Fiscal Reform and Monetary Union in West Africa

The government's budget is

bx_i+dπ_i=F_i-cs_i                                             (2)

where s_i denotes a reform package that captures all the different measures that have a direct
impact of the efficiency on public finances. As argued above, it is unlikely that simple
reductions in spending or deficits will have much effect on the real fiscal position of the
government (Easterly 1999). Structural reforms like privatization, the reduction of
subsidies, the reform of the public sector and administration more generally, and the
reduction of corruption are instead needed.⁶ Moreover, they should imply that the economy
works more efficiently. Therefore, it could be understood as having a direct impact on the
budget by reducing financing needs. It is thus appropriate to speak about structural reforms
and not only about fiscal discipline which could also be understood as choosing a different
fiscal policy and not as reducing fiscal needs.

The parameters measure the efficiency of the tax system (b), d measures the holdings
of base money as a share of output so that dπ_i is the contribution of seigniorage to the
budget, and the impact of structural reforms on the budget of the government (c). Note that
d is assumed to be a constant which seems a reasonable assumption for moderate rates of
inflation.⁷ Finally, F_i is some (exogenous) financing requirement of the government. This
may comprise debt service as in Beetsma and Bovenberg (1998a) or the operating costs of
government, fixed subsidies to interest groups, personal income of politicians, or some
minimum social payments.

⁶ For evidence on corruption and institutional quality more generally in ECOWAS,
see Debrun et al. (2002).

⁷ It is wellknown that inflation rates have to reach considerable height before currency
substitution and major reductions in money demand are observable.

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