Tuesday, 8 February 2011

Rethinking SA's role - a new SACU revenue-sharing formula as the beginning of South African aid?

The Southern African Customs Union (SACU) is reportedly considering a dramatic review of how revenue is divided up. This could have dramatic implications for smaller nations, such as Swaziland, ranging from economic contraction to total economic collapse. There may be another option, however, if South Africa were willing to consider redirecting their new SACU income through the newly-proposed South African aid agency, a move that could be good for SACU, South Africa and even SADC.

The SACU is the world's oldest customs union, created 100 years ago, in 1910. The union instituted a common tariffs for imported goods, free movement of manufactured products within the SACU area and a revenue sharing formula for customs and excise duties collected by the union. In 2002, the most recent SACU agreement was signed by member states, Botswana, Namibia, South Africa, Lesotho and Swaziland. The new agreement established an independent administrative secretariat, attempted to set up systems to resolve concerns about South Africa's rather large power and, importantly, revised the revenue-sharing formula. The new formula was still based strongly on the 1969 version and has, for the past few years, seen some members of the SACU receive revenue far in excess of their proportional contribution. The revenue from this customs union has kept several smaller Southern African nations (notably Swaziland) afloat. Now a new formula is being proposed that will see South Africa keep an increasingly large share of SACU revenue, as South Africa brings in most of the money; somewhere between 85 and 90% of SACU revenue is contributed by the South African economy.

The big question here is: to what extent should South Africa be responsible for the economies of neighbouring countries that have become (sometimes extremely heavily) dependent on SACU-revenue? It should be kept in mind that the amount in question is just 1.15% of South Africa's GDP, so this is not a question of dramatically expanding SA's revenue base. That said, what responsibility does South Africa really have to these countries?

South Africa has it's own problems. Unemployment sits somewhere near 40% and is particularly (arguably dangerously) high among young adults. The health system is facing serious challenges due to a massive HIV-burden. Local service-delivery is regularly the cause of (sometimes violent) protests. And South Africa is reportedly not particularly happy with the way revenue is currently divided up. So, some will also argue that this money belongs in South Africa because a) it is contributed by South Africa and b) South Africa has problems, as listed above. In reality, this argument is a bit of a red herring, given that the amount is so small compared to the GDP of South Africa and also that, as has been repeatedly argued, South Africa's problems are really related more to ineffective use of funds than to overall lack of funds.

The SACU set-up is, however, limiting the chances of further SADC integration, which would provide a larger market for South Africa but is blocked by non-SACU countries demanding the same type of revenue sharing that exists in SACU, something that would be bad for other SACU members and place a further burden on South Africa.

On the other hand, the impact of such a change would be dramatic for SACU members other than South Africa. A drop in customs revenue during the 2009 global recession has provided evidence of what happens when SACU union is no longer available to at least one of the smaller nations in the fold: Swaziland is rapidly approaching collapse and will in the next few months be cutting 7000 public sector jobs, cutting spending and probably facing a health crisis and a collapsing economy. 2/3rds of Swaziland's government income comes from SACU. This accounts for 9% of SACU receipts. Under the proposed revenue sharing formula, Swaziland's share would fall to 3%. Namibia, although they would be less affected by the cuts, have already said that they will be opposing this proposition strongly. The previous agreement also sought to ensure democratic participation of all countries in setting trade policy, something that, realistically, requires that smaller nations have a stake in the income, rather than being at the mercy of South Africa.

An IRIN article last year argued that South Africa's contribution to the SACU could be viewed as aid spending. Perhaps this is an alternative lens through which to view these proposals. Removing income from smaller nations in Southern Africa would very likely destabalise these nations. This is not in the interests of South Africa or the nations in question. At the same time, the restrictions of the SACU are not necessarily good for South Africa or for further economic integration in SADC (which could boost growth in the region, creating jobs South Africa desperately needs).

If this spending was considered aid, the increased revenue flow to South Africa from the SACU could be channeled into the newly announced South African aid agency, to be directed back to those neighbouring countries that need it in order to survive. This would have the added advantage of giving South Africa the role, as aid donor, of pushing neighbouring countries (such as Swaziland, which remains, against all reason, an absolute monarchy) towards democratic reform, while at the same time, allowing a more equitable, sustainable starting point for discussions about regional economic integration.

In terms of a new revenue sharing formula, this solution would give South Africa a strong, unambigous role in the region, while also recasting SACU as a fairer model for further economic integration.

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