Towards a developmental SACU

PROFESSOR ROMAN GRYNBERG | Friday July 29, 2011 00:00

 

 Had the Australian consultant's report been accepted it would have seen a massive re-distribution of customs revenue away from Botswana Namibia and Swaziland to South Africa. Botswana would, based on 2011/12 projections lose Rand 8 billion and Namibia would lose Rand 6 billion. Fortunately cooler heads have prevailed for the moment in Pretoria and the opportunity to tear up the SACU agreement has not yet been taken. However, while SACU is still breathing it remains in intensive  care. Treasury and DTI officials in Pretoria make no secret of their desire to tear up SACU and collect what would be at least 13 billion rand in revenue. The reason not to do this was political because the so-called BLNS (Botswna, Lesotho Namibia and Swaziland) states are so dependent upon the revenue flows that if it is torn up then Lesotho and Swaziland which depend for 60-70% of their revenue would almost certainly  become politically unstable. Even Botswana and Namibia the two richest and most resilient of the BLNS would have suffered a massive loss if the recommendation from the report would have been accepted.

Based on the current SACU RSF 2011/12 figures Botswana would obtain Rand 9.7 billion, Namibia 8.1 billion and South Africa 4.5 billion , Swaziland 3.3 billion and Lesotho 3.1 billion of teh customs revenue. How is it that a country like South Africa which accounts for over 90% of the SACU GDP only gets 15.6% of customs revenue and  Botswana which accounts for  4% of SACU GDP gets 34%. To say the least this fact irks South African treasury and trade officials. They argue 'why should South African taxpayers subsidise richer Batswana when our own people don't have public services'. But treasury officials are never fussed about historical facts. The reason why this is the case is that SACU customs revenue sharing is not based on the share of GDP but on the share of intra-SACU imports. South Africa imports very little from the other BLNS but the BLNS are completely dependent on South African imports. As result South Africa gets very little of the customs revenue and the BLNS together got over 70% of customs revenue. Why, you might ask, would Pretoria, have ever agreed to a formula like this one which is so heavily stacked against  its revenue? No other customs union in the world uses a formula anything like it.

The reason is that these payments are compensation, for the cost raising effects on the BLNS of South African tariffs on such things as cars and clothes and the other is because of what economists call polarisation effects i.e. all the industry gravitating to Guateng. Virtually everything that is  produced in SACU, for SACU consumption  is made in South Africa and the only thing produced in the BLNS is under preference arrangements with the US or the EU eg fish garments, beef clothing etc or is natural resource based.

The implicit deal between the SACU members which has continued since 1969  is simple enough, the BLNS remain captive markets for South African exports and in return they get compensatory payments to their treasury.

But history has moved on and both sides are not happy with this equation. Since the advent of the SADC free trade area in 2000-2008 South Africa simply does not need SACU any more because it has roughly equal market access for its exports through the SADC free trade area without paying even one rand  through SACU, so why bother? For Botswana as well as other BLNS a deal where the country agrees to remain a captive market for South African exports looks less and less of a good bargain with the each passing year and the drawing down of the nation's huge but finite diamond reserves.

The other problem is that SADC was supposed to also become a customs union at the end of last year but failed to get there because every time it came to discussing how the customs revenue would be divided between 14 SADC members the other nine non-SACU members said they wanted the SACU revenue sharing formula. This would have cut dramatically into the BLNS revenues and the response was predictable so SACU cannot expand to include more members and SADC cannot deepen its relations.

So how do we solve this trade mess? There are no pretty answers if you want regional integration and development. The formula most frequently used in other customs unions is called the destination principle i.e. you get what would have into your country from outside the customs area.

This would mean a huge adjustment for the BLNS and a massive windfall for Pretoria. But it is the only formula that would allow for new members of SACU without the BLNS objecting. Many BLNS officials will tell you that this is not a price worth paying for regional integration.

The SACU RSF is no historical accident. In the last hundred years it has changed only three times and each change was associated with a seismic historical shift in the political landscape of Southern Africa. The original 1910 RSF  was developed by Britain without any of BLS ( there was no 'N') even being present.

It followed the formation of   the Union of South Africa. The second change occurred in 1969 with the decolonisation of the BLS and the need of the apartheid regime to buy friends and assure that the BLS did not become 'little Hong Kongs' The third reform (1994-2002) followed the end of apartheid and it actually increased the share going to the BLS.

To resolve the unsustainable dependence of Swaziland and Lesotho on SACU cannot be done by normal structural adjustments, the adjustment is too big and the economic base of these countries is too small.

The only obvious way the formula can be revised is following the lessons of history- to negotiate a new political arrangement with South Africa first, where people goods and services can move freely across borders and the integration be deepened into a common market.

For Botswana and Namibia a different approach is possible. These countries, while highly dependent upon SACU revenues, are sufficiently large and resilient that they could conceivably, with sufficient time, adjust to a SACU based on a more normal formula but even there the adjustment would be enormous, possibly no smaller than that experienced by Greece. Moving to a RSF based on the destination principle would be a huge windfall for Pretoria and could only proceed if that transfer were used to deal with the structural bottlenecks to development that the three larger members suffer from. The problem is that the pressures in Pretoria are the same in Windhoek and Gaborone- to use this money to pay ever higher salaries and recurrent costs of government rather than invest.

If the Southern African region is to be developed then the funds should be used for development and investment projects that would help alleviate polarisation as well as funding a real industrial policy for SACU.

There is no guarantee that this would work and Botswana and Namibia may not succeed in reversing polarisation but transfers to the general revenue will not solve the long term problem.

South Africa's view of itself is very much at the heart of the problem of SACU. South Africa is now at a point in its 100 year history when its economic future rests more than ever before on it being a vital entrepot and staging point for investment like Wal-mart into the rest of Africa. Yet arguably its economic vision has become more insular and more focused on playing with BRICS. The idea of playing with its little and troublesome neighbours is seen as an economic distraction in Pretoria. Until SA leadership is evident little will happen to either resolve the formula and to seize the opportunity to take these revenues and use them to move away from the resource dependent economic base to a more sustainable model. 

*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute of Development Policy Analysis where he is employed.