Whether we should be part of the Southern African Customs Union (Sacu) is a valid debate, but it is incorrect to count the transfers made by South Africa to the other Sacu states as a straightforward cost to South Africa. With the embarrassing failure to table a budget a minute ago, cutting this payment has been proposed by PWC partner Kyle Mandy (here), as a way for SA to “save” a very large expense. Although the R89 billion in the budget earmarked for the other Sacu states is a lot by any measure, it is not our money to keep.
How the revenue sharing formula works
The five states pool all of their customs and excise duties and then distribute these according to a revenue sharing formula.
15% of the excise duties from all five states are set aside for development and the balance is roughly sent back to the states who contributed, so not of much importance. The development portion is distributed to the states in inverse proportion to the per capita GDP of each state. In other words, the poorer states get more of the 15% development portion, but the excise duty rates are set by South Africa. Given that SA is “poorer” by this measure than Botswana, we would get a bigger portion, but this is not where the bulk of our transfer to Sacu comes from.
The important bit is the customs duties which are split according to the amount you import from the other Sacu states. The growing amount of money in the revenue pool is there because SA has been steadily raising import duties to protect South African businesses. When this protection doesn’t actually deter imports (such as on steel), then the duties collected goes up, rather than the local industry increasing their volumes. Given that South Africa has almost all of the manufacturing capacity in Sacu, it means the other Sacu states will receive the largest portion of this revenue pool.
But what does South Africa get?
We get the production (employment and economic development) and because we have a customs union, our producers get to sell at higher prices behind an ever-growing tariff wall. The consumers in the other states pay more, but the Sacu agreement locks the economic activity in SA and the consumption in five countries instead of one.
When the 2002 agreement was signed, Sacu was meant to set up a Tariff Board and a Tribunal, neither of which have ever come into existence, in no small part because South Africa has ‘discouraged’ their establishment. The tariff board is meant to determine how much duty should be paid on different products for the union. Instead, this function has been ‘delegated’ to the International Trade Administration Commission (Itac), which is 100% South African. Itac reports to the Minister of Trade, Industry and Competition, although they are nominally independent. The legislation which governs their behaviour is all South African and they take their direction from South Africa’s industrial policy (set by the same SA Minister). In the 22 years that Itac has existed it has conducted 460 tariff investigations, only one of which was brought by another Sacu state, so you can see what I mean.
The Tribunal, which should be settling disputes between states has never been created, which is why Botswana and Namibia have been banning our imports rather than using the dispute resolution mechanism in the agreement.
The unwritten part of the agreement was that we don’t directly target industries in the other states to relocate them to South Africa, but this happened as part of our Retail, Clothing, Textile, Footwear and Leather Master Plan and may still happen with our sugar sector. Our customs laws have already been changed to make it very difficult to import clothing from the other Sacu countries competitively and this passed with barely a whisper. When we destroy jobs in Lesotho, do we assume the seamstress will take her family and fly to Texas to work for Space-X?
The whole of the customs union is burdened by South Africa’s bad industrial policies for over a decade, only the other states have no control. The 25% unemployment rate in Sacu is four times the unemployment rate in the rest of Africa (6%), so no one is winning here.
The revenue sharing formula needs to be reviewed but beggaring our neighbours so we can spend that money poorly at home is not the way to do this. Look at the proposed budget. All of the focus is on how to raise more tax and close to nothing on how to cut profligate spending.
For as long as we refuse to share any policy making ability with the other states, we have no claim on the share we transfer to them. The customs union fails to create economic benefits for anyone because it is structured to extract value and send it to SA (I don’t think this was the intention, but it is the outcome).
The value in a customs union is in building value chains which play to the strengths of all five states, which means the union needs to formulate an industrialisation strategy, not just SA. If we take more away from these states and offer even less in return we run the very real risk of an economic collapse in all five states. Don’t expect Zimbabwe to take the flood of people when that happens.