The Portuguese escudo area in Africa and its lessons for monetary unions

ABSTRACT

The beginnings of the Portuguese Escudo Monetary Zone (EMZ) in 1961, to promote the economic integration of Portugal and its empire, coincide in time with Mundell’s seminal paper about optimum currency areas. If non-optimality was the cause of the EMZ’s demise, this would suggest that monetary unions are fragile achievements, with little prospect for survival. The EMZ turned out to be a short-lived experiment, with Angola and Mozambique building up large cumulative deficit positions offset by the sizeable cumulative surpluses of the mainland. A cobweb model using monthly observations for macroeconomic variables of these two territories describes a time divergent process caused by structural imbalances, as well as by the loan granting system. The EMZ was not an optimum currency area and was not sustainable in the long run. This is an historical experiment that is not without interest for the study of other monetary areas.

KEYWORDS:

• Optimal currency areas
• sustainability of monetary unions
• Portuguese colonial empire
• the escudo monetary zone
• partners’ indebtedness

JEL:

• N20
• N24
• N27

Acknowledgements

This paper belongs to a Project funded by the Portuguese Central Bank, Banco de Portugal. We thank the Banco de Portugal Historical Archives, particularly Gil Matos and Maria do Carmo Rogado. We thank Maximiano Pinheiro, Maria João Azevedo, Luís Campos e Cunha, Jorge Braga de Macedo, José Tavares, José Rodrigues da Costa, Nuno Valério, and James Brenan for discussion, and John Huffstot for our English correction. Any errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 Portugal, Banco de Portugal. Deliberação tomada pelo Conselho de Administração do Banco de Portugal, em sua sessão de 27 de Outubro de 1961. Espaço Económico Português, Sistemas de Pagamentos Inter-regionais, 1961, 2, 3, 5, (hereafter Arquivo Histórico do Banco de Portugal (AHBP)).

2 The political dimension is pointed out as a rephrased requirement for OCAs: see Fatas (1997).

3 Via specific law decrees (numbers 44698, with detailed instructions, 44701, and 44702, of 17 November 1962), which reflect the political importance given to this project. More detailed information is available at Banco de Portugal. Departamento de Serviços Jurídicos. Espaço Económico Português. Pastas n°s 1, 4. AHBP.

4 Comércio do Porto of 12 September 1961, 26 September 1961, 3 October 1961, 3 October 1961, 18 October 1961, and 20 October 1961. Diário Ilustrado of 22 October 1961 and 23 October 1961. Jornal do Comércio of 8 and 23 November 1961.

5 There is some exaggeration in this estimation, as total population in the 1960 Census was about 22.5 million.

6 Jornal do Comércio of 6 September 1961, 24 October 1961, and 21 November 1961.

7 Macao had no foreign exchange fund, and the corresponding duties were entrusted to the overseas issuing bank, BNU.

8 Portugal. Banco de Portugal. Estatísticas dos Pagamentos Interterritoriais, Informações estatísticas da Metrópole e Ultramar, Sistemas de Pagamentos Interterritoriais. AHBP.

9 As reported in the annual report of Banco de Portugal to the Board of Directors of the International Monetary Fund (1963). This gives evidence of contacts that explain the creation of the EMZ Fund resembling the IMF framework.

10 Term used indiscriminately reflecting and reinforcing the nationalist view of the colonies as an integral part of Portugal.

11 Portugal. Banco de Portugal. Relatórios Anuais do Conselho de Direcção do Fundo Monetário da Zona do Escudo, several years. AHBP.

12 Mozambique was the territory with closest access to gold thanks to Mozambican emigration to South Africa to work in the gold mining sector, an industry in which wages were paid partially in South African rands and partially in gold.

13 Phases which are identified by Goodhart (2010).

14 Portugal, Banco de Portugal, Espaço Económico Português, Sistemas de Pagamentos Inter-regionais, 1961, 1, Banco de Portugal Historical Archives. AHBP.

15 This was not so different from the EMU, for which a similar interpretation on the role of the European Central Bank is given by Fatas (1997).

16 For an appraisal see BNU. Boletim Trimestral, 3° e 4° trimestres. (1968).

17 Portugal. Arquivo Histórico do Banco de Portugal. Fundo Monetário da Zona do Escudo. Direção. Actas do Conselho de Direcção do Fundo Monetário da Zona do Escudo. 1963–1964. FMZE/Dir/001-010, AHBP.

18 BNU. Boletim Trimestral, 1° trimestre, 1 BNU. Boletim Trimestral, 1° trimestre, 1970 (1970).

19 System entropy refers to the speed of financial flows: see Mata and Tenreiro Machado (2017).

20 Portugal. AHBP. Observações gerais sobre o projecto de reforma do Sistema de Pagamentos das Províncias Ultramarinas com o Exterior, elaborado pelo Dr. Ramos Pereira, Espaço Económico Português, Pagamentos Inter-territoriais, Sistema de Compensação e de Pagamentos, Projecto de reforma de 1971, 1.

21 See Schenk (2013), 356, 430.

22 Openness was originally measured as the ratio of tradables to non-tradables. More recent measures consider the weight of trade to GDP.

23 These authors discuss fiscal federalism in the context of the European Monetary Union. See also Gáková and Dijkstra (2008) and Artis (2002).

24 This intent is clear as drawn out in via decree-law (44016 of 8 November 1961).

25 CCN (Companhia Colonial de Navegação) and CNN (Companhia Nacional de Navegação).

26 18 passenger vessels, 40 cargo vessels, and 13 tankers, which was a fleet of considerable size, according to the records in BNU, Boletim Trimestral, 1st quarter, 1970, 33.

27 BNU, Boletim Trimestral, 3rd and 4th quarters, 1968, 87.

28 Most passengers were active population, according to the Anuários Estatísticos do Ultramar, hereinafter also referred to as Statistical Yearbooks (1961–1973). Unfortunately, these do not distinguish between inactive population and students, and it is therefore impossible to assess the weight of unemployed individuals in the overall migration numbers.

29 Since the initial objective was to compare migration with unemployment, typically a lead variable compared to GDP, we disregard the possible endogeneity between GDP and labour force.

30 INE, Anuários Estatísticos, 1961–1974. INE, Anuários Estatísticos do Ultramar, Moeda, Crédito e Seguros [several issues] 1961–1974.

31 Only Angola and Mozambique exhibit material contributions from common funds. Between 1960 and 1963 the contribution of those funds to the total current and extraordinary revenues is virtually zero for Angola and around 1.7% for Mozambique. By 1971 the war had led to an increase in the contributions of common funds (1.5% for Angola and 5% for Mozambique) composed almost in its entirety of revenue from the military fund Fundo de Defesa Militar do Ultramar.

32 From 3.6% (1963) to 2.1% (1971) of GDP for Angola and from 2.2% (1963) to 1.5% (1971) for Mozambique.

33 This replicates the two key variables in Frankel and Rose (1998): bilateral trade intensity (normalized by GDP) and bilateral correlation of real economic activity (detrended GDP per capita), which are subject to caveats.

34 Given the lack of (sufficient) convergence and to avoid the use of complex measures, we use real GDP per capita following Diaz del Hoyo et al. (2017, p. 14): ‘sustainable convergence may be defined as the process whereby the real GDP per capita levels of lower-income economies catch up, on a durable basis, with those of higher-income economies.’

35 Acta nr. 6 of the meeting of 16 September 1963, of the Board of Directors of the EMZ, Conselho de Direcção do Fundo Monetário da Zona do Escudo, vol. 1, 27. AHPB.

36 See Equation A21 in the Appendix and corresponding explanation.

37 This was also motivated by the fact that Mozambique was quite willing to finance its exports to Angola. Details on this can be found in Art. 8, of decree-law nr. 44702, from the BNU Historical Archive.

38 Relatórios Mensais do Agente relativos às operações inter-territoriais, 1963–1973. Portugal. AHBP.

39 Estabilidade financeira e solvabilidade externa da moeda, following Normas orientadoras da proposta da lei de meios para 1969 enviada à Câmara Corporativa. Boletim da Câmara do Comércio de Lourenço Marques, n° 10, 4° trimestre de 1968: 21–78, 40, 42. BNU Historical Archives.

40 Ibid., 78.

41 ‘Porque seria errado desvalorizar o escudo’, Boletim da Camara do Comércio de Lourenço Marques, n° 17, 3° trimestre de 1970: 79–83, transcrito do Diário de Notícias, 1970. BNU Historical Archives.

42 Portugal. Arquivo Nacional Da Torre Do Tombo (ANTT), Relatório da Comissão, JMSC-A-009-0458.

Additional information

Funding

This work was supported by Banco de Portugal: [grant number: Project on ‘The Escudo Monetary Zone’]. Project funded by Banco de Portugal, in the sequence of the October 2017 Conference “Money in Africa - Monetary and financial decolonisation in Africa in the 20th Century”, jointly organized with the European Association of Banking and Financial History (EABH) in Lisbon. This paper is a result of this research. The views expressed are those of the authors and do not necessarily reflect those of Nova SBE, Banco de Portugal, or ECB.