Front Matter

Front Matter

Author(s):
Joannes Mongardini, Tamon Asonuma, Olivier Basdevant, Alfredo Cuevas, Xavier Debrun, Lars Engstrom, Imelda Flores Vazquez, Vitaliy Kramarenko, Lamin Leigh, Paul Masson, and Genevieve Verdier
Published Date:
April 2013
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    © 2013 International Monetary Fund

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Building a common future in southern Africa / Joannes Mongardini … [et al.]. — Washington, D.C.: International Monetary Fund, 2013.

    p. ; cm.

    Includes bibliographical references and index.

    ISBN 978-1-61635-399-5

    1. Africa, Southern — Economic integration. 2. Customs unions — Africa, Southern. 3. Southern Africa Customs Union. 4. Common Monetary Area (Organization) I. Mongardini, Joannes, 1970–. I. International Monetary Fund.

    HC900.Z9 B85 2012

    Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.

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    Foreword

    Regional economic integration in sub-Saharan Africa can play a critical role in strengthening private sector activity and supporting growth. The vision formulated by the Heads of States of the Southern African Customs Union (SACU) in 2010 for “an economic community with equitable and sustainable development, dedicated to the welfare of its people for a common future” underscores that deeper regional integration can lead to higher sustainable growth, more jobs, and better living standards for the people of Southern Africa. For this vision to fully materialize, though, SACU member states (Botswana, Lesotho, Namibia, South Africa, and Swaziland) must still overcome a number of policy challenges.

    This book, Building a Common Future in Southern Africa, represents a broad-based and valuable contribution by my IMF colleagues to finding practical solutions to these policy challenges. The areas covered in the book include the welfare gains from regional and monetary integration, possible changes to the SACU revenue-sharing formula that could reduce volatility and facilitate regional integration, a framework of fiscal rules to maintain budgetary discipline at a national level, and policies that could reduce the high unemployment rate within the region. The policies discussed in the book lay out a possible roadmap to implement the vision articulated by the SACU Heads of States in 2010.

    In each chapter the findings offer specific insights for regional integration. Starting with the overall integration process, Chapter 2 of the book estimates significant welfare benefits from the existing union. The empirical evidence indicates that SACU has been the most successful trade arrangement in Africa, generating significant trade opportunities for its members both within and outside of the union and with only weak evidence of diverting trade from other parts of the world. Such beneficial effects on trade have already produced higher living standards and more jobs. More importantly, such evidence suggests that deeper regional integration in Southern Africa could generate further gains.

    Yet, there is evidence that the current SACU revenue-sharing formula has drawbacks in that it contributes to high revenue volatility for the smaller members of the union (particularly Lesotho and Swaziland) and may hinder regional integration. Chapter 3 provides concrete short- and medium-term proposals on how the formula could be revised in order to reduce volatility and foster integration, while acknowledging that the specific distributional aspects of the formula will need to be decided by SACU member states themselves.

    On fiscal policy, drawing on the lessons from the European crisis, Chapter 4 proposes a set of policies to reach a sustainable position for the smaller countries of the union, while minimizing the short-term impact on growth. It also describes a framework to implement fiscal rules at a national level in order to maintain fiscal sustainability over the medium term.

    The book proceeds to discuss the benefits of greater monetary integration in the context of the rand Common Monetary Area (CMA), comprising Lesotho, Namibia, South Africa, and Swaziland. It estimates that there are welfare benefits for all current members of the CMA, but that those benefits are largest for the smaller members of the union. The book cautions, however, against moving further toward full monetary integration, as—given still-significant underlying differences in economic structures—recent European experience shows that this could reduce the incentives for monetary stability. Enlargement of the CMA could also be beneficial for existing and new members.

    In view of the main economic challenges in the region, no assessment would be complete without addressing the thorny issue of the high level of unemployment in all SACU countries. Chapter 6 identifies that one source for the high unemployment level in Southern Africa is the skills mismatch between job seekers and job vacancies—the result of an educational system that has not fully kept up with the needs of the labor market. As such, the public sector often becomes the employer of last resort to mitigate the level of unemployment. Reforms are therefore needed to both public employment policies and the educational system to create a labor force that is more flexible and can better respond to the needs of a changing economy. This—together with a business climate more conducive to private investment—could foster higher growth and more job opportunities.

    Finally, this book represents what I hope is the beginning of a deeper policy dialogue between the SACU members and the IMF on ways to implement the vision of the SACU Heads of States. As demonstrated by the IMF’s involvement in other regional groupings (the Central American Free Trade Agreement, the East African Community, the European Union, the West African Economic and Monetary Union, etc.), the expertise of IMF staff can assist country authorities in realizing the full benefits of greater regional and monetary integration. Our hope is to contribute in a similar way to stronger regional and monetary integration in Southern Africa.

    Antoinette M. Sayeh

    Director, African Department

    International Monetary Fund

    Preface

    Deeper integration is a stated public objective of the members of the Southern African Customs Union (SACU), the oldest customs union in the world. The vision of the SACU heads of state is for SACU to become “an economic community with equitable and sustainable development, dedicated to the welfare of its people for a common future.” Although SACU is currently facing challenges related to the volatility of its customs revenue, the management of fiscal policy, and high levels of unemployment, significant opportunities also lie ahead. In particular, establishing a common market and a monetary union could bring higher economic growth and greater welfare benefits to its people. This book offers a number of policy options to address these current challenges and realize future opportunities through the analysis of macroeconomic and structural issues facing SACU countries from the perspective of IMF staff. At the outset, the book identifies the significant benefits associated with membership in SACU and the Common Monetary Area (CMA). Second, it offers practical solutions to the volatility of the current SACU revenue-sharing formula at a regional level and the management of fiscal policy at a national level. Third, it suggests that tackling the high level of unemployment within SACU members will require both a change in public employment policies and reform of the educational system to respond to the changing needs of the labor market. Fourth, it outlines a road map toward deeper regional integration.

    Acknowledgments

    The authors would like to thank the country authorities of Botswana, Lesotho, Namibia, South Africa, and Swaziland, and the SACU Secretariat for their helpful comments on an earlier draft of this publication, and for organizing a technical workshop in Swakopmund, Namibia, on December 2, 2012, at which the findings of this book were discussed. The authorities of a number of the SACU member countries have indicated that they have concerns with some of the conclusions in this book, but would not stand in the way of the IMF in publishing this book.

    Our gratitude also goes to our IMF colleagues Sharmini Coorey, Anne-Marie Gulde, and Calvin McDonald for their support for this publication, their guidance, and their useful comments. We are also indebted to the Publications Advisory Board and other IMF colleagues for their comments and support.

    The authors are all IMF staff, except Imelda Flores Vazquez and Paul Masson. Imelda was a summer intern at the IMF in 2011 when she coauthored Chapter 6 with Lamin Leigh. She is currently an assistant professor at the Rochester Institute of Technology in Rochester, New York. Paul Masson is a former IMF staff and is currently a Research Fellow and adjunct professor at the Rotman School of Management, University of Toronto, Canada.

    This publication would not have been possible without the excellent research assistance of Emily Forrest and editorial support of Breda Robertson and Karen Coyne. All remaining errors or omissions are, of course, our own.

    Abbreviations

    ANDEAN

    Andean Community (customs union comprising Bolivia, Colombia, Ecuador, and Peru)

    BLNS

    Botswana, Lesotho, Namibia, and Swaziland

    CCB

    common central bank

    CEMAC

    Central African Economic and Monetary Community

    CEPII

    Centre d’Etudes Prospectives et d’Informations Internationales

    CMA

    Common Monetary Area

    COMESA

    Common Market for Eastern and Southern Africa

    DMP

    Debrun Masson Pattillo

    DOTS

    IMF, Direction of Trade Statistics

    EAC

    East African Community

    ECOWAS

    Economic Community of West African States

    EU

    European Union

    ILO

    International Labor Organization

    LNS

    Lesotho, Namibia, and Swaziland

    MERCOSUR

    Common Southern Market

    MTEF

    Medium-term expenditure framework

    NAFTA

    North American Free Trade Agreement

    OCA

    optimum currency area

    OECD

    Organization for Economic Cooperation and Development

    RMA

    Rand Monetary Area

    ROW

    Rest of the world

    RTA

    Regional trade agreement

    SACU

    Southern African Customs Union

    SADC

    Southern African Development Community

    SARB

    South African Reserve Bank

    SSA

    sub-Saharan Africa

    SWF

    sovereign wealth fund

    WAEMU

    West African Economic and Monetary Union

    WDR

    World Development Report

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