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Poverty and the CFA Zone: Impacts of Devaluation and Monetary Policy Shifts

Explore the effects of the 1994 devaluation and CFA zone membership on poverty, income growth, and food prices in West Africa. Learn about the unexpected outcomes and long-term influences on various sectors of the economy.

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Poverty and the CFA Zone: Impacts of Devaluation and Monetary Policy Shifts

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  1. Poverty and the CFA Zone by Jean-Paul Azam

  2. Three Main Issues • Impact of 1994 devaluation on poverty • Impact of belonging to the CFA zone on the growth of incomes of the poor • Impact of monetary policy on relative prices of food

  3. The 1994 Devaluation Shock • Expectations were that it would reduce poverty by changing the internal terms of trade in favor of agriculture, where most of the poor are. • This textbook approach is not appropriate to West Africa

  4. Main Findings (i) • The devaluation increased urban poverty • Formal sector wages were cut by 40 % • Less jobs for the “little brothers” in the informal sector, as the richer formal sector employees are the main investors in the informal sector (stratified labor market) • Formal sector employees ran down their assets, slowing down job creation in the informal sector

  5. Main Findings (ii) • Without relieving rural poverty • Short-run fall in real agricultural prices due to fall in urban demand for food • Slow down rural-urban migration • More favorable impact in the longer run (a decade) in some countries thanks to faster growth (Senegal, Benin may be…)

  6. Long-Run Growth and Poverty(i) • The determinants of growth in the WAEMU and CEMAC are no different from other developing countries (Bleaney-Nishiyama, chap. 8) • No WAEMU nor CEMAC dummies • No SSA dummies • After controlling for initial income (-) and income share of the poor (-), openness (+), life expectancy (+), tropical climate (-), government saving (+), primary commodity exports (-), ethno-linguistic diversity (+),

  7. Long-Run Growth and Poverty (ii) • Same result for growth in the incomes of poorest quintile • No WAEMU nor CEMAC dummies • No SSA dummies • After controlling for initial income (-) and income share of the poor (-), openness (+), life expectancy (+), tropical climate (-), government saving (+), primary commodity exports (-), ethno-linguistic diversity (+),

  8. Note • Notice that the Bleaney-Nishiyama result, about the growth of the incomes of the poorest quintile is in fact talking about the change in absolute poverty • Watt’s index:

  9. Impact on Real Food Prices (i) • High volatility of food prices in response to large changes in monetary policy instruments, especially for low-income households in Mali and Senegal and money supply shocks (M0 and interest rate) • Different short-run impacts of money supply per country, disappear after 12 months • No lasting effects of interest rate changes, significant short-run effects for Mali and Togo.

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