Chapter

16 Regional Integration Arrangements in Southern Africa: SADC and SACU

Editor(s):
Zubair Iqbal, and Mohsin Khan
Published Date:
December 1998
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Author(s)
Trudi Hartzenberg and Gavin Maasdorp 

Regional integration in Southern Africa entered a new phase in the 1990s. Developments in regional integration in the European Union and North America, South Africa’s democratization, and the conclusion of the Uruguay Round of trade negotiations have all played a role in injecting new vigor into regional integration efforts in Southern Africa.

As is well documented, diversity of size and level of development could pose constraints to integration efforts in the region. The diversity within the region highlights the complementarities and the tensions between regional integration and national economic growth and development priorities.

The multiplicity of arrangements in the region further poses specific challenges. Coexistence of the Southern African Customs Union and the Common Market for Eastern and Southern Africa States is certainly feasible. A symbiosis between the Southern African Development Community and COMESA may be more problematic, however.

This chapter focuses on two Southern African regional integration arrangements, SADC and SACU. It reviews their track records, recent developments within these configurations and future prospects, highlighting a selection of key considerations for regional integration in Southern Africa. These considerations include a focus on the need for institutional capacity development, the lack of comprehensive private sector involvement in the regional integration initiatives and the question of political and economic commitment. The conclusion is that regional integration is likely to proceed haltingly and with difficulty.

The Southern African Development Community

SADC has responded to a number of challenges during the 1990s, and the result has been an expanded regional grouping, including the powerhouse of the region, South Africa. There is also a new focus on trade integration, which was not substantively on the agenda of its precursor, the Southern African Development Co-Ordinating Conference (SADCC).

From Development Coordinating Conference to Development Community

SADCC emerged as a response to the challenges of independence and the impact of apartheid South Africa in the Southern African region. South Africa had attempted to exert its influence in the region mainly through its efforts to establish a Constellation of Southern African States, and subsequently, during the high years of apartheid, through military operations against targets in neighboring countries and other means of destabilizing the region.

The establishment of SADCC in 1980 was an attempt to specifically reduce the dependence of Southern African countries on South Africa; a dependence that effectively dated back to the early days of colonialism in the region. Nine countries were signatories to the SADCC at its inception: Angola, Botswana, Lesotho, Swaziland (the latter three constituting the so-called BLS countries), Malawi, Mozambique, Tanzania, Zambia, and Zimbabwe. This meant that the BLS countries, which formed part of SACU (see below) now formed part of the attempt to reduce dependence on South Africa—somewhat of an anomaly given the operation of SACU.

The founding documents of SADCC focused primarily on the promotion of sectoral cooperation rather than on intraregional trade promotion. The initial emphasis, in the SADCC Programme of Action (SPA), was on transport and communications, since in this sphere marked dependence on South Africa existed. Food security and energy also became key focus areas. Industry and trade followed later under the banner Let Production Push Trade.

In 1985 the project-based approach was adapted to focus more on the coordination of sectoral plans and programs. The aim of this change was to facilitate the prioritization of programs and projects, and to clarify the criteria for the evaluation of progress. Each member state was allocated responsibility for at least one sector. For each sector, a sector coordinating unit was established under an appropriate ministry, to carry out its coordinating responsibility, using its own resources. The year 1987 saw nominal attempts to bring the private sector on board, with the formation of an SADCC Business Council. It remained, however, outside the formal SADCC structures and was not a committed attempt to bring the private sector into the business of regional integration. One annual general meeting was attended by only three countries!

By 1989, it was clear that the number of sectors and the growth of the SPA had outpaced the capacity of SADC to manage and to mobilize resources for the implementation of the SPA. In addition, no clear set of priorities between and within sectors had been established, leading to superficial impact of programs. A moratorium was therefore declared, by the Council of Ministers, in August 1990 on the creation of new sectors, so as to facilitate consolidation of effort within existing sectors. A thorough review of the SPA was also commissioned. This review highlighted a number of key concerns, including: (1) approximately 90 percent of the SPA funding was targeted for external financing by international cooperating partners, with the remaining 10 percent met by member states, which stood to benefit from each particular regional program; (2) by 1989, the SPA included 500 projects, some of which were of doubtful regional importance or feasibility, due to weaknesses in the capacity to process projects on the part of some SADC institutions; and (3) the size of the SPA was unrelated to the resource availability and national development policies and strategies of member states (Chipeta and others, 1997).

Despite the moratorium on the establishment of sectors, and the findings of the SPA review, the areas of cooperation have continued to expand. By 1995, the number of areas of cooperation had expanded from 14 to 18. The reliance on external funding for the implementation of the SPA continues, and so far the SPA has not taken into account the shift in emphasis from coordination of discrete projects to regional integration.

The early 1990s brought the realization that the demise of apartheid was approaching, and that this would bring a new dimension to regional integration in Southern Africa. For SACU, this meant that operation “at arm’s length from South Africa” by the BLNS1 countries would be replaced by closer, more interactive ties. A Customs Union Task Team (CUTT) was appointed in late 1994 to investigate the operation of SACU and recommend changes to the agreement.

For SADCC, the pending democratization of South Africa necessitated a reorientation of its objectives and focus. The outcome was the Treaty of Windhoek of August 1992, which led to the transformation of SADCC into the Southern African Development Community. SADC more closely resembles the PTA, precursor of the Common Market for Eastern and Southern Africa. At the August meeting, a theme document proposing moves away from project cooperation to close political cooperation to pave the way for equitable trade integration was also considered. SADC was now directly concerned with trade integration.

The SADC treaty focused on

  • The harmonization of political and socioeconomic policies and plans of member states.

  • The encouragement of economic, social, and cultural ties across the region.

  • The development of policies aimed at the progressive elimination of obstacles to the free movement of capital and labor, of goods and services, and of people generally among member states.

  • The development of human resources.

  • The promotion of the development and transfer of technology.

  • The improvement of economic management and performance through regional cooperation.

  • The promotion of harmonization of international relations of member states.

  • The promotion of international understanding and cooperation and support, so as to mobilize the inflow of private and public resources into the region.

At its independence in 1990, Namibia became the tenth SADC member. South Africa joined in August 1994 and, in terms of the SADC mission of functional cooperation and division of responsibility for the selected areas of cooperation among the member states, was accorded the responsibility for the finance and investment portfolio. Mauritius became the twelfth SADC member in 1995. September 1997 saw the admission of the Seychelles, Africa’s richest country, and the Democratic Republic of the Congo, the third poorest in Africa. The admission of the latter two increases the market size of SADC to account for approximately 60 percent of sub-Saharan Africa’s GDP (Business Africa, October 1-15, 1997), but lowers its per capita GDP to $990 (still double that for sub-Saharan Africa as a whole, however). This latest expansion of SADC brings opportunities as well as risks, especially with the Congo’s admission. President Kabila’s initial reluctance to cooperate with the United Nations in its investigations of alleged ethnic cleansing by his troops could cost the country dearly in terms of donor community support, and IMF and World Bank funding. The enormous economic potential of this new member state could therefore be seriously compromised by the associated risks, and these costs could be keenly felt by SADC.

A number of key trends and recent developments have confirmed that the SPA, its policies, and the strategies on which it is based are not adequate or appropriate to address the challenges that now face the region. These include the growing global trend toward the establishment of economic blocs so as to take advantage of economies of scale and integration, the competition for scarce resources from the Eastern European states, and the conclusion of the Uruguay Round of trade negotiations. The transformation of the SPA to more closely fit the SADC vision is therefore urgent. This will involve a shift in funding reliance from the international cooperating partners to member states, placing serious emphasis on employment creation through the SPA, finding clear direction in the prioritization between and within sectors, and attempting to address the imbalances in economic development of the region.

Trade Integration: The SADC Trade Protocol

The SADC Trade Protocol was signed in August 1996 at the Maseru Summit, marking a breakthrough in the process of advancing to a free trade area (FTA). The bickering that preceded the signing of the protocol, concerning in particular access to South Africa’s markets, did not bode well for the implementation process. The intention of the protocol is to ensure that firms in all countries within the region can compete on an equal footing to provide for the collective market of 150 million consumers. It is anticipated that regional free trade will increase intra-SADC commercial activity, enhance economic growth prospects, create jobs, and raise the standard of living of SADC citizens (SADC Executive Secretary, Harare Summit on Trade and Investment, 1997). At the same summit, President Mandela of South Africa noted the anticipated benefits of a collective regional power within a “world characterized by fierce competition for limited resources.” These optimistic expectations may exceed the realm of possibility of the SADC regional integration configuration, however.

At the time of the signing of the Trade Protocol, which provides for the gradual liberalization of intraregional trade, 10 of its members (excluding only Botswana and South Africa) had already effected 70 percent tariff reductions under the COMESA Trade Liberalization Program. The overlap in membership of the various arrangements in the region could hamper implementation of the SADC Trade Protocol.

Trade integration, as envisaged in terms of the SADC Trade Protocol, has the following objectives (as stated in SADC, 1996, Article 2):

  • To liberalize intraregional trade in goods and services on the basis of fair, mutually equitable and beneficial trade arrangements, complemented by protocols in other areas.

  • To ensure efficient production within SADC, reflecting the comparative and dynamic advantage of its members.

  • To contribute toward the improvement of the climate for domestic cross-border investment.

  • To enhance the economic development, diversification, and industrialization of the region.

  • To establish an FTA among the SADC member states.

In pursuit of these objectives, the Protocol provides for the elimination of barriers to intra-SADC trade. More specifically, import and export duties are to be eliminated, and NTBs are to be eliminated and no new barriers erected, subject to certain exceptions, which are outlined in Article 9 of the Protocol. These exceptions take account of international agreements, conservation of exhaustible natural resources and the environment, and other factors.

The principles outlined in the Protocol, according to which the phased reduction of trade barriers was to proceed, have been overtaken by a recent brief to Imani Development to prepare a report on tariff reduction schedules and a list of sensitive products. Bargaining over these will begin in 1998, and if the protocol is ratified in 1998, then the FTA could be complete by 2006. The SACU countries are currently preparing a collective position on the tariff reductions.

Since the SADC tariffs will be higher than the COMESA’s tariffs until at least 2006, trade between SADC members that are also COMESA members will be conducted under the COMESA arrangement. The SADC Trade Protocol will only effectively cover non-COMESA SADC members, since importers will clearly choose to pay the lower rates of customs duties under the COMESA umbrella.

For products to be accorded SADC preferential treatment, rules of origin have to be complied with. Products will be accepted as of SADC origin, if they satisfy the following: (1) They are consigned directly from a member state to a consignee in another member state. (2) They must meet one of these conditions: are wholly produced goods; are produced in the member states wholly or partially from materials from outside the member states or of undetermined origin by a process of production that reflects a substantial transformation of those material, such that (a) the c.i.f. value of those materials does not exceed 60 percent of the total cost of materials used in its production, or (b) the value added resulting from the production process accounts for at least 35 percent of the ex-factory cost of the goods. (3) There is a change in the tariff heading of the product as a result of the processing from the nonoriginating materials.

Under the Trade Protocol, SADC-member states agree to accord one another MFN treatment, so as to ensure equal preferences. An element of contradiction appears in the inclusion of a provision that allows member states exemption from the obligation to extend preferences of another trading bloc of which they were a member at the time of the signing of the Trade Protocol.

Provisions are included to allow member states not to accord preferential treatment to intra-SADC trade for reasons such as national security, cause of serious injury to a domestic industry that produces similar or directly competitive products, and protection of infant industries (this appears to contradict the elimination of infant industry protection referred to above).

A range of measures complementary to trade liberalization, such as the promotion of cross-border investment, protection of intellectual property rights, competition policy, trade development, and coordination of trade policies, are also embraced in the Protocol. In addition, the implementation of intraregional trade measures, such as trade facilitation, transit trade, standards and technical regulations on trade, and monetary and financial arrangements, are also provided for.

The fact that a limited selection of commodities will be eligible for preferential trade under the Protocol can be expected to limit its impact on intraregional trade expansion. Member states can be expected to offer commodities that do not constitute a significant proportion of their imports or those they know are not produced in the region for preferential treatment under the arrangement.

The removal of NTBs is likely to proceed with difficulty—the calculation of tariff equivalents is much easier in theory than in practice, and negotiations are likely to be complicated. In the SADC case, restrictive import licensing, administrative delays, bureaucratic contortions, stipulations of sources of supply, and prohibitions on importation of certain goods may prove to be serious challenges in this regard. SADC may benefit by taking a leaf from the COMESA arrangement to implement a more practical approach to the reduction of NTBs.

An important consideration is COMESA’s intention to erect a common external tariff (CET). The SADC countries that are also COMESA members may not be in a position to extend zero tariff preference to countries that are not COMESA members. Taking account of the fact that one SADC country, South Africa, accounts for the bulk of intra-SADC trade, it can be expected that very little intra-SADC trade will be generated as a result of the Protocol. In addition, the confusion that is likely to ensue from having two parallel arrangements, SADC and COMESA, with significant overlaps in membership, liberalizing intraregional trade may be confounded and confused rather than facilitated. In addition, the Cross-Border Initiative, a fast-track regional integration initiative in the region, that commenced in 1993 and has a membership overlapping with both SADC and COMESA, is forcing member countries to lower tariffs to those of the lowest-tariff members—which under structural adjustment programs have already reached levels as low as 5 percent.

South Africa’s decision to join SADC rather than COMESA indicated that COMESA’s clear objective of the formation of a common market (effective trade integration), was found less appealing than the less comprehensive objectives of SADC at the time, 1992. South Africa’s perspective is that a comprehensive approach to regional development encompassing a regional industrial strategy, including regional infrastructure projects and harmonization of the financial sector and not merely free trade, should be on the SADC agenda. It is important to keep in mind that, while governments contribute to the environment within which business decisions, including location decisions, are made, it does not make those decisions. Undeniably, South Africa as the dominant economy in the region, and given its current privileged international status, is uniquely positioned to make a positive contribution to the international investor image and the competitiveness of the region. A query in this regard is whether it can afford to concentrate on regional issues while domestic challenges to policymakers are growing uncomfortably.

The overlap between SADC and COMESA, and the sensitivities related to South Africa’s membership in one and nonmembership in the other, are likely to present problems for integration in the region. Some of these arise from the asymmetric trade patterns in the region. South Africa enjoys a significant trade surplus with the region, and this has been enhanced by democratization—the period 1990–94 recorded a 24 percent increase in the dollar value of South Africa’s exports to the region (McCarthy, 1996, p.19).

Prospects for Intraregional Trade Growth in SADC

The nature and patterns of intraregional trade in Southern Africa are quite predictable, presenting a familiar developing-country scenario. The region is heavily dependent on the international market for capital and technology-intensive goods, for which there are, with the minor exception of South Africa, few intraregional substitutes. Primary commodity exports dominate the trade profiles of all countries within SADC, recording an average of 82 percent of total SADC exports. South Africa’s exports dwarf the SADC total; for 1993, South Africa accounted for approximately 70 percent of SADC total exports and 62 percent of total imports (SADC Secretariat). Table 1 presents South Africa’s trade profile, for 1994, with countries in Southern Africa.

Table 1.South Africa’s Trade with the Southern African Region, 1994
CountryExports from South AfricaImports to South Africa
Botswana1,146157
Lesotho83069
Namibia1,014425
Swaziland793323
Malawi14552
Mozambique39626
Zambia32629
Zimbabwe693288
Source: Nedcor Economic Unit, Johannesburg.
Source: Nedcor Economic Unit, Johannesburg.

The large trade surplus enjoyed by South Africa with the region can be expected to cause much consternation in the region. Access to South African markets has been the cause of much contention in this connection. More recently, however, South Africa has not been alone in attempting to limit access to its markets. In March 1997, Zambia stopped exports of cement to Zimbabwe after the latter increased the import duty from Z$13 to Z$180 per ton (SADC Today, April 1997). These are some of the hitches in the way of free trade in the region.

Despite obstacles, expectations for SADC are running fairly high—its growth in membership being one indicator of this. The admission of South Africa, in particular, to SADC and the signing of the Trade Protocol, in spite of a growing literature to show that small countries have more to gain from multilateral liberalization than from regional integration, raise the need for critical inquiry into the prospects for increasing intraregional trade within SADC.

A key question is whether SADC’s attempts to increase intraregional trade will be constrained by the structural characteristics of the region. Recent evidence suggests South Africa may be in a position to benefit disproportionately from regional and specifically trade integration initiatives. Relocation of production activities, for example, South African breweries to Tanzania, clothing and textile producers to Malawi, and the expansion of South African retailers into a range of neighboring countries (including Zambia, Zimbabwe, and Mozambique) are evidence of South Africa’s benefits from the process of closer integration within SADC. Evidence of the converse can be found more readily in South Africa’s informal sector, in particular retail activities, indicating a clear imbalance in the integration process.

SADC’s track record certainly leads to cautious optimism regarding its prospects, especially in terms of generating an increase in intraregional trade. Internal dissent, lack of focus on joint objectives, and lack of institutional capacity to efficiently manage programs and projects, have hampered SADC’s achievements, and the achievement of a cohesive strategy on external economic relations. However, it appears that since the transformation from SADCC into SADC, the expectations from countries in the region have improved markedly, as is evidenced by the clamor to join the group.

Integration prospects look bleak when the emerging disputes between South Africa and its neighbors are reflected upon. Perhaps one of the most public was the dispute between Zimbabwe and South Africa that emerged at the September 1997 summit in Malawi. Zimbabwean sources accused President Mandela of being a “bully.” The latter had taken over the SADC chair in 1996, and had reportedly attempted to oust President Mugabe as chair of the politics, defense, and security wing. As expected, South Africa denied such allegations. Nevertheless the incident is evidence of a perception that South Africa could become the playground bully. Another dispute concerns the negotiations to modernize and streamline SACU. Its five member states form the “inner-core” of SADC. Negotiations to revise the revenue-sharing formula have been going on for the past three years, and little progress has emerged to date. The four smaller members are demanding a share of the tariff-setting machinery, so as to prevent South Africa’s Board of Tariffs and Trade from having too dominant a role (see the discussion below on SACU). The director general of the South African Department of Trade and Industry has indicated that it is unlikely that South Africa would agree to a regional tariff-setting body that could potentially outvote it. He argues that this would only be tenable once the other member countries have tabled “clear industrial policies” (Business Africa, October 1–15, 1997, p. 2). Further frustrations over South Africa’s behavior are being voiced in connection with “Pretoria sabotaging SACU industry”. This is discussed below.

Another important consideration is South Africa’s proposed FTA with the EU. Critics claim that South Africa is involved in a number of possibly mutually incompatible sets of trade negotiations, including the SADC Free Trade Protocol, SACU negotiations, providing for accelerated tariff cuts; and bilateral negotiations with members of SADC—the SADC Secretariat has indicated that it would prefer focus on regional rather than bilateral arrangements, such as that between South Africa and Zimbabwe, and South Africa and Zambia.

Given South Africa’s dominant position in the region, these disputes are to be expected. South Africa’s share of SADC’s GDP currently stands at 77 percent (Business Africa, October 1–15, 1997). In fact, frustration with South Africa can be expected to escalate as negotiations with the EU gather momentum, and as the 14 SADC states attempt to find common ground as regards the timing and method of regional tariff cuts. Furthermore, the upcoming lack of effective leadership in the region to guide SADC forward, is cause for concern. Slow progress toward free trade, in halting and dispute-ridden negotiations, is a very likely scenario.

The implication, from this and other studies referred to above, is therefore that factors that will encourage development and the growth of the individual economies are more likely to enhance the prospects for intraregional trade growth. Diversification of industrial structures, macroeconomic stability, political stability, and policy credibility may also attract FDI, and to this extent, if SADC can contribute to a more stable political and economic environment, it may lead indirectly to increased intraregional trade flows.

The Southern African Customs Union

This section reviews the performance of the Southern African Customs Union, the oldest in the world, and examines its impact in the region while reflecting on the drawn-out renegotiations of the agreement. Its origins date to 1889; incremental growth thereafter saw a common customs union covering the area of present-day Botswana, Lesotho, Namibia, South Africa, and Swaziland by 1904 and, by 1921. SACU, with the exception of Botswana, is overlaid by the Common Monetary Area (CMA).2 Since Botswana has a convertible currency closely tied to the rand, and there is a high degree of de facto labor mobility among the countries, SACU and the CMA together provide the Southern African countries with an advanced form of economic integration approaching that of a common market. SADC might be the flavor of the year, but its achievements are still in the future: SACU and the CMA already exist.

The 1969 Agreement

The present SACU Agreement was signed in 1969. Before that, the customs union had been governed by an agreement of 1910, which was concerned mainly with the allocation of revenue among the four partners (South Africa and the then High Commission Territories, HCTs, of Basutoland, Bechuanaland, and Swaziland). On the basis of figures for the previous three financial years, the share of customs revenue allocated to the HCTs was fixed at 1.31097 percent and, within this figure, the allocation to each of the territories was also fixed. This arrangement became outdated as the various economies grew at different rates. Thus, from 1965/66, The United Kingdom, as the administering power, changed the allocation among the three territories, with Swaziland gaining at the expense of the others, especially Basutoland.

After the independence of the three territories as Botswana, Lesotho, and Swaziland, a new, more comprehensive agreement was negotiated. It was explicitly aimed at encouraging the development of the BLS group and the diversification of their economies. Moreover, to compensate BLS for what they argued were the disadvantages of being in a customs union with a more-developed country—namely, the trade diversion effects, the polarization of industrial development between core and peripheral areas, and the loss of fiscal sovereignty3—Article 14 of the Agreement inserted an enhancement factor into the revenue-sharing formula.

The formula works as follows. All customs, excise, and sales duties (but not general sales tax) as well as import surcharges collected in the five countries are pooled at the South African Reserve Bank. The formula provides the basis for calculating the amount due to each of the BLNS countries. There are three stages in this calculation. First, the basic amount due to each country, let us say Swaziland, in any financial year is given by the equation

where R = the amount payable to Swaziland; A = c.i.f. value (including all duties) at border of imports into Swaziland from all sources; B = value of excisable and sales duty goods produced and consumed in Swaziland; C = excise and sales duties paid on B; D = c.i.f. value at border of imports into the common customs area from the rest of the world; E = customs and sales duties paid on D; F = value of excisable and sales duty goods produced and consumed in the customs union; G = excise and sales duties paid on F; and H = total revenue pool of customs, excise, and sales duties.

The formula thus seeks to divide the common revenue pool among the partners in proportion to their annual imports and their production and consumption of dutiable goods, but, as mentioned above, an enhancement factor was added, so that the formula may be rewritten as

where 1.42 = enhancement factor.

The enhanced rate of revenue received by Swaziland is then

In 1976, the formula was amended to provide BLS with a stabilized rate of revenue of about 20 percent. This may be written as

subject to the constraints

First, the amount due to Swaziland is calculated as in equation (2). Then, if the enhanced rate of revenue

half of the difference between the enhanced rate and 20 percent is either added to or subtracted from 20 percent subject to the constraints that the stabilized rate may not be less than 17 percent or greater than 23 percent.

The reason for the introduction of the stabilization factor was that, in 1969, BLS had wanted a rate of revenue of 20 percent—the average in African Commonwealth countries. However, the rate was fluctuating widely from year to year, and this made revenue forecasting and economic planning difficult. Thus, they negotiated for an amendment that would guarantee them a rate of revenue of 17–23 percent fluctuating around a mean of 20 percent.

There are five pertinent issues concerning revenue sharing. First, the formula includes BLNS imports from South Africa, but not vice versa. The inclusion of South Africa’s imports from BLNS would increase the denominator, albeit by a relatively small amount, and thus reduce the share payable to BLNS. Walters (1989) points out, however, that the cost to South Africa of maintaining customs posts at BLNS borders to record imports might well be more than the revenue it could earn from the inclusion of those imports. Nonetheless, because the great majority of BLNS imports are from South Africa and hence are duty free, they contribute very little to the common revenue pool by way of duties collected.

Second, by including excise duties and sales tax, the formula takes the agreement beyond that of a pure customs union and some way along the path of fiscal harmonization, which is a characteristic of an economic union.

Third, if one accepts 20 percent as a target rate of revenue on the part of BLNS, there is a case for increasing the stabilization factor range given the tendency for the rate to approximate only 17 percent. But, as Walters (1989) points out, if 20 percent is an acceptable target, why then not simply fix Rs at 20 percent rather than retain the constraints in equation (3) above? It is noteworthy that the effect of the stabilization factor is that, in recent years, the nominal multiplier has exceeded 1.42, standing at 1.94 in 1991/92. However, Leith’s (1993) calculations show that Botswana could gain slightly, on a static basis only (ignoring transitional and long-term dynamic effects), from having its own independent tariff regime. It may well be that iso-price tariff calculations of what some of the other smaller countries could raise on their own by applying the SACU common external tariff would also show that the effective enhancement was much lower than the nominal figure of 94 percent.

Fourth, the actual payments made to BLNS out of the common pool in any one year do not equal the accrued revenue, that is, the revenue calculated by the stabilization factor. The reason for this is that relevant statistics are not available to enable their accrued revenue to be calculated immediately; instead, there is an elaborate formula for making payments in respect of any particular year during a two-year period in three installments. A common argument in the literature is that, because the cash flow always lags behind the accruals, this may be regarded as an interest-free loan to South Africa, which has the use of the funds in the meantime. Moreover, the shortfall declines in real value because of inflation. Walters (1989), however, argues that because estimation errors are corrected each year, cash flow will only lag behind accruals if estimation errors are increasing. He interprets the payments formula as a forecasting one based on the assumption that the absolute growth in accrued revenue during any two-year period is constant. Cash flow will then lag only if absolute growth of accrued revenue is increasing, causing the equation to forecast too low a value for accruals. Thus, the alleged two-year lag is a misnomer for a poor forecasting method that consistently underestimates future accrued revenue.

Fifth, there has been an overall downward trend in South Africa’s share of the common revenue pool (Table 2). The main reason for this is that the BLNS economies are highly open with a high propensity to import and, with average rates of economic growth exceeding that of South Africa, the numerator in the formula has grown more rapidly than the denominator.

Table 2.Payments from Common Revenue Pool
Fiscal YearPool (Millions of Rand)To BLSTo Namibia1To South Africa (percent)
Millions of RandPercentMillions of RandPercent
1969/70430.716.93.996.1
1970/71463.916.03.496.6
1971/72640.722.73.596.5
1972/73747.329.74.096.0
1973/74859.148.95.719.62.392.0
1974/75864.366.37.722.12.689.7
1975/761,010.958.15.730.13.091.3
1976/771,113.651.14.636.03.292.2
1977/781,447.5104.97.246.23.289.6
1978/791,723.6162.69.447.62.887.8
1979/802,290.3228.710.044.51.988.1
1980/812,246.4260.111.641.51.886.6
1981/822,122.6243.811.5257.812.176.4
1982/832,418.8314.713.0250.010.376.7
1983/843,167.8390.812.3250.07.979.8
1984/853,299.8462.514.0250.07.678.4
1985/863,614.6472.113.1300.08.378.6
1986/874,118.0496.912.1350.08.579.4
1987/884,706.6577.312.3350.07.480.3
1988/896,867.5719.810.5394.25.783.8
1989/907,675.6918.012.0447.85.882.2
1990/917,922.21,353.717.1657.68.374.6
1991/928,017.01,814.222.6735.59.268.2
1992/938,917.92,248.725.2751.68.466.4
1993/9410,136.52,307.522.8765.87.669.7
1994/9511,222.12,346.420.9902.48.071.1
1995/9612,257.82,734.422.31,155.79.468.3
Sources: McCarthy (1986); Report of the Auditor General for the Financial Year (annual); Department of Trade and Industry, Pretoria.

Namibia’s first receipts as an official member were for 1990/91. Before that, South Africa used the pool for arbitrary transfers to Namibia (South West Africa).

Sources: McCarthy (1986); Report of the Auditor General for the Financial Year (annual); Department of Trade and Industry, Pretoria.

Namibia’s first receipts as an official member were for 1990/91. Before that, South Africa used the pool for arbitrary transfers to Namibia (South West Africa).

Development Objectives

It is important that all member countries share in the benefits of economic growth and development. A review of comparative performances of the economies since the signing of the 1969 Agreement shows that BLS have enjoyed far higher average annual real growth rates than South Africa. It is clearly impossible to disentangle and to quantify the effects of the various forces that were at work, but South Africa’s virtual stagnation is attributable very largely to domestic political volatility from 1976 onward and the effect that this had on investment. For BLS, it is clear that SACU membership did not prevent them from achieving satisfactory rates of real economic growth or from transforming the sectoral composition of their GDP, agriculture’s share falling significantly and that of industry rising. In terms of per capita income growth, BLS have improved their position relative to South Africa during the past twenty years. World Bank figures (World Development Report, annual) show that Botswana’s per capita GNP as a proportion of South Africa’s increased from 30.6 to 92.1 percent between 1976 and 1994; during the same period, Lesotho’s rose from 12.7 to 23.4 percent, and Swaziland’s from 35.1 to 36.2 percent.

During the 1969 negotiations, South Africa agreed to infant industry protection (Article 6) and a pioneer industries-type clause (Article 7) for BLS. If by “development” is meant industrial development, however, then economic integration schemes cannot guarantee that all member countries will attract industry. Textbook advocacy of a planned program of industrial development for such schemes fails in practice, because locational decisions are made not by governments but by firms, and firms cannot be coerced into locating in countries to which they do not want to go. The tendency of industries to polarize in the most developed country would mean, in the case of SACU, that South Africa would attract the great bulk of new industrial investment. This tendency was exacerbated shortly after the signing of the 1969 Agreement by South Africa’s industrial decentralization policy, adopted to further the development of the Bantustans, and later by a more sophisticated Regional Industrial Development Programme (RIDP) from 1982 onward. BLS simply did not have the resources to match the incentives available under the South African program (Maasdorp, 1988). McCarthy (1986) correctly pointed out that the industrial polarization problem in a customs union cannot, in principle, be countered by compensatory revenue transfers.

Unfortunately for BLS, neither these articles nor Article 11 (which allows member countries to prohibit the importation of goods for economic, social, cultural, and other reasons) were sufficient to offset the forces of polarization in the 1970s. Furthermore, BLS did not always make the maximum use of these articles, and some differences of interpretation also occurred (Maasdorp, 1982). Cases in which South Africa was accused of attempting to crush new industrial ventures in BLS by acting ultra vires the agreement in fact related to instances in which proposed industries in BLS would have penetrated the South African market by flouting NTBs applicable there (Maasdorp, 1982). Article 11(5) allowed BLS to import goods from outside the SACU without regard to South Africa’s import controls, provided they did not reexport those goods to South Africa and thereby obstruct the attainment of the economic objectives of that import-control legislation. The two controversial cases were a proposed fertilizer factory in Swaziland and motor vehicle assembly plant (Honda) in Lesotho: both were designed primarily to serve the South African market, and represented attempts to penetrate that market by avoiding NTBs imposed by South Africa on its own industries. South Africa therefore invoked Article 11(5), but it could also have used Article 17, which states that if one member sells a product to a partner in such increasing quantities as to threaten producers in the partner country, the two governments should consult and cooperate in finding a mutually acceptable solution.

The best prospects for industrialization in BLS in the 1980s seemed to lie in their attracting as much industry as possible while South Africa was being subjected to disinvestment and sanctions campaigns, and to using the articles in the Agreement, especially those relating to infant and pioneer industries, to the maximum. Indeed, membership in the SACU, and the duty free access to the larger South African market that this guarantees, has always been a major promotional point of BLS in attempting to attract foreign investment in manufacturing.

The extent to which SACU membership per se has helped in this process cannot be quantified, but it was certainly a factor. For example, the decision by Conco in 1986 to disinvest from South Africa and relocate its Coca-Cola concentrate plant to Swaziland was based on the continued ability to service the South African market duty free. This is but one example: there is plenty of anecdotal evidence to suggest that this was a factor in the case of other disinvesting companies. However, a number of other factors contributed to speeding up the growth of the manufacturing sector in BLS during the late 1980s. In particular, all three countries revised their incentives for foreign investment in manufacturing, and this attracted firms from the newly industrialized Asian economies; for example, Swaziland’s revised incentives of 1985 attracted four textile-related manufacturing plants from Taiwan Province of China the following year, while in Lesotho the annual growth rate in real value added in manufacturing was 10 percent between 1986 and 1991, principally as a result of FDI in textiles and clothing from the Far East.

Mention has been made above of an abortive attempt in the 1970s to establish a motor vehicle assembly plant in Lesotho. This industry has once again become an issue within SACU. In recent years, a French manufacturer (Peugeot) planned to set up a plant in Namibia to serve the South African market, but South Africa objected. Surprisingly, however, a Swedish truck manufacturer (Volvo) and a Korean car manufacturer (Hyundai) went ahead with assembling in Botswana. The difference between the Hyundai venture and those of Honda and Peugeot are: (1) The local content program of the South African government in respect of the motor vehicle industry has progressed significantly since the 1970s, and is no longer regarded as an import control measure as it was at the time the Honda plant in Lesotho was being planned. Thus Article 11(5) was not a valid mechanism for South Africa to use to stop the Botswana project. (2) The Namibian government requested that excise-duty relief be given for the proposed Peugeot plant, but this was not acceptable to South Africa. By contrast, Botswana saw a loophole in the form of imports under rebate of customs duty in respect of semi-knocked-down (SKD) units. In fact, a number of enterprises in South Africa was making use of the same loophole to assemble vehicles that were not being manufactured in South Africa.

The South African motor industry and trade unions were upset at these developments, and requested the South African government to intervene. The Board of Tariffs and Trade agreed to abolish the rebate, and there were also proposals to raise excise duty on imported vehicles and components not conforming to a definition of completely knocked-down (CKD) units that had been revised in 1993. The South African industry wanted Botswana’s imported SKD kits reclassified as completely built-up (CBU) units, which would carry a much higher duty. Botswana complained that this would adversely affect its vehicle assembly. The Board of Tariffs and Trade did not implement its new policy pending resolution at the SACU level. The matter was resolved in July 1995 when South Africa and BLNS agreed that the motor industry should be based on CKD units. A new definition of CKD came into effect in April 1995 and allowed SKD assemblers two years to convert their facilities; later, this was extended until 1999. In terms of the GATT offer, the SACU is moving away from excise duties to customs duties, and will allow rebates to manufacturers and assemblers on the basis of their export/import ratios: a favorable ratio will allow an individual manufacturer to import even CBUs.

Intra-SACU Trade

South Africa has tended to underestimate its benefits from the SACU. Together, BLNS are South Africa’s major trading partner. For example, in 1994 exports to BLNS were worth R13,788 mn (more than double that to any other country) while total trade with BLNS was R17,131 mn as against R16,678 mn with Germany, South Africa’s largest single trading partner. Moreover, South Africa has a favorable balance of trade with the BLNS, running at about 5.9:1, and they take approximately 25 percent by value of its manufactured exports. South Africa traditionally has been by far the major supplier. These statistics refer to goods “from or through” South Africa; that is, they include goods that were imported through South African commercial channels but that might have had their origin elsewhere. In other words, the figures for South Africa reflect the role of South African producers as well as distributors in supplying the BLNS market. Since 1969, Swaziland has imported at least 90 percent of its requirements from South Africa in all but five years. Lesotho obtains more than 90 percent of its imports from South Africa, while for Namibia the figure is about 90 percent and for Botswana 80 percent. In the absence of a customs union, some of South Africa’s exports to BLNS would face severe competition and be lost to suppliers from abroad. The proportion is difficult to estimate because many retail and wholesale firms in BLNS are branches of South African companies and are linked into the buying patterns of their head offices. However, there is no doubt that there are trade-diverting effects in South Africa’s favor. Moreover, apart from being a market for goods, there is a substantial flow of services from South Africa to BLNS. Clearly, BLNS purchases contribute substantially to South African company profits and employment attributable to the trade-diverting effects of SACU tariffs, which until the advent of the WTO in 1995 had been set in order to protect South African industry. McFarland (1983) estimated that 300,000 jobs in South Africa were attributable to the SACU, but his methodology might be questioned.

Trade liberalization under the WTO will lead to a reduction of SACU tariffs during the period 1995–99. This will open up the SACU market to competition from overseas suppliers, and it is possible that South Africa might lose some of its hold on BLNS markets. The liberalization of tariffs, therefore, might have the effect not only of reducing the degree of trade diversion in the SACU for BLNS but also of leading to a slightly less skewed balance in their trade with South Africa.

Many BLNS industries predominantly serve the South African market, for example, the range of Swaziland’s manufactured exports to South Africa has grown rapidly since the mid-1970s when the industrial diversification of the country started to show in the statistics. This continued in the 1980s, the large increase in exports to South Africa in the second half of that decade being accounted for largely by increases in textiles, miscellaneous manufactured goods, and miscellaneous edible products. Soft-drink concentrate and paper were dominant in these new product ranges. The net result of these developments is that South Africa has become far more important as a destination for Swaziland’s exports over the years. Whereas in the early 1970s it took only about 16 percent on average of Swaziland’s exports, the figure today is approximately 50 percent. In the case of Lesotho, while the absolute volume of exports to South Africa has grown, the proportion has remained at about 40 percent, Lesotho’s growing exports of clothing and textiles being aimed mainly at preferential markets abroad. The exports of Botswana and Namibia are dominated by minerals (especially diamonds) and are sold mainly abroad; nevertheless, South Africa takes 25 percent of Namibia’s exports and the major share of Botswana’s manufactured exports.

The high level of intra-SACU trade is driven by firms. In a survey in 1992 that covered firms engaged in cross-border trade in BLNS, firms were asked whether or not they had found the various regional groupings to be useful in the course of their business. The CMA (85.4 percent) and SACU (73.3 percent) received the highest rates of approval. The survey did not include South Africa, but organized business in South Africa has generally been very positive toward the Customs Union and, indeed, to some vague notion of deeper integration. The positive experience of BLNS firms in SACU revolved around four points, namely, ease of trade, the lowering of prices, the availability of goods and services, and access to markets. Under ease of trade, answers include: a reduction of import problems (borders/customs problems, documentation, bureaucracy, delays), a simplification of business procedures, ease of contact with suppliers, and good information. The main benefits from the CMA related to issues of mobility, the exchange rate, and convertible currency. Many firms benefited from the free flows of capital and currency; the reduction of exchange control problems (because of the ability to pay in local currency); the reduction of bureaucratic and administrative problems; the absence of delays in payment; and the facilitating of intercompany business activities and transfers of funds. Rand parity was regarded as useful, the exchange rate was favorable for exporters, and foreign exchange fluctuations with neighboring countries were eliminated. The rand was a fully convertible currency and accepted worldwide, and any independent currency would not have had sufficient backing to be stable. The CMA was also good for intraregional tourism.

Cross-Border Investment

If the SACU is to promote higher rates of economic growth in all member countries, this will also imply higher rates of investment. South African firms have been major investors in the smaller countries, and the flow of funds to Lesotho, Namibia, and Swaziland has been facilitated by their membership in the CMA. BLNS have not been left out in South Africa’s growing cross-border investments since the political changes of 1990. Indeed, South African firms in banking and finance, retailing and wholesaling, and manufacturing have continued to expand in BLNS, although unfortunately no data are available in respect of these flows.

The Renegotiations

By the end of the 1970s, it was clear that neither South Africa nor BLS were entirely satisfied with the 1969 Agreement, albeit for different reasons. In essence, South Africa and BLS differed in the 1980s as to where the emphasis ought to be placed in the customs union, that is, on revenue or development. According to Walters (1989), the SACU “was to be a tool of integration designed to promote economic development and it was explicitly recognized that this could only be achieved if there were discriminatory measures in favor of BLS.” One of these measures was the enhancement factor. Since the new Agreement led to an immediate increase (by a factor of 2.8) in the revenue accruing to BLS, it is not surprising that it was this aspect rather than development that they tended to emphasize.

Whereas South Africa wanted to shift the emphasis to ways and means of encouraging economic development in BLS in line with the preamble, BLS raised a number of problems concerning the formula, proposing that the range for the stabilized rate of revenue be increased to 19–25 percent, and that an econometric method be introduced for calculating cash flows and eliminating the time lag in payments. These proposals were favorably considered by a subcommittee of the Customs Union Commission in 1981–82 but were rejected by Pretoria, which stated that it wished to renegotiate the Agreement as a whole. South Africa then commissioned a study (McCarthy, 1986) to investigate the matter. Thereafter, it advised BLS that it would press for a revised, “clean” formula with no enhancement or stabilization factors; a strategy to counter polarization and to provide for an equitable distribution of economic development in the Customs Union; the establishment of a Council of Ministers and a permanent Secretariat; and ways of improving BLS relations with the then Board of Trade and Industries. BLS contested the main conclusions of the McCarthy report, and it was agreed to establish a study group to investigate the agreement.

With no progress being made in the investigation, BLS took the initiative, and negotiations recommenced in 1990. At that stage the newly independent Namibia joined the SACU as a formal member. South Africa’s attitude (in 1991) was that the Customs Union was becoming financially unaffordable, and that it wished to have greater freedom in respect of its industrial development policies. It suggested that the agreement in its present form should continue pending further discussions, but that the terms of reference of the study group should be suspended.

In the following two years, South African government spokesmen from time to time made public comments suggesting that Pretoria wished to dissolve the Customs Union. For example, the minister of finance was reported in the press as having been on the verge of withdrawing South Africa from SACU, being dissuaded from doing so by the Department of Foreign Affairs (Sunday Times Business Times, February 7, 1993).

South Africa then suddenly changed its views on SACU, the minister of finance informing his BLNS counterparts in 1993 that SACU was indeed viewed as an important instrument for regional integration. Positive views were also expressed by BLNS, and it was agreed to establish a Joint Technical Group, the first task of which was to deal with the GATT offer. However, with general inaction in government in Pretoria in the runup to the April 1994 elections, other SACU matters took a back seat, and it was only in November that a CUTT was established.

The Current Position

The five SACU countries have been renegotiating the existing Agreement since December 1994. The negotiations have been behind closed doors with very little information being made available to the public, but it is well known that the major issues have been the revenue-sharing formula and the institutional structure of the proposed secretariat together with the control of tariff policy. The new agreement was originally scheduled to be concluded in 1995, but it is now clear that this will not occur before 1998.

The CUTT last met in October 1996, and there has been virtually no movement on the major contentious issues since then. One reason is that the negotiations are being conducted by the South African Department of Trade and Industry which simultaneously has been involved in discussions with the European Union on a free trade agreement and with SADC on a trade protocol for the establishment of a free trade area. More recently, too, the SACU countries together have been negotiating a free trade agreement with Zambia. The labor resources of the DTI are severely stretched, and the SACU negotiations have lagged, presumably because they relate merely to renegotiations of an existing agreement rather than to the establishment of something new. In the meantime, however, South Africa and the BLNS governments have worked closely together on the three trade agreements mentioned above. A bilateral free trade agreement between a customs union partner and a third country is incompatible with customs union membership because of the CET. Thus BLNS felt that they should have been included in the South Africa-EU free trade discussions; this was understood by South Africa, which has consulted with BLNS during the negotiations. Although South Africa has renewed a bilateral trade agreement with Zimbabwe, the five countries agreed to approach the SADC free trade and Zambia free trade negotiations as SACU: the main difficulty in reducing tariffs within SADC is in fact between the SACU and non-SACU countries. However, this cooperation should not mask the fact that there are very real differences between South Africa and the BLNS countries.

The revenue-sharing formula is not one of these differences: although the new formula has not been made public, the South African minister of trade and industry has stated that it would ensure that BLNS revenue was not destabilized. The formula will exclude excise duties,4 surcharges, and the enhancement and stabilization factors, but will compensate BLNS for the price-raising effects of their total imports. The concept of a residual due to South Africa will disappear. Revenue from SACU has been an important source of central government revenue for BLNS: during the period 1990/91–1995/96, for example, receipts from SACU averaged 17.1 percent of central government recurrent revenue for Botswana, 50.2 percent for Lesotho, 27.6 percent for Namibia, and 44.8 percent for Swaziland (South Africa’s figure is about 13 percent). Under the new formula, BLNS would be responsible for setting and collecting their excise duties, but customs duties would continue to be pooled before being distributed. The net effect will be that BLNS will receive about 60 percent of the new customs duty-only pool; nonetheless, this share, together with the excise duties they raise independently, is expected to result in a decline of customs and excise revenue because of tariff liberalization.5

The major issues are those surrounding the institutions to govern the revised Agreement. The idea of a secretariat was that it would also be a supranational tariff-setting institution. However, South Africa has now indicated that it is reluctant to cede such vital decision-making powers to a supranational body as long as there is no agreement on industrial policies. South Africa’s problems are principally with Namibia and Botswana.

The problems with Namibia are twofold: first, in textiles and clothing Namibia is apparently not implementing the duty credit rebate scheme correctly, while it is also not applying the agreed-on excise duty on beer. The other countries claim that the excise duty must be levied, but Namibia argues that it is there to protect a South African beer monopoly that wants to expand into Namibia. This issue needs to be resolved to divide the revenue pool among the BLNS countries, and there is no room for flouting the agreed-on formula. Namibia has a point when it argues that the South African monopoly will dump on the Namibian market, and unfortunately the SACU agreement is vulnerable on this score. None of the five countries has the capacity to handle the dumping issue, and this is precisely why a secretariat is needed.

Despite the agreement mentioned above relating to motor vehicles, there remain differences of opinion between South Africa and Botswana in this area. The new plant in Botswana is state of the art, and production will be more efficient than in competitors’ South African plants. Botswana argues that the South African policy has been worked out in isolation by individuals favoring a protectionist strategy, but it has not made any counterproposals.

Another point of dispute—between Swaziland and South Africa on sugar—has occurred mainly at the industry rather than the government level. Swaziland has a comparative advantage in sugar-based manufacturing industries, but the South African industry has complained that it is concerned about the loss of domestic sales to industries that have relocated their processing operations to Swaziland. The Swaziland Sugar Association claims that South African proposals for a protocol limiting such trade violate the free trade provisions of SACU. It now appears, however, that the dispute will be resolved by the conclusion of a special protocol on sugar, which will then also be used in negotiations between SACU and the other SADC countries in respect of the SADC trade protocol.

South Africa’s stance has been criticized by other customs union countries, particularly Namibia, but it might stem from a realization that, with Pretoria’s hand on the tiller, SACU, unlike all other regional organizations in Africa, has functioned effectively. South Africa is unwilling to lose control of vital mechanisms until clear policies have been agreed upon. In the meantime, it has suggested that the BLNS countries should each have a seat on the Board of Tariffs and Trade, but these countries want a supranational body. Clearly, this is an issue that requires resolution.

There are also apparently some voices in Pretoria that still raise the question as to whether SACU is worthwhile. However, it is essential, for the future of economic integration in Africa, that the SACU Agreement be renegotiated successfully. Failure to do so would send a negative message to the rest of Africa, and especially to SADC and COMESA: the same five countries that had failed to reach an agreement would now be involved in other moves toward trade integration, and the same obstacles would again arise. If South Africa and the BLNS countries are unable to improve the SACU agreement, they are hardly likely to work together more harmoniously under any other institution aiming to become an authentic economic integration arrangement.

Key Considerations for Regional Integration

North-South Versus South-South Arrangements

Collier and Gunning (1993) argue that developing countries have more to gain from North-South than from South-South regional integration arrangements, because the former would bring the benefits of global liberalization and play a role in the enhancement of policy credibility of the South partners. In the Southern African case, South Africa’s concentration on the negotiations for an FTA with the European Union are an attempt at North-South integration. From South Africa’s perspective, the question as to whether or to what extent it needs the region is certainly a tough question, particularly in view of the fact that it has bilateral trading arrangements (or is in the process of renegotiating these) with its important trading partners in the region. Hence it is legitimate to examine its effective economic commitment to the region. In addition, the renegotiations of the Lomé Convention, starting in October 1998 may be viewed as more significant to some member states than negotiations in the region.

Trade-Transactions Costs

McCarthy (1996) suggests that infrastructural development should precede regional integration efforts. Mistry (1995) goes further to suggest that a much broader approach to integration is required. Sectoral investment cooperation and development of institutional capacity are included in his list of areas of cooperation. For the Southern African case, as applies to SACU and SADC, the lack of infrastructure (for example, in terms of road and communications networks), bureaucratic delays, customs formalities, and industrial standards contribute to trade-transactions costs. Some of these are noted as NTBs, and in terms of the SADC Trade Protocol these are to be eliminated. However, as noted above, this is a daunting task. Decisions to trade are ultimately not made by governments, but by firms, and these transaction cost calculations will determine whether they focus on the regional market or elsewhere.

Lack of Private Involvement

Firms are the decision makers when it comes to location of industry and the search for new markets. Governments contribute to the creation of the environment within which these decisions are made, and can influence or attempt to guide firm decisions. In this regard, the problem of policy credibility in the region is a key consideration. North-South arrangements would arguably offer less risk for firms because there would be effective sanction (such as withdrawal of market access, for example) in the event of policy reversal.

Although a business council was formed in 1987 by SADCC to bring the private sector into the regional integration process, and Annex V of the SADC Trade Protocol makes provision for the involvement of the business community, there are no explicit provisions to include labor, farmers, commerce, and other social partners in the process. This could prove to be problematic in view of, for example, the response of labor in South Africa to the perceived threats of increased labor mobility and a regional labor market. The involvement of these key partners in the process of regional integration is also important from the perspective of institutional capacity development and the building of a support base for regional integration efforts.

South Africa’s role as an investor in the region should not be underestimated. South African firms have responded to the opportunities afforded by flexible labor markets in the neighboring countries, and a more favorable wage-productivity nexus than in the South African economy. The development of manufacturing and retailing activities in countries such as Malawi, Mozambique, Tanzania, Zambia, and Zimbabwe, indicate that the private sector is perceptive to regional opportunities, however these should be supported by a credible policy environment with guarantees against reversals. Ensuring that the private sector has a stake in the regional integration effort could make a positive contribution to the process.

Legal and Political Concerns

Issues of peace and security and political stability in the Southern African region need to be considered. The potential for political instability in Angola and in one of SADC’s newest members, the Congo, cannot be ignored. Here the potential impact of political commitment to the region cannot be underestimated. South Africa needs to reflect on its interventions in the region: concerns about the bully on the block do not contribute to a politically stable region! The intricate interplay between political and economic factors should enjoy priority on the regional integration agenda in Southern Africa. An example here relates to the attraction of FDI to the region: the private sector responds to perceived political risk and stability of the policy environment. Recent developments in Zimbabwe (December 1997–January 1998) are adequate evidence in this regard.

Given the provisions for implementation of the Uruguay Round, countries wanting to offer preferential arrangement for some trading partner in services were required to notify a list in 1994. SADC did not do this, so its “view to liberalize their services sector within the Community” may not be easy to achieve. Investment regulation is clearly on the international agenda. SADC and SACU should take note and be prepared.

The legal compatibility of the GATT-WTO agreements, the Lomé Convention, SADC, SACU, COMESA, and the various bilateral agreements in the region needs to be carefully examined to ascertain the impact on the process of implementing of the SADC Trade Protocol and the renegotiated SACU Agreement.

Integration and National Economic Challenges

A number of studies referred to above indicated that regional integration arrangements, in sub-Saharan Africa and also in Southern Africa are not significant determinants of intraregional trade flows; that stimulus to intraregional trade is more likely to come from the development and growth of the national economies and from a reduction of trade transactions costs. The complementarities and tensions between the objectives of regional integration as envisioned by SACU and SADC, and those of domestic economic policy need to be explored. What is, for example, the impact of eliminating subsidies or infant industry protection (assuming that these do not fall under permitted exemptions) as required in terms of the SADC Trade Protocol on the domestic economy.

Another factor in this regard concerns the relative importance attached to regional integration initiatives vis-à-vis domestic economic challenges. As has been pointed out, in the case of South Africa, it is reasonable to expect that the challenges at home are more likely to enjoy the attention of policymakers than regional priorities. And the same can probably be said for a number of other countries battling the effects of structural adjustment.

Institutional Capacity Building

The transformation of SADCC into SADC and the track record of the SPA have highlighted the urgent need for institutional capacity building. SADC institutions require the development of capacity to formulate, coordinate, harmonize, manage, and implement policy. Development of effective coordination and management capability of national structural adjustment program so as to make them responsive to the objectives of economic integration should be pursued by member states.

Conclusion

Regional integration in Southern Africa, with the exception of SACU, does not have an impressive track record. Despite this, SADC is growing, and attempts to invigorate regional integration are being pursued, as the signing of the SADC Trade Protocol indicates. Factors contributing to this optimism include the new role of South Africa in the region, which despite misgivings on certain counts is expected to contribute to the development of the region. In addition, the experience of the European Union and North America has persuaded regional policymakers that the benefits from regional integration extend well beyond static welfare gains, to dynamic benefits that affect the development prospects of national economies.

The fundamental objectives of regional integration in Southern Africa need to be clarified. In this connection, it should be recognized that regional integration in Southern Africa could divert trade from cheaper international sources. This clearly does not enhance the welfare of the region.

Regional industrial development (supported by cooperative infrastructure development) and institutional capacity development to manage the process of regional integration both deserve attention. Regional integration should be seen as a component of a regional development strategy, complemented by coherent national policy initiatives. The conclusion is that, given the track record of Southern Africa and current regional and national challenges, the path of regional integration can be expected to proceed haltingly with disputes among members and diversions, as countries focus on national priorities.

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Botswana, Lesotho, Namibia, and Swaziland. In discussing the situation before 1990, the acronym BLS is used.

There are almost exact parallels in the history of trade and customs integration in the region, although formalization of monetary integration did not occur before 1974 when Lesotho, South Africa, and Swaziland signed the Rand Monetary Area Agreement. Botswana had opted out of the negotiations and instead introduced its own independent currency in 1976. In 1986, the RMA became the CMA, which today is governed by the Multilateral Monetary Agreement of 1992 and separate bilateral agreements between South Africa and each of its partners to vary the precise terms of monetary integration. The three smaller partners each have their own currency, which is at par with the rand, although Namibia and Swaziland are entitled to delink their currencies. Other provisions are that common exchange controls apply; there is free movement of funds between member countries; and Lesotho, Namibia, and Swaziland have access to the South African capital markets.

South Africa’s Board of Tariffs and Trade sets import tariffs, excise duties, and surcharges, ostensibly in consultation with BLNS but in practice calling the tune.

This appears to be a retrogressive step. The purpose of excise duties is to raise revenue for a government. Excise duties were included in the formula to reduce the administrative costs that had been incurred under the 1910 agreement, involving rebates on intra-union trade under removal-in-bond procedures. McCarthy (1986) conceded, and both the Margo Commission (South Africa, 1987) and the White Paper (South Africa, 1988) accepted, that practical problems of administering such a system, requiring as it would strict border controls, made it essential to retain excise duties in the formula. This underlines the fact that, if it is the intention to eliminate customs frontiers and documentation in a customs union, a uniform excise tariff is necessary. BLNS will gain some fiscal sovereignty from the new arrangement, but the intensity of integration will be lower.

The outcome will depend on the elasticity of substitution between SACU products and imports. On balance, however, in the long run this effect in itself is thought unlikely to be positive, although sufficiently significant positive growth effects from trade liberalization on the SACU economies could generate an expanded common revenue pool.

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