Southern Africa: A customs union to prevent failed states

The Southern African Customs Union (SACU) - the world's oldest, comprising Botswana, Lesotho, Namibia, South Africa and Swaziland - applies a common set of tariffs and disproportionately distributes the revenue to member states, providing a lifeline that ensures the economic survival of Swaziland and Lesotho.

Mzukisi Qobo, head of the Emerging Powers Programme and Global Challenges at the South African Institute of International Affairs (SAIIA), a think-tank, noted in a recent SAIIA presentation at the University of the Witwatersrand in Johannesburg that according to "rough estimates", Swaziland relied on customs revenue for 75 percent of its budget.

Lesotho derived 65 percent of government spending from SACU, while in Botswana and Namibia the distributions accounted for about 30 percent of government revenue. SACU's complex framework ensures that Lesotho and Swaziland, and to a lesser extent Namibia and Botswana, share disproportionately in the union's proceeds.

Most of the customs revenue is produced by South Africa, the continent's largest economy, and about 90 percent of the SACU region's GDP is generated by South Africa.

Qobo commented that 1.15 percent of South Africa's GDP, about R27 billion (US$3.7 billion), was directed to Botswana, Lesotho, Namibia and Swaziland, and described the SACU distributions as development aid in disguise.

This interpretation would make South Africa the largest foreign donor in the world - on the basis of percentage of GDP - surpassing the United States, Britain and Japan, whose overseas development aid constitute less than one percent of GDP.

Qobo told IRIN that such a "heavy dependence" on South Africa by Lesotho and Swaziland undermined their claim to sovereignty, and issues of incorporation should be considered.

Swaziland's government is dependant on outsiders for its budget. At least two-thirds of the people live in chronic poverty and do not pay taxes, so if this outside aid disappears, government services stop

Swaziland's Minister of Finance, Majozi Sithole, has dismissed the notion of SACU receipts being a disguised form of aid that keeps the country afloat. "I am aware of the misconception that South Africa gives the country aid money, but this is not true."

The International Monetary Fund (IMF) has consistently warned Swaziland about its reliance on SACU money, and recommended reductions in public sector spending and diversification of revenue sources, which at least one Swazi government official has dismissed as meddlesome and irrelevant because, unlike the World Bank, the IMF has no mechanism to assist Swaziland financially.

"There is no immediate threat of government closure due to lack of [SACU] revenue; SACU money is still there, though less of it can be expected in future," an economist at an international bank at in Swaziland's capital, Mbabane, who declined to be identified, told IRIN.

He also dismissed speculation that the only viable future for Swaziland was to be absorbed by neighbouring South Africa. "You won't find a political leader who will discuss that, and in the absence of public opinion polling, the views of ordinary Swazis are not known."

Lesotho and Swaziland have small impoverished populations, large numbers of HIV-infected people, and few or no natural resources - although the Lesotho Highlands Water Scheme supplies Gauteng Province, South Africa's industrial hub, with more than 50 percent of its water needs.

One in four Swazis between the ages of 15 and 49 are living with HIV - at 26.1 percent the world's highest prevalence - in a population of about 1 million. Lesotho, with about 2.1 million people and unemployment of around 40 percent, has the world's third highest HIV prevalence - 23.2 percent of people aged between 15 and 49 are infected.

"Of course, economics are interlinked with the humanitarian crisis: AIDS is primarily a disease of the poor. To end poverty, jobs require capitalization, and a health system and a social safety net require tax money to build," Charles Ndwandwe, an economist at a financial institution in Mbabane told IRIN.

"Swaziland's government is dependant on outsiders for its budget. At least two-thirds of the people live in chronic poverty and do not pay taxes, so if this outside aid disappears, government services stop."

Lesotho and Swaziland are also generally food insecure. Swaziland's Prime Minister, Sibusiso Dlamini, acknowledged in July 2010 that unemployment had reached 40 percent. The Central Bank of Swaziland has reported that economic growth is below population growth for a third decade, with the result that resources to alleviate poverty are diminishing rather than increasing.

Richard Rooney, professor of journalism at the University of Swaziland, noted in a recent article that "Swaziland is not deemed as a good place for investors to set up business because of its small market - its people are too poor - and Swaziland's limited international reputation as a destination for foreign direct investment."

SAIIA's Qobo told the Times of Swaziland newspaper that economic pressures were being experienced throughout the SACU region, and the customs receipts "could address socio-economic challenges in South Africa". Another concern was having "no accountability over how these [SACU] resources are utilized" in Swaziland.

Swaziland is ruled by southern Africa's last absolute monarch, King Mswati III, and his luxurious lifestyle is often seen as incongruous against the poverty of most of his subjects.

"From a benefit-creation point of view, it would be extremely hard to justify why South Africa continues to expend massive financial resources on building an ailing customs union arrangement, while social stability at home [in South Africa] is on the verge of implosion. The more pressing question for South Africa is how to reconcile these massive transfers with deep-seated socio-economic challenges within the country," Qobo told IRIN.

"There are as many poor people in South Africa as there are in the BLNS [Botswana, Lesotho, Namibia and Swaziland] countries combined," he noted. Do ... [they] know that a significant portion of the fiscus - which could have gone towards building houses, better schools and road infrastructure - migrates to pay for public servants, prop up the royal household in Swaziland, and maintain the lifestyle of elites in the BLNS countries?"

The customs union survived colonial rule and apartheid, and the five countries belonging to it have become woven into the fabric of the 15-member-state Southern Africa Development Community (SADC). Any tinkering with SACU would have ramifications across the southern African regional body.

"The global economic crisis has highlighted the flaws in the revenue-sharing mechanism, particularly its pro-cyclical character," said Peter Draper, head of the trade programme at SAIIA, and intern Memory Dube, in an article marking the centenary of the customs union on 29 June, Scoping the future of SACU - a hundred years on.

"While revenues escalated dramatically, and unsustainably, in the run-up to the financial crisis, they have dropped just as sharply since. Further, in South Africa there is consensus in official structures that the country cannot afford to indefinitely carry the fiscal burden imposed on it by the revenue-sharing formula."

Draper said an "abrupt withdrawal" by South Africa from SACU would "effectively create two failed states in Swaziland and Lesotho", with all the associated economic, social and political fallout, in a region already grappling with Zimbabwe's astonishing 10-year economic decline.

"However, those states [Swaziland and Lesotho] must realize that South Africa cannot indefinitely subsidize them at current levels," Draper and senior researcher Nkululeko Khumalo said in a research article, The Future of the Southern African Customs Union, published in August 2009.

Record New Fine Looms Overtures by the European Union (EU) are complicating the possibility of change in SACU: Botswana, Lesotho, and Swaziland have signed an interim Economic Partnership Agreement (IEPA), indicating that "they are keen to diversify trade and investment away from overwhelming dependence on South Africa's embrace."

This has strained relations with South Africa, as it "is on a different path, favouring a sector-based industrial policy incorporating potential tariff increases, [and] a renewed emphasis on state-owned enterprises in network services sectors," Draper and Khumalo said.

"So it is scarcely surprising that talk of dismantling SACU is in the air. But what are the implications? We start from the standpoint that it is easy to destroy, but difficult to create," the authors commented.

"And if South Africa pulled the plug on revenue transfers, the administrations in Lesotho, Namibia and Swaziland would collapse overnight. That would propel thousands of poor people to join Zimbabwean, Mozambican, and other African citizens to cross South Africa's borders in search of economic opportunities," Draper and Khumalo pointed out.

"Given the xenophobic riots that gripped South Africa in 2008 [when more than 60 people were killed and over 100,000 displaced], that nightmare scenario is scarcely in anybody's interests."

Cautioning any hasty decisions regarding SACU's continued existence, the authors recommended that Botswana, Lesotho, Namibia and Swaziland "accept less revenue, possibly on more onerous terms, in exchange for South Africa affording them greater say over trade and industrial policy."

"The former may encompass 'conditionalities' in some form; the latter would require South Africa to recognize ... legitimate interests which, while perhaps divergent to the current South African policy thrust, could nonetheless be potentially accommodated within a consolidated SACU."