New knife to cut Sacu pie

Last month the Southern African Customs Union (Sacu) had what newspapers in Gaborone called a ‘near-death experience” when members agreed to reject a consultant’s report and consider afresh the union’s controversial revenue-sharing formula.

Had the Australian consultant’s report been accepted, it would have seen a massive redistribution of customs revenue away from Botswana, Namibia and Swaziland to South Africa. Botswana would, based on 2011-2012 projections, lose R8-billion and Namibia R6-billion.

Fortunately, cool heads have prevailed for the moment in Pretoria and the Sacu formula has not yet been torn up. But although the customs union is still breathing, it remains in intensive care: national treasury and department of trade and industry officials in Pretoria make no secret of their desire to tear up the revenue-sharing formula and collect what would be at least R13-billion.

The reason not to do this is political—the so-called BLNS states (Botswana, Lesotho, Namibia and Swaziland) are so dependent on the revenue flow that, if it dried up, Lesotho and Swaziland, which depend on it for up to 70% of their revenue, would almost certainly become politically unstable.
Even Botswana and Namibia, the two ­richest and most resilient of these states, would suffer a massive loss if the recommendation of the report was accepted.

Based on the union’s revenue-sharing formula figures for 2011-2012, Botswana will get ­R9.7-billion, Namibia R8.1-billion, South Africa R4.5-billion, Swaziland R3.3-billion and Lesotho R3.1-billion of the customs revenue. How is it that a country like South Africa, which accounts for more than 90% of the union’s GDP, gets only 15.6% of customs revenue, whereas Botswana, which accounts for 4% of the GDP, gets 34%? It irks South African treasury and trade officials, to say the least. ‘Why should South African taxpayers subsidise richer Batswana when our own people don’t have public services?” they argue.

The reason for this is that the 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 states, whereas they are completely dependent on South African imports. As a result, South Africa gets very little of the customs revenue and the states together get more than 70% of customs revenue.

Why, you might ask, did Pretoria ever agree to a formula that is so heavily stacked against its own revenue? No other customs union in the world uses a formula anything like it. One reason is that these payments are compensation for the cost-raising effects on the states of South African tariffs on items such as cars and clothes, and another is because of what economists call polarisation effects, in other words, industry gravitating to Gauteng.

Virtually everything that is produced in the Sacu for consumption by its citizens is made in South Africa. The things produced in the other states are either natural resource-based or fall under preference arrangements with the United States or the European Union, for example, fish, beef, garments and clothing.

The implicit deal between the Sacu members that has continued since 1969 is simple enough: the states remain captive markets for South African exports and in return they get compensatory payments to their treasuries. But times have changed and neither South Africa nor the states are happy with this formula.

Since the advent of the South African Development Community’s (SADC) free-trade area in 2000, South Africa has not needed the customs union, because it has roughly equal market access for its exports without paying even one rand through the Sacu. So why bother?

For Botswana—as well as the other union states—a deal in which it agrees to remain a captive market for South African exports looks less and less like a good bargain each year, especially as its huge but finite diamond reserves dwindle. 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. That is because every time it came to discussing how the customs revenue would be divided between 14 SADC members, the nine non-Sacu members wanted the customs union’s revenue-sharing formula. This would have cut dramatically into the union states’s revenues. The negative response was predictable and meant the union could not expand to include more members and SADC could not deepen its relations.

So how do we solve this trade mess? There are no easy answers if one wants regional integration and development. The formula most frequently used in other customs unions is called the destination principle, that is, you get what would have come into your country from outside the customs area. This would mean a huge adjustment for the BLNS states and a massive windfall for Pretoria, but it is the only formula that would allow new members into the customs union without these states objecting. Many BLNS officials would say this is not a price worth paying for regional integration.

The customs union’s revenue-sharing formula is no historical accident. In the past 100 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 formula was developed by Britain without Botswana, Lesotho or Swaziland (there was no Namibia) being present, following the formation of the Union of South Africa. The second change occurred in 1969 with the decolonisation of these three countries and the apartheid regime’s need to buy friends to assure they did not become ‘little Hong Kongs”. The third reform (operational from 1994 to 2002) followed the end of apartheid and actually increased the share of these three countries.

To resolve the unsustainable dependence of Swaziland and Lesotho on the customs union cannot be done by normal structural adjustments—the adjustment is too big and the economic bases of these countries are too small. The only obvious way the formula can be revised is to negotiate a new political arrangement with South Africa that allows people, goods and services to move freely across borders, as well as their deeper integration into a common market.

A different approach is possible for Botswana and Namibia. These countries, although highly dependent on the Sacu revenues, are sufficiently large and resilient that they could conceivably, with sufficient time, adjust to a union that is based on a more normal formula. But even then the adjustment would be enormous, possibly no smaller than that experienced by Greece.

Moving to a revenue-sharing formula based on the destination principle would be a huge windfall for Pretoria and could proceed only if that transfer was used to deal with the structural development bottlenecks from which the three larger members suffer.

The problem is that the pressure in Pretoria is the same in Windhoek and Gaborone—using this money to pay ever-higher salaries and for recurrent costs of government rather than investment. If the Southern African region is to prosper, the funds should be used for development and investment projects that would help alleviate polarisation as well as fund a real industrial policy for the customs union. 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 at the heart of the problem of Sacu. The country is now at a point in its 100-year history where its economic future, more than ever before, rests on it being a vital entrepôt and staging point for investment in the rest of Africa, such as that by Walmart. Yet its economic vision has arguably become more insular and focused on playing with Brazil, Russia, India and China. The idea of playing with its small and troublesome neighbours is seen as an economic distraction in Pretoria.

Until South African leadership is evident, little will happen to resolve the formula and 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 private views of Professor Roman Grynberg, who is a research fellow at the Botswana Institute for Development Policy Analysis

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