Frank Flatters and Matthew Stern
(and previously published as part of their Geekonomics column in the Business Day)
SADC
Heads of States have committed themselves to establishing a regional
customs union by 2010. This is an ambitious task, well beyond the scope
of this little article. But discussions on regional integration bring
into focus problems with the existing Southern African Customs Union
(SACU), and this is something we Geeks do know something about.
Importing motor vehicles from Botswana is just not as fun as it used to
be.
SACU dates back to June 29 1910, when South Africa,
Basutoland, Swaziland and Bechuanaland signed at Potchefstroom. Only
Britain and South Africa were involved in the negotiations and Lord
Gladstone, as Governor of the Union of South Africa and High
Commissioner for the three protectorates, had only to agree with himself
and then sign the Agreement four times. This Agreement was renegotiated
with the apartheid government in 1969.
The advent of democracy
in South Africa gave rise to a new SACU, although the negotiations which
commenced with great urgency in 1994 were only concluded in 2002.
The
main weakness of the old SACU Agreement was the absence of joint
decision-making. Import tariffs and excise taxes were set by South
Africa. Not much has changed. Although the new agreement provides for
joint tariff-setting bodies and for increased consultation over excise
rates, these have not been implemented and South Africa still calls the
shots.
But in SACU, trade policy issues receive little attention
compared to discussions over the sharing of customs and excise revenues.
This is not surprising. The Governments of Swaziland, Lesotho and
Namibia depend on SACU for an extremely high proportion of total revenue
and most of this revenue comes from customs duties on imports. The
recent splurge in South African consumption has contributed to a
dramatic increase in imports. Payments to the BLNS (SACU-speak for our
four SACU partners) have almost doubled over a space of four years.
The
South African Government believes the BLNS are getting too much money
for doing too little. It would like to see a large proportion of this
revenue reclassified as "development assistance" and managed accordingly
The BLNS, however, maintain that the size of these payments is fair
compensation for the "cost-raising" and "polarization" effects of SACU
membership.
The cost-raising argument is based on the premise
that the SACU tariff protects South African industries at the expense of
SACU consumers. Discussions about polarization are based on the
substantial differences in per capita incomes, growth rates and other
development indicators among the SACU Member States.
Our own
analysis suggests that in the absence of SACU, the BLNS would have to
raise their own tariff duties substantially to collect the same amount
in customs duties and that the "cost-raising" impact is in fact
cost-reducing for consumers in these countries. We can also find no
clear pattern of increasing or decreasing polarisation among SACU member
states. Without doubt, the current revenue sharing distribution
provides excessive compensation from South Africa to the BLNS.
That
said, SACU payments are highly sensitive to changes in imports and
tariffs; and the current size of the customs pool is abnormally high.
Consider that about a third of all customs duties are collected on
imports of motor vehicles. So any slowdown in imports of cars (which is
already happening) or any reduction in duties on these imports (which is
likely under future WTO negotiations) could have a dramatic and adverse
revenue impact on the smaller SACU member states.
This takes us to some of the more fundamental economic problems with SACU.
Tariff-setting
decisions generally involve trade-offs among the interests of consumers
and users of protected products, producers of these products, and the
Treasury. The new revenue sharing formula changes this calculus in
peculiar and different ways in South Africa and in the BLNS.
The
BLNS, with few producer interests in traditionally protected industries,
have generally argued against most SACU tariffs. From their
perspective, it is the consumer/user interest that has quite naturally
dominated. The new formula turns this traditional BLNS calculus on its
head. The BLNS now have a strong economic and financial interest in
maintaining and maybe even increasing the import tariffs that they
traditionally had opposed. So the new revenue sharing formula will make
it difficult to engage in further tariff reform in SACU.
A more
fundamental question about the revenue sharing formula is whether it is
appropriate or sustainable in an expanded SACU, or as a model for a SADC
Customs Union. This formula was designed to achieve some particular
political purposes in a particular historical context. It is difficult
to imagine that South African taxpayers would be willing to make
financial transfers of similar orders of magnitude to the rest of SADC.
While
BLNS governments have benefited from this system recently, they must
soon realize that it is dangerous to rest long-term development
cooperation strategies on bloated budgets and the fickleness of changes
in the SACU customs revenue pool.
The Geeks suggest it's time for all parties to give serious thought to alternative revenue sharing strategies.