Unsafe at any Speed: MIDP and SACU

In three articles headed the wheels may come off South Africa's Mail and Guardian draws on a recent paper by Matthew Stern and myself to explain problems with customs revenue sharing in the Southern Africa Customs Union (SACU).

The articles cleverly explore the links between SACU's new revenue sharing formula, South Africa's Motor Industry Development Program (MIDP) and the recent boom in car sales in South Africa, to illustrate how the new formula turns all previous interests in SACU trade policy on their heads. By fattening the government budgets of the four small and less developed SACU members (Botswana, Lesotho, Namibia and Swaziland—the "BLNS countries" in SACU-speak) the formula has turned these countries into avid supporters of a program designed to subsidize South African motor industry producers at the expense of South African and BLNS consumers. The cost of the program to BLNS consumers is now dwarfed by the (far more than) offsetting revenue transfers to BLNS governments (to the tune of 23 percent of GDP in the case of Lesotho and 12 percent in Swaziland). And now poor South African consumers/taxpayers are saddled not only with high priced motor vehicles but also with the burden of huge fiscal transfers to the BLNS.

South Africa's National Treasury, quite naturally, is bemoaning not only the size of the revenue transfers, but also the difficulties they will create in reaching agreement on badly needed rationalization of the SACU tariff structure. Under the new SACU arrangement, tariff rate decisions are meant to be decided collectively by all members. Having been turned into the greatest supporters of South Africa's protectionist trade policies, the BLNS countries are unlikely to favour tariff reductions that threaten their fiscal windfalls. Before complaining too much, however, South Africa should look at its own central role in promoting agreement on this new revenue formula.

Among the cutest parts of the M&G articles is an illustrative calculation of the amount of revenues transferred to the BLNS whenever a South African buys a new imported car. Based on an import duty rate of 25 percent and an assumed transfer of about half of these revenues to the BLNS, the article shows that the purchaser of a new "Volvaru" that cost a dealer R200 000 would pay just over R25 000 to the BLNS, of which about R5 000 would go to the government of Swaziland and R4 100 to Lesotho.

In fact the numbers are much worse than that. The import duty on cars is now 30 percent, not 25 percent. And, according to our estimates of last year, the share of duty collections going to the BLNS is about 88 percent, not 50 percent. This means that a South African buyer of the above-mentioned "Volvaru" would contribute about R52 000 to the BLNS, of which over R11 000 would go to Swaziland and R7 400 to Lesotho (and greater amounts to the governments of Botswana and Namibia).

This tale leaves South African consumers and taxpayers with much to ponder. The consequences of the MIDP and of the new SACU arrangement are surely much different than whatever might have been expected by those who designed them; and their combined impact is far worse than either of them individually. Two bad policies do not make a good one.

South Africa's MIDP

South Africa's Motor Industry Development Program (MIDP) has been one of my favorite topics recently. The Department of Trade and Industry (DTI) and the motor industry have been remarkably quiet as the country awaits the release of the MIDP Review (due sometime last year) and the government's future policy framework for this industry.

However, an industry representative was reported yesterday as saying that government support of the industry is "below par" relative to other countries and will have to be improved in order to make the industry competitive.

How much support has the MIDP given the industry? Answers to this basic question are difficult to obtain. I have estimated that typical subsidies to motor vehicle and/or components manufacturers range from 260 to over 650 percent of the size of MIDP-supported investments.

Support to the motor industry from export subsidies and import duties has almost certainly exceeded R100 billion over the life of the program so far. The cost to consumers has been similar. How can an industry that relies on such levels of support expect to become "competitive"? Surely the solution is not to give even more subsidies.

Australia, after whose program the MIDP was initially modelled, is entering the final phase of its "Automotive Competitivness and Investment Scheme." This program provides modest production and investment-linked subsidies and a phase down of its import tariff from 10 percent at the moment to 5 percent in 2010. The South African tariff is still 30 percent—a long way to go before encouraging competitiveness.

For more on this, including a link to the news story in question, see the Features page of my website.