25 November 2010

Challenges to SADC Regional and Global Integration

I was asked recently to give an assessment of progress and possible future directions for economic integration in the Southern Africa Development Community (SADC). The resulting paper and presentation summarize my views on some of the main challenges facing the region.

The Importance of SADC Integration

Trade policy is one of many tools for improving productivity, increasing competitiveness and promoting long-term economic development. It is about far more than tariff negotiations. Similarly, SADC is about much more than implementing and extending the Trade Protocol. Great progress has been made; but much more could be done to achieve more meaningful and productive economic integration—globally and in the region. Despite substantial reform trade in SADC remains costly (see Table 2 of my paper) and continues to be hampered by well-intended initiatives whose unintended negative consequences for the region’s development are insufficiently appreciated.

SADC is economically small; for most internationally traded goods regional markets are too small and fragmented to provide a base for globally competitive operations. To focus primarily on products in which firms rely on protection to compete locally and regionally is of limited value and often harmful. The focus must be on creating an environment in which investors can think about competing internationally. When this happens, SADC growth will accelerate and the SADC market will eventually merit real attention. But growth based on global markets must be the primary concern.

SADC is also geographically large, and the resulting hard and soft logistical infrastructure challenges are among the main constraints to effective global integration of the region.

A SADC Customs Union?

Early plans called for formation of a SADC customs union by 2010. This deadline will not be met. A SADC customs union could reduce the need for intra-regional border controls, especially those related to enforcing rules of origin. Against this, however, must be weighed several considerations.

1. Rules of origin are not the only barriers to regional integration in SADC. Dealing with the other barriers is of great economic importance; and many of them can be dealt with independently of a customs union.

2. Based on experience to date, a number of countries are simply not ready for a customs union, or even for complete intra-SADC free trade. A customs union in which members insist on restricting intra-regional trade for economic development purposes would be futile, as would a union in which poorer countries are too dependent on customs revenue to contemplate reducing import duty rates. There are even more basic issues such as rules and guarantees on transit trade that can and should be dealt with long before a customs union or even completion of the SADC FTA.

3. A customs union requires agreement on overall tariff policy—not only on common external tariffs but also on future preferential and MFN-based tariff negotiations as well as antidumping, safeguards and other contingent protection. Member States are far from united on these questions. Mauritius plans to eliminate all MFN import duties and become a duty-free island. South Africa, on the other hand, sees import tariffs as a key tool of industrial policy. Agreement on a common tariff would require either undoing substantial reforms that have already taken place in some countries, or forcing others to move more swiftly on MFN tariff reform than they are prepared to do.

4. Differences in approach to trade and economic development policy might make it difficult and maybe even inadvisable to move too quickly towards a SADC customs union. Allowing for different approaches permits countries to experiment and to learn by themselves and from other SADC partners. A “lowest common denominator” approach, which might result from moving in unison towards a customs union now, could hold back more progressive and ambitious countries. Countries like Mauritius can “raise the bar” for all SADC Member States in setting targets for tariff, trade and industrial policies.

Is SACU a Model?

As the oldest customs union in the world, and one that includes five SADC Member States, the Southern Africa Customs Union (SACU) might be thought of as a model for a SADC customs union. However,

1. In some respects SACU is a customs union more in name than in fact. Use of the infant industry protection clause, for instance, has resulted in significant intra-SACU trade barriers aimed at achieving industrial policy goals of questionable value. All intra-SACU imports are subject to complete customs control by each country, with intra-SACU trade being subject to inspection and documentation on each side of all borders.

2. The current SACU Agreement calls for joint decision-making on all MFN tariff decisions. Until now no SACU wide tariff body has been set up, and South Africa continues as de facto arbiter on tariff policy. The Economic Partnership Agreement (EPA) negotiations with the EU revealed potentially serious differences among SACU members.

3. The SACU revenue sharing formula is viewed by poorer SADC Member States as a potential model for a SADC. This is primarily because it allocates a disproportionate share of customs revenues to the four smallest members. This is not replicable on a SADC-wide basis, nor should it even be thought of as a possible model.

There certainly are lessons to be learned from SACU. But it is unlikely to be an appropriate starting point or model for a SADC customs union, at least in its present form.

Monitoring SADC Performance

The approach to monitoring progress in SADC so far has been largely “legalistic”—focusing on intra-SADC trade and the extent to which countries are meeting agreed liberalization commitments. This is important. But it is also critical not to lose sight of the broader purpose of SADC integration—it is part of a much larger project to improve productivity and competitiveness of SADC Member States so that they can integrate more effectively into the global economy.

Why not complement existing monitoring efforts with a new and possibly much less “coercive” attempt to monitor progress in improving international competitiveness? Benchmarking success stories and identifying ways in which they can be extended and generalized could be very useful to all Member States.

At the risk of oversimplification, SADC appears to operate now at two different levels. At one level it is dominated by high level political visionaries guided by dreams of and plans for developing a greater southern Africa and ultimately a more unified and successful African continent. On a day-to-day basis, however, it is dominated by trade negotiators, who see “concessions” on the use of tariffs, non-tariff barriers (NTBs) and other economic instruments as a surrender of sovereignty. They tend to view their main goal as to achieve openings in external markets. They do not see trade liberalization as part of a strategy to promote economic development by improving global competitiveness.

This is not uncommon. Trade negotiations are often driven by a mercantilist fiction, that imports are an evil to be avoided and that trade is a zero sum game.

In fact most of what trade negotiators deal in are issues that can best be resolved through domestic, unilateral trade policy reform. Most of what is needed to improve any country’s business environment and international competitiveness can be done at home. It does not have to be “negotiated” with other countries.

Of course, pursuing domestic reform through international negotiations can help overcome domestic resistance by using the fiction that reform is part of the price to pay for obtaining similar “concessions” by foreign partners. However, negotiators need to see through this fiction and recognize domestic reform as a means of enhancing development through improved competitiveness.

Unfortunately, negotiators more often see themselves as representatives of domestic interests that might be negatively affected by trade reform; they see their main “stakeholders” as existing investors and producers that benefit from current trade restrictions, and not those that compete in world markets or future investors, producers, workers and consumers that will benefit from improvements in the business environment arising from trade reform.

This might be changed by some broadening of the focus of SADC itself—working together not so much to promote trade reform and trade negotiations as goals in themselves, but rather to identify and deal with the real constraints to growth. This does not necessarily require all Members to move at the same pace. Countries that wish to fast track certain reforms can do so, and in the process provide valuable information and maybe even a model to partner countries. Some issues will be more important and/or more amenable to change in some countries than in others.

This is not to denigrate past accomplishments or ongoing initiatives. It is to suggest, rather, the value of complementing past successes with a greater emphasis on monitoring and improving competitiveness in the region. A first step might be to complement annual trade audits and ongoing NTB monitoring with annual competitiveness audits. The purpose would not be to “name and shame” individual countries or to enforce negotiated agreements, but rather to highlight lessons that can be utilized by any Member and to identify areas and mechanisms for independent action and regional cooperation for the mutual benefit of the citizens of all Member States.