There goes the neighbourhood

It is well known that African trade ministers love signing agreements. These cement relationships with neighbours and increase trade and local competitiveness, as domestic firms have to compete with their regional peers.

These are good, so signing more trade agreements must be a good thing.

Unfortunately, they do not liberalise trade and some African countries have signed so many trade agreements that they overlap and have resulted in what trade experts commonly refer to as the great African spaghetti junction.

In order to deal with this and to facilitate trade, the members of the Southern African Development Community (SADC), the East African Community and the Common Market for Eastern and Southern Africa plan to create a giant free-trade area.

Softening up Botswana?
But last week the African cyberspace was buzzing with rumours that the Southern African Customs Union (Sacu) was about to be finally killed off by South Africa.

From Windhoek to Cape Town and Mbabane, trade policy wonks were debating what the most recent moves from Pretoria regarding Sacu really meant.

The agreement between Botswana, Lesotho, Namibia, South Africa and Swaziland is 101 years old and the oldest in Africa.

When one very senior treasury official of the BLNS countries (Botswana, Lesotho, Namibia and Swaziland) was asked whether he thought South Africa would pull the plug on Sacu, he answered "maybe".

The negotiating position that Pretoria has taken recently is widely perceived as being very tough — with a "take it or leave it" offer expected soon — and no one really knows whether it reflects a desire to kill off Sacu or whether it is just a move to soften up Botswana, which is perceived as the ringleader of the BLNS states.

But the fact that, in the past few weeks, Pretoria has signed bilateral agreements with Lesotho, Swaziland and Botswana, which include trade issues, lends credence to the view that South Africa is preparing a Sacu exit strategy.

The Sacu agreement is particularly odd because, unlike others, it is run by the treasuries and finance ministries of the five member countries and not by the trade ministries.

This is because, principally, Sacu's function is to distribute the customs revenue earned by the five members from their trade with one another. Each country gets a cut based on its share of the intra-Sacu imports, which benefits the smaller BLNS members.

South Africa gets precious little because it imports very little from the other Sacu members and ends up paying the BLNS states about R15- to R18-billion a year more than it would if Sacu did not exist.

This annoys not only the treasury in Pretoria and the International Monetary Fund (IMF), which hates the bloated BLNS budgets that result from it, but also the South African trade union federation Cosatu, which sees no reason why South African workers and taxpayers should subsidise the huge and over-paid public services in Lesotho and Swaziland, or Botswana, which has a higher gross domestic product per capita than South Africa.

But this is not news. What is news is that, according to normally well-informed sources, South Africa's department of trade and industry sees Sacu as a threat to its own ability to set policy.

Previously, in effect, Pretoria determined the external tariff unilaterally and, until 2002, its "piddling" neighbours did not have a legal say.

But a "more equal" agreement was signed that year, according to which the other states would establish national tariff bodies, and then a Sacu tariff board, which would decide on the tariff.

But they never did this. The accepted reason is that the BLNS states did not have the technical capacity and needed training. But the "real" reason is harder to determine, although a common refrain heard in many BLNS states is that, if they established the tariff boards and removed South Africa's sovereign right to set the tariffs, Pretoria would not accept it.

But Botswana has taken moves recently to establish a national tariff body. This, it is felt, could lead to the limiting of South Africa's ability to raise and lower tariffs at will.

So, if the South African treasury, trade department, Cosatu and the IMF all hate Sacu, why is it still alive? And the continued existence of Sacu is all the more perplexing when one considers that the BLNS states, in effect, committed fiscal suicide by signing the SADC free-trade agreement in 2005 and implementing it in 2008. This gives South African exports similar although not identical market access to that available under Sacu.

But, technically, the SADC agreement is a free get-out-of-jail card — Pretoria can walk away from Sacu, save billions of rands, and South African exports will continue to flow around in more or less the same uninterrupted way.

So why didn't the South African government tear up the Sacu agreement in 2008 after SADC was implemented? After all, Sacu had achieved what the apartheid regime had meant it to.

Only friend
The BLNS states are financially dependent on the Sacu revenue transfers and, if they are stopped, there would be an economic catastrophe in Swaziland and Lesotho (which are 60% to 70% dependent respectively on revenues from the customs union) and a serious financial disaster in Windhoek and Gaborone, which are somewhat less dependent (30% to 40% respectively) on them.

In Botswana, the Sacu revenue has become even more important to the country than diamonds, the country's main export.

This then explains Sacu's only real friend — the South African presidency. Despite the desire of most of the lesser parties in South Africa to end Sacu and the massive fiscal transfers it entails, the question President Jacob Zuma has to face is whether he wants to go down in the region's history as the man who crippled the Namibian and Botswana economies and created two more Zimbabwes — that is, Swaziland and Lesotho — within the country's borders.

It is for this reason alone that Sacu remains alive but on death row — in effect, a dead man walking — just waiting for someone to pull the plug and end its life.

Radical reform
Of course, there would be no need to end Sacu if only the BLNS states would recognise that the political reality that underpinned the revenue sharing of Sacu for nearly 100 years simply no longer exists.

The deal was necessary during the apartheid era when South Africa needed to buy its neighbours. But South Africa now has pressing needs for development within its own borders, which, one day, will overcome the political and economic risks of pulling the plug on its neighbours.

There is no longer any political basis for the old Sacu and it needs to be revised to become a development union in ways similar to what South African Trade Minister Rob Davies has often suggested.

The Sacu funds should be used to create a development community, ending the old revenue-sharing arrangement and creating a new one based on mutually beneficial and agreed development spending.

Needless to say, a 10- to 15-year period would be needed for the states to adjust and move away from the current system. Unfortunately, we are still a million miles from this and the BLNS treasury officials continue to "negotiate" over minor revisions in the old formula when radical reform is the only thing that will save Sacu from the executioner.

New member
The Sacu revenue-sharing formula needs wholesale reform now in order to bring it into the 21st century and eventually to deepen the integration between the members of Sacu.

The best way to start is to let Mozambique, which has long expressed a desire for Sacu membership, join the organisation.

Under the current formula, it would result in substantial declines in revenues for the BLNS states and is the reason why Mozambique has never been allowed to join.

But accepting Sacu as a fraternity of genuinely equal nations would necessitate a complete rethink of its revenue-sharing arrangement.

This would radically shock Sacu, which is precisely what is needed. As it stands, without real reform, the Sacu revenue-sharing formula is the single and most immediate impediment to the integration of Southern Africa.

The SADC free-trade area can never be developed to become a customs union and Sacu, under the current formula, can never be broadened to include countries such as Mozambique.

It is in the long-term interests of the BLNS states to lead a real and radical reform of Sacu rather than trying to negotiate minor revisions of the formula and wait until Pretoria, or the IMF, delivers the coup de grâce to an admittedly very profitable apartheid-era formula and finally end the dysfunctional relationship it has created between the BLNS states and South Africa.

An announcement on the future of Sacu is widely expected from South Africa early next year.

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

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