There are major costs and benefits of a monetary union between member states of the Economic Community of West African States (ECOWAS). One key challenge is the varying degrees of economic openness among member nations. The level of economic openness, measured by total trade (exports plus imports) as a percentage of GDP, differs significantly. Among five key representative members, Côte d'Ivoire is the most open economy (71.2%), followed by Ghana (64.5%), Senegal (55.8%), Nigeria (34.2%), and Sierra Leone (29.5%). Historically, trade openness has risen across most of these nations, with the exception of Sierra Leone, which experienced structural supply-side disruptions that depressed its trade ratios. These wide variations in trade openness suggest that ECOWAS members are highly vulnerable to asymmetric shocks, presenting a major obstacle to a successful monetary union under current conditions. However, if trade integration continues to rise over time, it may lay a more robust foundation for a single currency, helping to eliminate foreign exchange transaction costs and promoting cross-border investment.
Nevertheless, regional trade data reveals that gross intra-ECOWAS trade accounted for only 4.1% of their collective GDP in 2021. By comparison, in the Eurozone, intra-regional trade stood at 28% of GDP in 1998 just prior to the launch of the euro, rising to over 36% by 2019. This demonstrates that trade integration in European markets was far deeper prior to currency unification. Consequently, the transaction cost savings and trade-creation benefits of a common currency—which were considered modest even in Europe—are likely to be significantly smaller for the members of ECOWAS.
Question
Using the information in Extract C and your economic knowledge, discuss the likely costs and benefits of a monetary union to the five selected members of ECOWAS.
