Beyond Borders: The Euro Crisis and Public Support for Monetary Integration in East Africa

• Author: Neven Valev,Menna Bizuneh,Steven Buigut
• Published date: 01 December 2020
• DOI: http://doi.org/10.1111/saje.12258
• Date: 01 December 2020

South African Journal of Economics Vol. 88:4 December 2020

doi: 10.1111/saje.12258

518

© 2020 Economic Society of South Africa

BEYOND BORDERS: THE EURO CRISIS AND PUBLIC

SUPPORT FOR MONETARY INTEGRATION IN EAST AFRICA

MENNA BIZUNEH*,† , STEVEN BUIGUT‡ AND NEVEN VALEV§

Abstract

We show that economic experiences in one part of the world affect proposed policies elsewhere.

Specifically, we find that the recent crisis in the European Monetary Union (EMU) has impacted

negatively the public support for the new proposed monetary union in the East African Community

(EAC), with a more pronounced effect for less educated Kenyans. That external effect is robust to

controlling for an array of other factors such as the expected economic benefits from the union,

the desire to gain international influence as part of a larger community and the memory of an

earlier failed EAC monetary union.

JEL Classification: F33, E5

Keywords: East African Community, monetary union, euro crisis, survey data

1. INTRODUCTION

As explained by Mundell (1961), monetary unions involve a trade-off between, on one

the hand, the lower uncertainty and greater ease of transactions associated with a com-

mon currency and, on the other hand, the more difficult adjustment to economic shocks

due to the lack of exchange rate and monetary flexibility. However, whether or not the

benefits exceed the costs for a particular country in a monetary union is not an easy ques-

tion to answer. The magnitude and importance of these factors become more transparent

only after many years of operation of the union when the economy has gone through

multiple phases of the business cycle. And probably, even after many years, the question

whether the monetary union is the best exchange rate policy remains open. How then

does the public judge proposed monetary unions that are not even in place? It seems un-

likely that citizens can confidently weigh the issues ahead of creating the union. How do

they form opinions about it? Do they seek guidance in the experience of other existing

monetary unions?

We address that question in the context of the East Africa Community (EAC) whose

five members – Burundi, Kenya, Rwanda, Tanzania and Uganda – have pledged to join

* Corresponding author. Menna Bizuneh, Department of Economics, Pitzer College, Claremont,

CA 91711, USA. Tel: 217-377-0770. E-mail: Menna_Bizuneh@pitzer.edu

† Pitzer College

‡ Canadian University Dubai

§ Georgia State University

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of Economics

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© 2020 Economic Society of South Africa

their economies in an East African Monetary Union (EAMU).1 We ask whether a crisis

in one monetary union has an effect on decisions to form a monetary union in another

part of the world. Specifically, has the crisis in the European Monetary Union (EMU)

raised concern among the population of the EAC’s member states and influenced the

public support for monetary integration in the EAC? We take advantage of unique survey

data from Kenya that were collected during a time when the EAC was actively deliberat-

ing the merits of its proposed monetary union while problems in Greece and other

European Monetary Union countries threatened the viability of the euro. We find that

the problems in Europe influenced the support for the EAMU. More precisely, the crisis

in Europe made Kenyans more sceptical about their own proposed monetary union.

However, domestic considerations had a similarly strong impact on the support for the

EAMU including the expected economic benefits from the union, the desire to be taken

seriously as part of a larger community and the memory of an earlier failed EAC mone-

tary union. Moreover, we find that education – a proxy for the respondent’s knowledge

about the monetary union – plays an important role. More educated people find the

EMU crisis less relevant when they consider the proposed EAC monetary union com-

pared to less educated people. In contrast, they see more parallels between the earlier

failed attempt at monetary integration in the EAC and the new proposes monetary union.

We extend the literature in several directions. First, we contribute to the literature on

exchange rate policy in developing countries such as Nathaniel et al. (2019), Cushman

and De Vita (2017), Gnimassoun (2017), Gnimassoun (2015), Frankel (1999) and

Edwards (1996). Much of the literature has focused on the question of fixed vs. flexible

exchange rates with less attention to monetary unions among less developed countries.

Moreover, the analysis is typically carried out on the macroeconomic level and is based on

realized actual policies. In contrast, we take the analysis on the individual level and study

a hypothetical choice to understand the process of implementing a monetary union ahead

of its actual implementations. The survey data are uniquely useful in that respect.2

Second, we contribute to the large literature on policy diffusion, e.g. Maggetti and

Gilardi (2016), Graham et al. (2013), Simmons and Elkins (2004) and Dolowitz and

Marsh (1996), which shows that domestic economic policy does not take shape in a vac-

uum. Governments and citizens try to learn from the policy success and mistakes of other

countries and to position themselves competitively given the policy choices of others. We

extend that literature with a particular focus on how monetary union problems in one part

of the world affect the support for a new monetary union in another part of the world.

Our data allow us to examine that question on the individual level during a period when

the future of the most prominent monetary union, the EMU, was in question. As such, we

1 The Republic of South Sudan was recently admitted into the community. South Sudan signed

the accession treaty on April 15, 2016 and it became a full member when it ratified the Treaty only

in September 2016. Our analysis focusses on the five EAC members as when the survey was un-

dertaken South Sudan was still not a fully fledged member. Thus, the survey questions only re-

flected attitudes in relation to the five members forming a currency union.

2 The literature, e.g. Frieden (2002), has long recognized that currency policy has distributional

consequences. Some agents stand to benefit and others stand to lose from a policy change (or the

absence of such). The survey data make it possible to observe these differences across the

population.