In 2012, South Africa’s (SA) gross domestic product (GDP) made up 91.4% of the Southern African Customs Union’s (SACU) combined GDP value.⁽²⁾ South African economic dominance within the region has been a fact for a long time. The question is whether this dominance is used as leverage to gain even greater advantage over neighbouring states, or if it is open to allow all to share in the growth and development.

A historical perspective of the SACU certainly does not shine a complementary light on South African policy. As the longest standing customs union in the world, the history of SACU goes back to 1910. Colin McCarthy (1988 and 2013) gives a scathing account of a colonial system which was later adapted by the apartheid regime to the advantage of minority elites.⁽³⁾ However, with the end of apartheid, the ruling African National Congress (ANC) prioritised renegotiation of the SACU agreements in their regional trade strategy.⁽⁴⁾

It has been 11 years since the 2002 agreement on a new SACU, which gives rise to the need for an up-to-date look at the advantages and disadvantages that the new system has delivered to the BLNS countries (Botswana, Lesotho, Namibia and Swaziland). This paper seeks to provide a short report on the growth of trade, the growth of, and issues surrounding, intra-SACU foreign direct investment (FDI), the risks of magnifying economic volatility and the loss of domestic monetary policy for some of the BLNS countries.

Trade performance of the SACU block

SA exports make up 80% of intra-SACU trade.⁽⁵⁾ Since the customs union is already dominated by SA exports, SACU member countries as export destinations are more important for BLNS countries than for SA.⁽⁶⁾ For SA, the European Union (EU) and the United States (US) constitute a considerably larger part of exports.⁽⁷⁾ Even given that SA is more important to the BLNS countries than vice versa, the trade situation does seem stark. In 2010 the trade balance (as a percentage of GDP) between the BLNS countries and SA was as follows, Botswana: -23.6%, Lesotho: -62.8%, Namibia: -20.4% and Swaziland: -29.5%.⁽⁸⁾  With such large negative trade balances, how is it possible for the BLNS countries to capitalise on their SACU membership to further their economic development through exports? To answer this question it is necessary to consider the figures on trade, particularly on trade growth.

Firstly, to borrow from the traditional economic explanation of integration/liberalisation: the pie. The relative size of each country’s portion of the economic pie is not the most important factor. In an international situation which is characterised by animosity and potential military hostility it is true that the relative economic advantages gained by rival states must be considered. However, this zero-sum game scenario does not accurately depict the relationships within the SACU. It seems fair to say that, at least since 1994, SA is very unlikely to invade its SACU partners. Essentially, in a situation like this, the question is not of relative size but of the growth of the pie. If the whole pie grows, then everyone develops in a mutually advantageous environment. So, one answer to the original question lies in whether the SACU has stimulated trade growth, both intra-SACU and with the rest of the world.

The values used below are based on data from both the International Monetary Fund (IMF) World Economic Outlook database and the SACU secretariat. Included as a comparative measure, US dollar amounts reflect the current value of the South African rand (ZAR). It is important to remember that the performance of SACU trade during the period indicated below is set against the backdrop of the global financial crisis and the resultant drop in global demand. The year 2009 seems to have been a particularly bad year in the global demand for developing countries’ exports.⁽⁹⁾  After the recovery from the crisis began, the SACU region’s total exports grew by 8.9%, from ZAR 752.23 billion (US$ 80.5 billion) in 2009 to ZAR 819.43 billion (US$ 87.6 billion) in 2010.⁽¹⁰⁾ Between 2004 and 2008, exports grew by an average of 20.2%.⁽¹¹⁾ The figures for 2004 to 2008 track a very similar growth pattern for both exports and imports. However, by 2008 a relatively small trade deficit had appeared (ZAR 52 billion or US$ 5.2 billion).⁽¹²⁾ This was rectified by 2010; imports grew at the slower rate of only 1.7%, from ZAR 676.68 billion (US$ 72.3 billion) to ZAR 687.87 billion (US$ 73.5 billion).⁽¹³⁾ Given the union’s relatively strong overall economic growth during the crisis,⁽¹⁴⁾ the marginal growth in imports represents a healthy restraint and a desire to maintain a favourable trade balance.

A comparison of the most recent data on intra-SACU trade, from 2010 and 2011, shows considerable differences among member countries. As can be seen in Table 1 below, intra-SACU exports grew for all countries except Namibia, which dropped 2.1%.⁽¹⁵⁾ Intra-SACU imports also increased, except in Lesotho and Swaziland. Notably, each of the BLNS countries had greater intra-SACU import than export values.  Furthermore, SA was the main SACU trading partner for both imports and exports for Botswana, while SA was Lesotho, Namibia and Swaziland’s main export destination.⁽¹⁶⁾ Namibia was SA’s main SACU export destination.⁽¹⁷⁾ Unlike the other SACU nations, the relative value of SA’s intra-SACU exports compared to total exports remained minor at 8.1%.⁽¹⁸⁾ Imports increased by 11.7%, but still only accounted for 2.8% of SA’s total imports.⁽¹⁹⁾

Table 1: Intra-SACU exports and imports (2010 and 2011 data) (see right) ⁽²⁰⁾

Whilethere has been some variation throughout the years, this trade pattern demonstrates that while individual country differences do exist, in general the picture is one of growth.⁽²¹⁾ SACU exports to the rest of the world and the BLNS countries’ exports to SA are rising. Thus there is good reason to view the trade partnership as mutually beneficial, and even though it is true that SA takes by far the biggest slice of the pie, the pattern indicates that the BLNS countries are availing themselves of the opportunity to shrink the trade deficit. Equally important is the significance that this relationship has for the various parties; for the BLNS countries SA is a critically important partner in their trade development.

Customs revenue

In 2002 the negotiating parties to the new SACU were well aware that the trade benefits would disproportionately belong to SA. In an alternate situation this may have been left as a ‘take it or leave it’ deal, but the parties, SA in particular, sought to address this inequality.⁽²²⁾ They developed a new formula for dispersing the revenues accrued from the common customs receipts. The formula consists of two components: customs revenue and a development component which works to the advantage of the smaller states. The revenue from customs receipts is divided out based on intra-SACU imports, which means that SA provides considerable compensation to the BLNS countries for the trade advantage that it gains.⁽²³⁾ The importance of these receipts for the BLNS countries can be seen in the Figure 1 below:

Figure 1: BLNS countries’ share of customs receipts as a percentage of national GDP ⁽²⁴⁾

As can be seen in the above graph, in the most extreme case, Lesotho, custom receipts made up 35% of GDP before 2009 and remained significant thereafter.

In addition to the customs revenue sharing, the SACU also has an excise duty sharing agreement.⁽²⁵⁾ As was mentioned earlier, SA GDP makes up 91.4% of total SACU GDP.  However, it only receives 80% of the excise revenue; 15% goes into a regional stability fund and the rest is split between the BLNS countries based on GDP size.⁽²⁶⁾
Investment

South Africa is the single largest source of foreign direct investment (FDI) for the BLNS countries. The graph below gives the value of relative FDI in the SACU countries.

Foreign direct investment

Figure 2: SACU foreign direct investment stocks from selected countries as a percentage of GDP, 2010 ⁽²⁷⁾

SA also has some strong financial linkages to the other SACU countries, with SA banks and financial institutions present in all of the BLNS countries.⁽²⁸⁾ While on the whole this involvement is considered to benefit the BLNS countries, the question was raised by Canales-Kriljenko, Gwenhamo and Thomas (2013) of whether these financial linkages, combined with the considerable trade linkages, would act as a conduit for economic volatility. The concern arises when the nature of the SA economy is considered. It is very open and SA GDP tracks global GDP quite closely; and as a result it was affected quite badly by the global crisis.⁽²⁹⁾ While SA might have a financial system deep enough and an economy big enough to ensure adequate buffers and correct monetary policy during times of recession, this is not necessarily true of the BLNS countries. Using a combination of panel data and vector auto-regressions, Canales-Kriljenko, Gwenhamo and Thomas found that there was no reason to believe that SA had any systemic effect in conducting the international crisis onto the other SACU members.⁽³⁰⁾

While the paper by Canales-Kriljenko, Gwenhamo and Thomas did praise the effective use of countercyclical fiscal policies by the SACU countries, it underplayed the potential disadvantage that the lack of monetary policy freedom could have had.⁽³¹⁾ One of the major concerns of critics of the SACU is the loss of monetary policy in Lesotho, Namibia and Swaziland.⁽³²⁾ Having pegged their exchange rates to the SA rand, the central bank in SA effectively dictates monetary policy. If the crisis had had asymmetrical effects throughout these four countries, then the monetary policy of SA would only suit itself; those in a situation requiring a different policy approach would be left with much less policy space for buffering their economies from the crisis.

Conclusion

The debates around economic integration are always fierce; some benefits may seem invisible while costs are only too apparent. Certainly the general trend of globalisation does push smaller economies towards regional integration in order to maintain any position on the global market, but that does not necessarily mean that in every instance integration works. This paper’s examination of the advantages and disadvantages of the smaller economies within SACU comes at a time when SA foreign policy in Africa is receiving considerable scrutiny. This foreign policy has been praised as development assistance by some and denounced as hegemonic positioning by others.⁽³³⁾ What certainly can be said is that SA has championed the neoliberal economic model throughout Africa.⁽³⁴⁾ Unfortunately, the market forces that this releases cannot be minutely directed, and the success of such economic liberalisation and economic integration depends, to a large degree, on the willingness of the participating states to involve themselves in a fair but competitive manner.

Looking back on the trade figures highlighted earlier, it would certainly appear that SA is conscious of its regional dominance and trade advantages that it has accrued from the customs union. Basing the formula for the distribution of the customs receipts on intra-SACU imports is a clear recognition of this, and the value of the funding that is distributed adds considerably to BLNS countries’ revenue. However, the story is not just one sided. Within the trade figures there is good indication that the BLNS countries are making their own concerted efforts to take advantage of the access to the large SA market and to increase the trade balance within the SACU.

The disadvantages that the union confers on the smaller states are not insignificant. Primarily, the level of competition which SA firms bring to the BLNS markets has been the cause of considerable hardship in the form of downsizing and local firms closing.⁽³⁵⁾ In the long run these costs will be offset by the benefits to competitiveness that the local economy will be forced to undergo, but that does not make the more present pain any more bearable. The effective loss of monetary policy space in Lesotho, Namibia and Swaziland is also something which should be a concern for these countries going forward. While SA monetary policy has so far been appropriate to these countries, this is unlikely to always be the case.

Written by Gerald Flanagan ⁽¹⁾

NOTES:

(1) Contact Gerald Flanagan through Consultancy Africa Intelligence's Africa watch Unit (africawatch@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Claire Furphy and was edited by Nicky Berg.
(2)‘Report for selected countries and subjects’, IMF World Economic Outlook database, April 2013, http://www.imf.org.
(3) McCarthy, C., ‘A perspective on common industrial policies for the member states of the Southern African Customs Union’, Tralac working paper S13WP01/2013, April 2013, http://www.tralac.org.
(4) Alden, C. and Soko, M., 2009. South Africa’s economic relations with Africa: Hegemony and its discontents. Journal of Modern African Studies, 43(3), pp. 367–392.
(5) Canales-Kriljenko, J., Gwenhamo, F. and Thomas, S., ‘Inward and outward spillovers in the SACU area’, IMF working paper WP/13/31, January 2013, http://www.imf.org.
(6) Ibid.
(7) Ibid.
(8) Ibid.
(9)‘Merchandise trade statistics 2011’, Southern African Customs Union, 2011, http://www.sacu.int.
(10) Ibid.
(11) ‘Merchandise trade statistics 2009’, Southern African Customs Union, 2009, http://www.sacu.int.
(12) Ibid.
(13) ‘Merchandise trade statistics 2011’, Southern African Customs Union, 2011, http://www.sacu.int
(14) ‘Report for selected countries and subjects’, IMF World Economic Outlook database, April 2013, http://www.imf.org.
(15) ‘Merchandise trade statistics 2011’, Southern African Customs Union, 2011, http://www.sacu.int.
(16) Ibid.
(17) Ibid.
(18) Ibid.
(19) Ibid.
(20) Compiled by the author using data available at: ‘Merchandise trade statistics 2011’, Southern African Customs Union, 2011, http://www.sacu.int.
(21) McCarthy, C., ‘A perspective on common industrial policies for the member states of the Southern African Customs Union’, Tralac working paper S13WP01/2013, April 2013,  http://www.tralac.org; Canales-Kriljenko, J., Gwenhamo, F. and Thomas, S., ‘Inward and outward spillovers in the SACU area’, IMF working paper WP/13/31, January 2013, http://www.imf.org.
(22) Canales-Kriljenko, J., Gwenhamo, F. and Thomas, S., ‘Inward and outward spillovers in the SACU area’, IMF working paper WP/13/31, January 2013, http://www.imf.org.
(23) Alden, C. and Soko, M., 2009. South Africa’s economic relations with Africa: Hegemony and its discontents. Journal of Modern African Studies, 43(3), pp. 367–392.
(24) Canales-Kriljenko, J., Gwenhamo, F. and Thomas, S., ‘Inward and outward spillovers in the SACU area’, IMF working paper WP/13/31, January 2013, http://www.imf.org. The drop in the value of the receipts in 2010 visible in the figure is due to the lagged effects of the financial crisis.
(25) Ibid.
(26) Ibid.
(27) Ibid.
(28) Ibid.
(29) Ibid.
(30) Ibid.
(31) Ibid.
(32) Alden, C. and Soko, M., 2009. South Africa’s economic relations with Africa: Hegemony and its discontents. Journal of Modern African Studies, 43(3), pp. 367–392.
(33) Flemes, D. and Wojczewski, T., ‘Contested leadership in international relations: Power politics in South America, South Asia and Sub-Saharan Africa’, GIGA working paper No 121, February 2010, http://edoc.vifapol.de.
(34) Alden, C. and Soko, M., 2009. ‘South Africa’s economic relations with Africa: Hegemony and its discontents. Journal of Modern African Studies, 43(3), pp. 367–392.
(35) McCarthy, C., ‘A perspective on common industrial policies for the member states of the Southern African customs union’, Tralac working paper S13WP01/2013, April 2013, http://www.tralac.org.