‘Achieving Greater Financial Independence for Latin America: a proposal’, in World Development, III, 11 and 12, 1975, pp. 839–44.CrossRefGoogle Scholar

page 277 note 1 Easily the most influential study is that by the International Monetary Fund entitled ‘Impact of the 1971 Currency Realignment on the Trade of Developing Countries’, Document SM/72/73, Washington 1972. A factual record of the various currency changes prior to and following the 1971 re-alignment is contained in ‘How Did We Get There? A Banker's Diary’, in The Banker (London), September 1973, pp.1005–12.

page 278 note 1 This analysis is of responses by African monetary authorities to a questionnaire survey initiated by the Association of African Central Banks, supplemented by information collected through interviews by the author of officials in a number of African countries while he was a consultant to the United Nations Economic Commission for Africa.

page 278 note 2 More African Sterling Area countries would have moved their pegs from the pound had they not agreed under the Sterling Area Agreement of 1968 (the so-called Basle facility) to maintain a specified proportion of their official external assets in sterling in return for a limited guarantee of their dollar value. See the U.K. Government White Paper, The Baste Facility and the Sterling Area (London, 1968), Cmd. 3787.

page 279 note 1 While the institutions and functions of foreign-exchange markets could be incorporated more formally in an economy-wide model, to do so here would not materially advance the argument of the article. The technically inclined reader is referred to an interesting example of this in Galbis, Vincente, ‘Monetary and Exchange Rate Policies in a Small Open Economy’, I.M.F. Staff Papers, Washington, D.C., XXII, 3, 1975, pp. 316–20.Google Scholar

page 281 note 1 See Dixon-Fyle, S. R., ‘Economic Analysis for a Devaluation Decision’, Bank of Sierr a Leone, Freetown, 1967,Google Scholar although much of the material used remains classified.

page 282 note 1 See Bank of Leone, Sierra, Economic Review, Economic Trends, and Annual Reports (Freetown),Google Scholar and International Monetary Fund, Direction of Trade (Washington), passim. It is highly significant that such multilateralisation is virtually impossible to explain in conventional ‘dependence’ terms because both the concentration measures of the ‘aidcon’ or ‘tradecon’ type and the tests which attempt to correlate them with certain indicators of economic performance are probably meaningless and possibly irrelevant. See Stallings and McGowan, op. cit.

page 282 note 2 The latest development plan although technically an improvement on earlier plans has, like them, been largely bypassed in actual project choices and expenditure appropriations even by the Government itself, and largely discounted by the private sector. Some foreign institutional finance has gone into agricultural and infrastructural projects.

page 284 note 1 Much of the recent macro-political analysis of the economic power of large foreign firms is relevant here, even though the mechanisms of influence on decision-making are often inadequately analysed. See, for example, Sunkel, Osvaldo, ‘Big Business and “Dependencia”’, in Foreign Affairs (New York), 04 1972, pp. 517–31.Google Scholar

This is part of a wider problem which is receiving increasing academic attention. In 1973, I noted ‘the existence of an almost totally neglected range of conflicts, effectively operating to distort national purpose, frustrate autonomy and peŕpetuate domestic inequalities within developing countries, which derive from the proliferation of “anti-social” coalitions between the political/administrative bourgeosie, elitist and professional classes, entrepreneurial and labour aristocracies, on the one hand, and resident non-indigenous business groups and foreign private investors and multinational corporations, on the other’; Economic Independence: a neglected issue in international development policy, op. cit. pp. 10–11. See also Sklar, Richard L., Corporate Power in an African State: the political impact of multinational mining companies in Zambia (Berkeley, 1976),Google Scholar and Faber, M. L. and Potter, J. G., Towards Economic Independence: papers on the nationalisation of the copper industry in Zambia (Cambridge, 1971).Google Scholar

page 285 note 1 The literature on the behaviour of multinational corporations facing exchange risks is rapidly increasing. See, for example, Manser, W. A. P., The Financial Role of Multinational Enterprise (London, 1973), pp. 109–39;Google ScholarLitaer, B. A., ‘Managing Risks in Foreign Exchange’, in Harvard Business Review (Boston), 48, 2, 03–04 1970, pp. 127–38;Google Scholar and Gull, Don S., ‘Composite Foreign Exchange Risk’, in Columbia Journal of World Business (New York), Fall 1975, pp. 51–70.Google Scholar

page 285 note 2 Since it has been accepted by the Government that direct price control was impracticable, action has been confined to very occasional inquiries into the level of key prices (e.g. motor vehicles), exhortation, and ritual warnings against price increases in anticipation of or following annual budgets. The attempt since 1974 by the Cabinet to give prior approval of increases in strategic prices (e.g. petroleum products, some consumer staples and services) has been only marginally effective, with firms managing to secure the increases they want.

page 287 note 1 See, for example, Leith, J. Clark, Foreign Trade Regimes and Economic Development: Ghana (New York, 1974), especially ch. v;Google Scholar and Dunn, Robert M. Jr.Exchange-Rate Flexibility, Investment Distortions and the Failure of Bretton Woods (Princeton, 1973),Google Scholar Essays in International Finance, No. 97, pp. 4–5.

page 287 note 2 See Bhagwat, A. and Onitsuka, Y., ‘Effect of Devaluation on Trade Traced in Analysis of Non-Industrial Countries’, in I.M.F. Survey (Washington), 18 02 and 4 03 1974.Google Scholar A depreciation-bias has often been urged in Sierra Leone as a means of strengthening the export sector, notably the cost structure of the mining industry, even though exports as a whole have remained generally unresponsive to the continuing depreciation of the leone.

page 288 note 1 Two recent studies on exchange rate flexibility and inflation are instructive: Brittain, W. H. Bruce, ‘Have Flexible Exchange Rates Caused World Inflation?’, in Colunbia Journal of World Business, Fall 1975, pp. 101–5;Google Scholar and Porzecanski, A. C., ‘The Inflationary Impact of Repetitive Devaluation’, in Journal of Development Studies (London), XI, 4, 07 1975, pp. 357–65.Google Scholar

page 289 note 1 Growth since 1970 in supplementary appropriations for current expenditures, and in ‘unrecorded expenditure’, a residual category reflecting largely under-recording of current and development expenditures, and recurring deficiencies in public budgeting, has been very substantial, while the proportion of expenditures on economic services has fallen.

page 290 note 1 With sterling having become a negotiated currency, shorn of its vestigial reserve currency rôle, and with the dollar–German mark rate as the central pillar in world exchange-rate structures, no useful purpose would be served in assessing the pound's appropriateness as a peg.

page 293 note 1 Very modest increases of up to 1·5 per cent have recently been made in commercial bank rates on time deposits over 12 months, savings deposits, and in Post Office savings deposit rates, but with the steep rise in lending and overdraft rates since 1973, the average differential between deposit and lending rates ranges between 10 and 12 per cent.

page 293 note 2 See Dixon-Fyle, S. R., ‘African Currencies and Multiple Exchange Rates’, in International Currency Review (London), 03 1975 pp. 11–14.Google Scholar

page 294 note 1 The ideas in this section have been developed in S. R. Dixon-Fyle, ‘The Development of Monetary Co-operation in Africa application of a theory of optimum currency areas’, Report prepared for the Group of Experts on the Joint E.C.A./A.D.B./O.A.U. Conference of African Ministers of Trade and Finance, 1973, African Development Bank, Abidjan, 1973.