REGIONAL INTEGRATION IN SOUTHERN AFRICA€¦ · All SADC countries could, however, take steps to prepare for further integration in the future by: • Developing granular and disciplined

REGIONAL INTEGRATION IN

SOUTHERN AFRICA

Binding Obstacles and a Practical Way Forward

Woodrow Wilson School of International and Public Affairs Graduate Policy Workshop Report

Fall 2011

Regional Integration in Southern Africa ii

This report was produced by a group of second-year graduate students at Princeton University’s Woodrow Wilson School for Public and International Affairs as a degree requirement for the completion of a Masters of Public Affairs degree. The authors of this report are Dhruv Malhotra, Mike McCaffrey, Emily Poole, Sarah Solon, Jake Velker and Keqin Wei, under the supervision of Professor Iqbal Zaidi.

The workshop included a field visit to Windhoek, Namibia and Pretoria, South Africa from October 31-November 5, 2011, during which the authors met with a range of individuals, including policymakers, representatives of private organizations and academics. The authors would like to extend their sincere thanks to all those who generously shared their time, insights, and expertise. Any omissions or errors of fact are the responsibility of the authors.

The Woodrow Wilson School of Public and International Affairs, founded at Princeton University in 1930, provides an interdisciplinary program that prepares undergraduate and graduate students for careers in public and international affairs. The views expressed in this report are the views of the authors and do not represent the views of Princeton University, the Woodrow Wilson School, or those who provided advice.

January 2012

Regional Integration in Southern Africa iii

Table of Contents

Executive Summary ............................................................................................................................................................ v

Tables ................................................................................................................................................................................. vii

Figures ............................................................................................................................................................................... viii

Abbreviations ...................................................................................................................................................................... ix

Introduction ..................................................................................................................................................................... 1 I.

Economic Barriers to Integration ............................................................................................................................... 3 II.

A. Economic Heterogeneity ......................................................................................................................................... 4

1. Asynchronous Shocks ........................................................................................................................................... 5

2. Natural Resource Dependence and Volatility ................................................................................................... 9

3. Aid Dependence and Volatility ........................................................................................................................ 10

B. Quality of Fiscal and Monetary Institutions ....................................................................................................... 12

1. Fiscal-Monetary Interactions in the SADC Region ....................................................................................... 12

2. Debt Carrying Capacity ..................................................................................................................................... 13

3. Debt Situation in the SADC region ................................................................................................................. 14

4. Frameworks for Monetary Policy .................................................................................................................... 14

C. Integration Readiness Scores ................................................................................................................................ 16

Contextual Obstacles ................................................................................................................................................ 19 III.

A. Political Obstacles .................................................................................................................................................. 19

1. Unstable Political Commitment ....................................................................................................................... 19

2. Fears of South African Dominance ................................................................................................................. 20

B. Legal Obstacles ....................................................................................................................................................... 21

1. The Weaknesses Inherent in International Law ............................................................................................ 21

2. The Lack of a Reliable Enforcement Mechanism to Ensure Fiscal Discipline ........................................ 23

C. Barriers to Intra-Regional Trade .......................................................................................................................... 24

Regional Integration in Southern Africa iv

1. Incomplete Compliance with the SADC Tariff Phase-Down Schedule .................................................... 24

2. “Hard” Infrastructural Challenges ................................................................................................................... 25

3. “Soft” Infrastructural Challenges ..................................................................................................................... 26

D. Statistical Quality .................................................................................................................................................... 27

Policy Recommendations ......................................................................................................................................... 30 IV.

1. Employ a ‘Variable Geometry’ Approach to Integration ............................................................................. 30

2. Prioritize the Depth of Integration Before Breadth ...................................................................................... 30

3. Develop More Tailored Fiscal and Debt Convergence Criteria .................................................................. 30

4. Develop Realistic Legal Enforcement Mechanisms ...................................................................................... 31

5. Strengthen Policies for Economic Diversification ........................................................................................ 31

6. Increase the Ratification Rate of SADC Protocols ....................................................................................... 31

7. Develop Selected Regionally-Linking Infrastructure Projects ..................................................................... 32

8. Prioritize Timely, Accurate and Verifiable Collection of Statistics ............................................................. 32

Conclusion ................................................................................................................................................................... 33 V.

References ......................................................................................................................................................................... 34

Appendix A: Construction of the Central Bank Transparency Index ..................................................................... 37

Appendix B: Quantifying Asymmetries on the way to Integration .......................................................................... 38

Appendix C: Construction of Readiness Index ........................................................................................................... 40

Regional Integration in Southern Africa v

Executive Summary

The Southern African Development Community (SADC) has fallen short of the ambitious economic integration goals it set for itself in terms of economic integration; the free trade area (FTA) envisaged for 2008 is not fully functional, and the region has made uneven progress towards the subsequent milestones of a common market and monetary integration. As such, there is mounting doubt about the economic and political feasibility of monetary integration in the region. This report has two principal objectives. First, we analyze the primary economic, political, and legal constraints to economic integration in the region. Second, we argue that SADC’s prospects for integration will be served better by a “variable geometry” approach, rather than a uniform integration model given these constraints.

The first point of analysis considers economic constraints. SADC countries have remarkably different economies and economic policy environments. Specific dimensions of heterogeneity which, according to our analysis, impinge significantly on integration include:

• The incidence of asynchronous shocks: GDP growth rates are volatile in the region, and the business cycles in different SADC countries are not well-synchronized with each other and with the region as a whole. This would complicate the abrogation of monetary stabilization policy, entailing substantial economic costs. Natural resource dependence in one set of countries and aid dependence in another is a principal reason for the lack of alignment of business cycles.

• Fiscal-monetary interactions: In a context where several countries have “fiscal-dominant” regimes, there are constraints on the scope and incentives for monetary-dominant countries to support integration. Moral hazard and fiscal spill-overs—of the kind recently seen in the crisis in the European Union—are of special concern in the SADC environment. In an unusually weak legal environment, moreover, the willingness and ability of SADC countries—both singly and as a region—to monitor debt and fiscal variables, let alone initiate punitive action, is low.

A second set of non-economic factors also constrains integration for the SADC countries. These include: • Political will and commitment: Uneven political commitment has led to underwhelming ratification of

protocols on common standards, resulting in persistent regulatory inconsistency in areas ranging from energy to trade. Political will also wavers in the face of South African dominance. Countries baulk at the idea of further integration into a regional body with such salient economic and political asymmetries.

• Lack of legal mechanisms: Current legal structures in SADC have little enforcement capacity and thus can do very little to alleviate the risks associated with SADC countries linking their economic fates.

• Trade-related obstacles: SADC’s current integration strategy calls for the creation of an FTA as a precursor to establishing a monetary union. However, countries have made uneven progress on tariff reduction targets, building “hard” infrastructure like roads and easing “soft” infrastructure, like incompatible border crossing procedures.

Policy Recommendations

This report argues that a realistic and economically sensible way forward for regional integration in SADC must proceed on a so-called “variable geometry” model. Under such a model, a group of countries with advanced progress on economic and structural alignment—such as the current Common Monetary Area (CMA, consisting of Lesotho, Namibia, Swaziland, South Africa) would form a nucleus, and other countries will join this nucleus at different speeds, as economic and political conditions warrant. Our analysis of economic variables suggests that such countries might include Angola, Botswana, Mauritius, and Zambia, though caveats apply in each case.

Regional Integration in Southern Africa vi

All SADC countries could, however, take steps to prepare for further integration in the future by: • Developing granular and disciplined fiscal and debt convergence criteria as well as a medium-term

program—consistent with their stabilization and growth objectives—to achieve these; • Designing a realistic, empowered legal mechanism for the enforcement of essential economic

variables; • Investing in data collection and monitoring capacity to make economic analysis of integration

prospects timely and realistic; • Giving further attention to economic diversification in their economic growth strategies; • Investing in both hard and soft infrastructure to ease trade and non-trade barriers to economic

integration.

Regional Integration in Southern Africa vii

Tables

Table 1: SADC Timetable and Milestones ...................................................................................................................... 1

Table 2: Summary statistics of SADC annual growth rates .......................................................................................... 6

Table 3: Real GDP growth correlations, 1990-2010 ..................................................................................................... 6

Table 4: Correlations of regional and country per-capita growth rates ...................................................................... 8

Table 5: Estimated risk-sharing gains from integration ................................................................................................ 8

Table 6: Export share of the top two exports in 2010 .................................................................................................. 9

Table 7: Correlation between the SADC and individual country REERs .............................................................. 10

Table 8: CPIA sub-indices .............................................................................................................................................. 13

Table 9: Measures of debt sustainability ....................................................................................................................... 14

Table 10: Macro-preparedness scores, with and without risk-sharing ..................................................................... 16

Table 11: Ratification of relevant SADC protocols by country ................................................................................ 20

Table 12: Compliance with the SADC Tariff Phase-Down Schedule ..................................................................... 25

Table 13: Non-tariff barriers to trade ........................................................................................................................... 26

Table 14: Data coverage in the Council of Central Bank Governors database ...................................................... 29

Regional Integration in Southern Africa viii

Figures

Figure 1: Share of SADC Nominal GDP ........................................................................................................................ 4

Figure 2: Country GNI per capita, Deviation from SADC Mean .............................................................................. 5

Figure 3: Growth in real GDP per capita ........................................................................................................................ 7

Figure 4: Volatility in export growth across selected countries ................................................................................ 10

Figure 5: Aid dependence ............................................................................................................................................... 11

Figure 6: Volatility in the share of aid as a percentage of GDP ............................................................................... 11

Figure 7: SADC central bank transparency and independence ................................................................................ 15

Figure 8: World Bank logistics performance index, overall ...................................................................................... 25

Figure 9: Measures of statistical capacity ...................................................................................................................... 28

Regional Integration in Southern Africa ix

Abbreviations

AGOA African Growth and Opportunity Act

CCBG-SADC Council of Central Bank Governors of SADC

CMA Common Monetary Area

COMESA Common Market for Eastern and Southern Africa

CPI Consumer Price Index

CPIA Country Policy and Institutional Assessment

DSA Debt Sustainability Analysis

EAC East African Community

EC European Community

ECB European Central Bank

EMU European Monetary Union

EU European Union

FDI Foreign Direct Investment

FOMC Federal Open Market Committee

FTA Free Trade Area

GNI Gross National Income

HIPC Heavily Indebted and Poor Countries Initiative

IDA International Development Association

IMF International Monetary Fund

MDRI Multilateral Debt Relief Initiative

MPC Monetary Policy Committee

NTB Non-Tariff Barriers

OCA Optimum Currency Area

Regional Integration in Southern Africa x

ODA Official Development Assistance

OSBP One Stop Border Posts

PPP Purchasing Power Parity

REC Regional Economic Community

REER Real Effective Exchange Rate

RISDP Regional Indicative Strategic Development Plan

SACU Southern African Customs Union

SADC Southern African Development Community

SADCSTAN Southern African Development Community Cooperation in Standardization

SGP Stability and Growth Pact

UNECA United Nations Economic Commission on Africa

Regional Integration in Southern Africa 1

Introduction I.

The Southern African Development Community (SADC) is the largest regional economic grouping in Sub-Saharan Africa. It accounts for about half of regional GDP at market exchange rates. It is also the richest, with real per capita income about two-thirds above the continental average (Burgess 2009). The vision for economic integration in this large region is commensurately ambitious, reflecting a political commitment to a regional approach to economic development. However, progress toward this ambitious goal has been much slower and less successful than hoped; although several timetables have been set, SADC countries have persistently not met them, as described in Table 1. As such, there is mounting doubt about the economic and political feasibility of monetary integration in the region. This report has two principal objectives. First, we analyze the primary obstacles thwarting regional economic integration in SADC, and propose recommendations on how some of these constraints might be eased. Second, we seek to argue that SADC’s prospects for integration might be served better by a “variable geometry” rather than a uniform integration model as a realistic response to the constraints encountered thus far.

Table 1: SADC Timetable and Milestones

Given recent global developments, it is unsurprising that commitment to, and progress on, integration targets has weakened. First, the integrationist project was hatched when the sun was shining brightly on Europe, and arguments for the economic benefits of integration had seemed to be clinched. With the onset of the financial crisis and the severe deterioration of integration economics in the European Union (EU), aspirant integrationists in other parts of the world, including in SADC, are understandably less sanguine. Second, the global financial crisis has hit all the economies in the region hard, particularly South Africa where recovery has lagged behind other emerging economies. Given South Africa’s dominance in the region, and the open nature of many of SADC’s small economies, there have been attendant, significant growth slowdowns in the small countries. Such an environment is conducive to protectionist pressures and disincentivizes integration, not to mention that crisis management diverts scarce policy attention away from the integration. Finally, the emergence of competing economic agreements—such as the tripartite free-trade trade agreement—coupled with the fact that many SADC countries are members of other regional groupings (such as the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC)), means that some countries are subject to rivaling agendas and commitments when setting economic policy.

Milestone Envisaged Date Current Status Revision

SADC Free trade area (FTA) 2008 Partial Achievement2000 Amended Trade Protocol requiring country-‐specific schedules, but uneven progress

Elimination of tariffs on 85% of goods

Jan 2012 Partial Achievement

Elimination of tariffs on remaining 15% of sensitive goods

Jan 2016 ..

Completion of negotiations for SADC Customs Union

2010 Not Achieved No indication of revised timetable

Completion of negotiations for SADC Common Market

2015 .. ..

Establishment of SADC Central Bank and Monetary Union

2016 .. ..

Launch of regional currency 2018 .. ..Source: SADC


There are also more intrinsic reasons for unease about monetary integration. First, SADC countries display remarkably heterogeneous economic fundamentals on almost any dimension. Although countries have done relatively well on the 2008 convergence criteria agreed in the Regional Indicative Strategic Development Plan (RISDP), recent events, for example in the Seychelles and Swaziland, are already beginning to reverse these gains. Given heterogeneity and differential vulnerability, it is not clear that the grouping economically justifies integration on conventional optimal currency area criteria. Second, and crucially, smaller SADC countries are often suspicious of giving up economic sovereignty to a bloc where economics and politics are dominated by one large country—viz South Africa. At the same time, these are precisely the countries that stand to gain most from the risk insurance mechanisms of a monetary union. Third, there is a misalignment of incentives on the one hand and capacity/will on the other; the largest countries—and, presumably, the providers of the largest amount of mutual insurance as well as good monetary policy, such as South Africa—have the least incentive to join. On the other hand, the smaller countries, which do stand to gain the most, have the least capacity to accelerate the project.

The remainder of this report is structured as follows. Section 2 will examine the economic fundamentals through a discussion of heterogeneity in both economic structure and the quality and capacity of fiscal and monetary policy institutions. Recognizing that economic fundamentals do not exist in a vacuum, Section 3 will discuss the political, infrastructural and institutional contexts that thwart SADC countries in their attempts to reach macroeconomic targets. The key contention of Sections 2 and 3 is that further integration in Southern Africa is more beneficial for some countries than it is for others, and that these differences must be taken seriously. In Section 4, we analyze the implications of the analysis of the obstacles discussed above and summarize our main policy recommendations. Specifically, we question the prudence and realism of an approach which relies on countries converging and integrating according to a uniform timetable. We also present the core argument for why a variable geometry model—whereby a nucleus of countries (i.e. the current CMA countries) is joined by others as they become sufficiently economically and politically ready. Section 5 concludes.


Economic Barriers to Integration II.

Countries in the SADC region are an economically diverse group. It is true that economic integration can proceed without strict, homogenous convergence to certain target indicator levels; indeed, one of the major reasons for economic integration is to increase the benefits of cross-country complementarities and comparative advantages, thereby capitalizing on heterogeneity (Frankel and Rose 1998). Nevertheless, there is a strong theoretical and empirical case in support of countries reaching certain baseline levels of economic similarity before they entertain the notion of integration. Barriers to integration across the region include asymmetric growth volatility, differential natural resource dependence, aid vulnerabilities, fiscal policy quality, and monetary policy frameworks.

A primary goal of this report is to provide a cursory measure and assessment of which countries are more ready than others to proceed with economic integration in the SADC region. The report argues for a “variable geometry” approach, which explicitly recognizes the following:

• Countries in the SADC region vary widely in their basic economic conditions and the timing of economic fluctuations;

• Countries will and should assess the costs and benefits of economic integration as they pertain directly to them;

• Some countries will find integration in their interests, while others will not; • Those countries who do find integration to be beneficial should use the Southern African Customs

Union (SACU) as an explicit fiscal and monetary anchor, with particular attention to South Africa.

Of the points above, the last merits more thorough discussion. Although countries in SACU are by no means perfectly economically integrated, they are much further along than the rest of SADC. The Rand is legal tender in all of SACU except for Botswana, which nonetheless gives a heavy priority to the Rand in its basket peg. South Africa’s monetary policy is generally more responsible than that of its neighbors, and thus reinforces the notion that prospective integrators should consider the CMA as the only worthwhile destination. Moreover, the variable geometry approach sidesteps the painful costs that would attend any move toward lockstep integration. Integration can proceed at a gradual pace, with all of the endogenous convergence benefits accruing to those countries ready to integrate while sparing those less prepared of misaligned countercyclical policy vulnerabilities.

It should be noted here that this section’s skepticism toward integration can in some cases be turned on its head to offer an argument for economic integration, as a means of cross-region risk-sharing. Although the presence of synchronized business cycles is often seen as a desirable pre-condition for economic integration (and particularly monetary union), there is an ample literature that focuses on the endogeneity of such synchronization and the benefits of risk-sharing (Mundell 1973; McKinnon 2004). However, we argue that any gains from risk-sharing are likely only to be realized in the long-term future and pale in comparison to the overwhelming near-term heterogeneity in the region.

The following section discusses the extent of the economic barriers to integration on a variety of dimensions. Section A traces the obstacles and opportunities that emerge from considerable economic heterogeneity and specialization. It finds that the region as a whole is ill-prepared for further integration, and that the cost-benefit analysis each country may undertake with regard to SADC-wide economic integration is highly variable. Another barrier to regional integration has been relatively low-quality economic policy. Section B explores the implications of variable fiscal and monetary policy regimes for the prospects of successful integration, incorporating early lessons from the Eurozone crisis. The section concludes with a basic attempt at quantifying the degree of preparedness and benefits that each country faces with regard to SADC


integration. As noted above, the analysis tends toward the inference that integration cannot be a lockstep process.

A. Economic Heterogeneity

On nearly every plausible metric, the region displays considerable heterogeneity. Both absolute and per capita levels of development are uneven (Figures 1 and 2). In absolute terms, the dominance of South Africa is clear, accounting for over 60% of the region’s GDP. From the simplistic observation that South Africa’s share of the region’s GDP is so large, it is clear that South Africa will continue to be the hub of any regional project. But this dominance extends beyond development: South Africa will form the bedrock of monetary policy in any regional monetary union; it will consume the majority of the region’s output; it will be a major destination for a mobile labor force; and it will likely bear at least some degree of fiscal responsibility for its neighbors. These issues are complex and have many political components, but they are grounded in economic fundamentals.

Figure 1: Share of SADC Nominal GDP Average between 2005-2009

In per-capita GNI terms (a useful measure for quantifying relative development levels, institutional quality, and country desirability as a destination for labor mobility), a double-peaked distribution is clear. The lack of countries near the center of the distribution in this case is a cause for concern: it suggests that within-region economic policy may be contentious and unstable, particularly as it pertains to labor mobility and transfers.

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Of course, any economic bloc will have some powerful members, while others are weaker. But the dominance of South Africa in SADC is unprecedented; Europe has a more balanced distribution of incomes, despite the strength of Germany and France. The essential issue is the fact that incentives for integration tend to be an inverse function of economic size, while ability to integrate is increasing with GDP. This calculus may obscure political and economic subtleties, but it suggests a powerful obstacle to integration. South Africa’s hesitations—ranging from fiscal responsibility for weaker neighbors and its perilous unemployment situation—must be taken seriously.

The region faces three salient issues related to economic heterogeneity, each obstructing the road to convergence:

1) Asynchronous shocks. The region is volatile as a whole. Moreover, business cycles in SADC are not well-aligned. Specifically, countries other than South Africa face relatively low correlation with SADC-wide average growth rates.

2) Natural resource dependence and volatility. The region as a whole is primarily dependent on natural resources for economic productivity. While resource extraction has brought wealth, it renders the region’s overall output volatile. Moreover, commodity dependence is highly variable within SADC, so that countries face asynchronous business cycles to the extent commodity prices are not correlated.

3) Aid dependence. Some countries in the SADC region depend on aid flows as a major portion of their income. This aid is politically contingent, highly volatile, and generally results in unstable fiscal regimes. The fact that some countries depend on aid while others do not poses distinct challenges for regional integration.

These problems will be discussed in turn below.

1. Asynchronous Shocks

The optimum currency area (OCA) literature makes clear that a primary determinant of the benefits of monetary union is the extent to which prospective integrators face synchronized economic fluctuations (Mundell 1961). In the presence of asynchronous shocks, the optimal fiscal and monetary counter-cyclical policy space is likely to be highly limited and fraught with political disputes. We focus our analysis of

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asynchronous shocks on output primarily due to the quality of data in this area, but it should be noted that asynchronous shocks should also be explored in the realms of terms of trade, real effective exchange rate (REER), employment, and other economic indicators.

Table 2 shows summary statistics for annual output changes amongst the SADC economies. Here it is important to note that GDP growth in the region is highly volatile, with a median standard deviation of 3.5% and considerable variance across time in most economies. Moreover, with the exception of South Africa, larger economies tend to be more volatile, which is largely a consequence of the crucial role in the region of natural resource exports. And while volatility may be posited as a reason for countries to prefer integration as a means of insulating against idiosyncratic features of the domestic business cycle (Kalemli-Ozcana, Sørensen and Yoshac 2001), such high volatility in the case of natural resource exporters underscores the desirability, both economic and political, for independence in monetary and fiscal policy.

Table 2: Summary statistics of SADC annual growth rates 1990-2010

Output amongst the six largest economies in the region is not highly correlated (Table 3). Although some bilateral correlations are high, others—particularly Botswana and Zambia—are problematically low. This analysis omits smaller countries, which display as much or more variation.

Table 3: Real GDP growth correlations, 1990-2010

If integration does proceed, it is important to note that business cycle misalignment may continue to impose significant welfare costs on countries that do not follow South Africa’s cycle. Figure 3 plots annual growth for

Country Mean Std. Dev. Min MaxAngola 6.0 10.1 -‐24.7 22.7Botswana 5.0 3.3 -‐4.9 10.6DRC -‐0.7 6.2 -‐13.5 7.2Lesotho 3.9 1.7 0.4 7.4Malawi 4.3 5.9 -‐10.2 16.7Mauritius 4.7 1.8 1.2 9.0Mozambique 6.5 3.8 -‐5.1 11.9Namibia 4.3 3.0 -‐2.0 12.3Seychelles 3.5 4.6 -‐5.9 12.0South Africa 2.5 2.2 -‐2.1 5.6Swaziland 3.3 2.3 0.4 10.1Tanzania 5.1 2.2 0.6 7.8Zambia 3.0 4.1 -‐8.6 7.6Zimbabwe -‐0.9 7.9 -‐17.7 10.4Mean 3.6 4.2Median 4.1 3.5Source: World Bank

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South Africa against the rest of SADC, with the clear implication that while business cycles have a broad pattern of co-movement, South Africa tends to lead the regional business cycle. It remains to be seen whether the improved alignment following the global boom and bust of the late 2000s will continue into the future. The obvious economic dominance of South Africa has clear political and legal implications as well, which are developed in section III.A.2.

Figure 3: Growth in real GDP per capita Annual

It is important to analyze the costs and benefits that any individual country would face in weighing its decision to move forward on SADC integration. As the costs and benefits vary widely, it seems that further integration in Southern Africa is more beneficial for some countries than it is for others; these differences must be taken seriously. Although the costs and benefits are of course a multi-dimensional question, one method of assessing a country’s readiness for further economic harmonization with the region is the degree to which its output shocks are already correlated (Demyanyk and Volosovych 2008). Given that a variety of options are available—including further bilateral integration with South Africa, using SACU as a hub, or proceeding directly to SADC-wide integration—we explore growth correlations for each member country with these key anchors.

The results (Table 4) confirm the basic proposition that certain countries are more ready for economic integration than others. There is a highly variable spread of correlation coefficients with the SADC region as a whole, from -0.11 (Mauritius and Zimbabwe) to 0.96 (South Africa). The extremely high correlation between South Africa and the region confirms its role as the dominant economy. For other countries, the results are mixed. It is troublesome that some of the countries whose business cycles are most aligned with the region as a whole (generally the larger economies) probably have less incentive to integrate for a number of other reasons (for example, wanting to maintain their own exchange rate). For example, Angola appears on this measure alone to be a relatively more appropriate candidate for integration, but its focus on managing foreign oil revenues and its lack of progress on SADC-approved trade liberalization suggest that it still has a ways to go. Perhaps most importantly, we see that for some countries—notably Botswana, Lesotho, Mauritius, Seychelles, and Zimbabwe—business cycles are so asymmetric to the rest of the region as to cast serious doubts on the wisdom of accelerating the integration process.

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Table 4: Correlations of regional and country per-capita growth rates 1990-2010

A more granular method of ranking the relative benefits (and thus incentives) of integration is from a method developed by Kalemli-Ozcana, Sørensen and Yoshac (2001) and explained in Appendix B. This methodology quantifies relative preferences for integration as a function of three major variables: the ranking is (1) positively related to the overall group-wide (SADC) per capita output variance, (2) positively related to the individual country’s output variance, and (3) negatively related to the individual country’s covariance in per capita output with the group (see Table 5). It is important to note that the figures below are all relative, as opposed to absolute (i.e., they are merely intended to provide ordinal information on country’s costs and benefits of integration).

Table 5: Estimated risk-sharing gains from integration

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This analysis, while crude, confirms some basic intuitions. First, there is little apparent incentive for South Africa to move forward with integration, as its role would be merely of an insurance provider, rather than receiver. More volatile countries, particularly Angola, may prefer integration as a means of insuring against idiosyncratic shocks and single-commodity vulnerabilities. However, their demonstrated reluctance indicates a strong preference for exchange rate stability and independence in countercyclical policy.

Finally, a basic premise of this report is confirmed: benefits from integration are widely divergent across the region. The existence of varying costs and benefits of integration points to variable geometry as the most viable strategy for moving the integration project forward without imposing undue costs on member countries.

2. Natural Resource Dependence and Volatility

Countries in the SADC region are highly dependent on natural resource exports for overall output and foreign reserves. The non-commodity tradable sector typically lags far behind in the region (with the exception of South Africa) and foreign reserves are generally built up through at most two major exports. Given the crucial role of resource exports in influencing certain SADC country’s management of the macro-economy (specifically the exchange rate), the uneven incidence and volatility of natural resource export volumes and prices must be taken seriously as an obstacle to integration.

Many SADC member states derive an unusually high proportion of wealth in general, and exports in specific, from one or two natural resources (Table 6). Nine countries in the region derive more than 50% of total export value from their top two commodities, while six countries derive more than 50% of exports from just one commodity. At particular risk to commodity price volatility are the major natural resource exporters of Angola, Botswana, DRC, and Zambia.

Table 6: Export share of the top two exports in 2010

Beyond facing considerable dependence on natural resource exports, the region is open in general, with a heavy reliance in many cases on both exports of commodities and imports of goods and services. While the import bundle tends to be relatively similar across countries, exports have both a high share of overall GDP (reaching a maximum of 70% recently in Angola) and a high degree of volatility. Figure 4 shows standard deviations in the year-on-year change in exports as a share of GDP for the six largest exporters (and economies) in the region. Volatility both within and across countries is clear.

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Figure 4: Volatility in export growth across selected countries Standard deviation*

Another useful framework for analyzing the degree of similarity in external competitiveness is through the real effective exchange rate (REER). The REER is a trade-weighted ratio of real exchange rates (i.e. nominal exchange rates scaled by relative price levels) and therefore is important as a potential consideration for monetary policy, particularly in the case of resource exporters. Table 7 shows correlations between movements in the REERs for SADC member countries and a GDP-weighted average SADC-wide REER for the period 1990-2010. As with growth movements, it is clear that certain countries are more in line with the SADC trend than others. REER movements for Botswana, Mozambique, Tanzania, and Zambia are sufficiently uncorrelated with the rest of the region to raise doubts as to the possibility for these countries to enjoy coherent exchange rate management policy in a SADC-wide monetary union.

Table 7: Correlation between the SADC and individual country REERs 1990 to 2010

3. Aid Dependence and Volatility

As it currently stands, dependence on volatile aid flows forms a significant fiscal risk to the region, which would by no means be eliminated through integration or monetary union.

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With the exception of South Africa, many countries in the SADC region either depend on raw material exports or official development assistance (ODA) for a substantial portion of government revenue. As such, aid plays an important role in determining the set of fiscal policy options available to a handful of the region’s countries (Figure 5).

Figure 5: Aid dependence Net ODA received as a percentage of GDP

The high volatility of aid inflows is as important a consideration as the absolute level of aid in the region. Looking at the five most aid-dependent countries in the region, aid patterns are clearly highly volatile over time, exacerbated by a lack of correlation across the region (Figure 6). Assessing the importance of these aid flows in a more integrated SADC is difficult, because although they are highly volatile and form major budgetary components for some governments, the overall magnitudes are less significant in comparison to the overall economy of the region. Therefore, the impact of ODA on an integrated SADC region will depend crucially on the extent of fiscal federalism (if any) the region decides to adopt.

Figure 6: Volatility in the share of aid as a percentage of GDP Standard deviation across selected countries*

Complicating the question of aid even further is the contentious question of revenue-sharing in SACU. Although revenue-sharing in this smaller customs union is primarily geared toward customs and excise duties,

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there is a substantial component for development assistance. SACU revenues as an overall portion of government budgets in SACU are very high in Swaziland and Lesotho (Mongardini, et al. 2011) SACU countries excluding South Africa are likely to object to any extension or dilution of the revenue sharing arrangement they currently enjoy, yet it seems clear that the revenue sharing arrangement cannot persist in its current form if broader integration throughout SADC is to proceed. Again, although in a different context, we see that further regional integration is more attractive to some SADC countries than to others.

Key Implications

Broad and deep economic heterogeneity renders the costs and benefits of integration to each SADC member country highly variable.

These variable costs and benefits for SADC member countries suggest that a lock-step approach is inappropriate at present. Only a nuanced, gradual approach (variable geometry) is viable in this context.

B. Quality of Fiscal and Monetary Institutions

1. Fiscal-Monetary Interactions in the SADC Region

The importance of fiscal constraints to monetary union cannot be overstated, as recent experience from the EU amply demonstrates. Why is this?

First, there is the powerlessness of monetary policy in a regime of fiscal dominance—the “unpleasant monetary arithmetic” of Sargent and Wallace (Sargent and Wallace 1981). Fiscal policy can affect monetary policy either through the monetization of debt or through a direct effect on price dynamics. While the former is the conventional view of fiscal-monetary interactions (i.e. based on a quantity theory of money framework), the latter turns the idea on its head. In this latter case the government’s inter-temporal budget constraint entails that the monetary authority must deliver higher seignorage revenue in the future in order to deliver a lower inflation rate today.

Empirical work suggests that at least five of ten countries with data available can be characterized throughout the period 1980-2006 as having fiscally dominant regimes: Lesotho, Botswana, Malawi, Zambia and Zimbabwe (Obinyeluaku and Viegi 2009). The remaining five countries exhibit a monetary dominant regime: South Africa, Swaziland, Mauritius, Seychelles and Tanzania. Changes in primary surpluses are shown to affect inflation through aggregate demand, suggesting that fiscal outcomes could be a direct source of inflation. Fiscal dominance matters in this context because abrogation of monetary policy to an independent and supranational institution is not going to provide real and nominal stability if fiscal policy does not operate in a stabilizing manner. A 2009 survey of econometric work on SADC monetary integration concludes that “in a monetary union comprising all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g. fiscal balances) in the region, the potential losses (i.e. higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits” (Tavlas 2009).

Second, there is moral hazard attendant on countries joining a union—prudent policies in a big country such as South Africa reduce the incentive for prudence in weaker countries. This makes it all the more necessary to ensure that analysis of integration is fully cognizant of the fiscal dominance present in many of the countries in the region. This is also closely related to the idea of fiscal spillovers in a monetary union; whereas singly, a


country must face the interest-rate consequences of running high primary deficits, in a monetary union it can socialize some of those consequences. The country will face lower interest-rate consequences (and its union partners negative externalities) as a result of its fiscal actions (Beetsma and Giuliodori 2010).

2. Debt Carrying Capacity

Given the importance of fiscal sustainability, any potential moves towards monetary integration in the SADC region must take into account, and accurately and regularly monitor, the evolution of fiscal management and debt carrying capacity.

Willingness and ability are two distinct elements to this notion of debt carrying capacity. First, authorities in the country must be willing to institute good institutions and fiscal checks and balances, both individually and at the regional level. This will require, as Section III.B argues below, serious legal and political innovation (of a kind, we note, that has failed in the case of Europe with regards to the monitoring and enforcement mechanisms of the Stability and Growth Pact). The willingness to publically commit to regional-level monitoring of the domestic fiscal stance is necessary precisely because of the dangers of fiscal dominance. Second, authorities must be able to use their policies, institutions, and mechanisms to ensure (a) prudent fiscal and structural policies (b) a sustainable time path of the evolution of national debt. This requires, among other things, the ability to forecast, collect and use data, and set appropriate policy thresholds for fiscal variables.

A partial picture of where the SADC region currently stands on these dimensions of willingness and ability is provided by Table 8, which presents the five-year average based on the most recently available series, for certain World Bank Country Policy and Institutional Assessment (CPIA) sub-indices relating to fiscal and macroeconomic management. This data is publically available only for the low-income countries in the region. As one might expect, the countries in the region perform below average on these indices. However, Lesotho, Tanzania, and Mozambique perform better than the rest as a result of recent policy reforms in fiscal and debt management.

Table 8: CPIA sub-indices 2004-2009 average*

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3. Debt Situation in the SADC region

Currently, the fiscal convergence and debt indicators are largely within sustainable ranges for all countries in the region (in part due to the automatic improvement in debt ratios as a result of the HIPC initiative). Table 9 presents three indicators, consistent with those used within the IMF/World Bank Debt Sustainability Framework.

Table 9: Measures of debt sustainability 2009, Percentages

Most countries are performing satisfactorily vis-à-vis the SADC convergence criteria relating to fiscal balance and current account balance (-5% primary balance and -9% of GDP respectively). Of course, it remains to be seen whether these criteria themselves are appropriate in the sense of whether they are necessary or sufficient for real stability. For example, it is not clear that the 5% primary deficit target is appropriate for all countries in the region. Aid-dependent countries, such as Mozambique, can afford to run smaller surpluses to debt sustainability because of the concessional nature of the debt. However, South Africa, with its large private-investment/savings gap might need to run larger surpluses to limit vulnerability to abrupt changes in private capital flows (Burgess 2009).

Indeed despite some convergence, several risks remain to both fiscal and external balance for specific countries in the region. Principal among these include aid dependence, commodity price dependence, structural shock asynchronicity, as discussed above. The recent experience of Swaziland and Seychelles, which have seen sharply escalating debt and deteriorating primary balances, is instructive. The deteriorating fiscal situation is due to a lack of structural reform and an excessive public sector wage bill, along with external competitiveness concerns. Without serious macroeconomic reform it is difficult to see how these countries with remain within the bounds of the convergence criteria going forward.

4. Frameworks for Monetary Policy

Monetary policy frameworks vary widely across SADC countries, from inflation targeting to monetary targeting to no quantitative targets at all. Countries with weaker monetary policy frameworks may find it more

Country NameExternal Debt to GNI Ratio

External Debt Service to

Exports Ratio

External Debt Service to

Revenue RatioAngola 28.2 8.4 13.4Botswana 14.1 1.2 1.1DRC 121.4 .. 25.7Lesotho 33.2 3 3.2Malawi 24.7 .. 2.4Mauritius 8.4 2.7 6.2Mozambique 43 1.6 1.7Namibia .. .. ..Seychelles 247.8 7.4 20.6South Africa 15.1 9.3 9.2Swaziland 15.4 2.1 3.8Tanzania 34 3.5 3.8Zambia 26.8 3.8 7.1Zimbabwe .. .. ..Source: World Development Indicators


difficult to sustainably obtain the inflation targets under the 2008 convergence criteria of less than 5 per cent in 2012 and less than 3 per cent in 2018. Perhaps in recognition of this, SADC has published a Model Central Banking Law that it has encouraged member countries to adopt.

To attempt to quantitatively compare current monetary policy frameworks across the region, we construct a central bank transparency index based on the methodology of Eijffinger and Geraats (2006). In this methodology, transparency is broken into five categories (political, economic, procedural, policy and operational) and each category is given a score out of three, making for a total transparency score out of 15. The political transparency sub-component is also used here as an indicator of central bank independence as it incorporates the use of an explicit policy target and the existence of legislation on the relationship between the government and the central bank (see Appendix A for more detail on the methodology).

The indices support the observation of Dincer and Eichengreen (2007) that higher transparency and independence is typically associated with countries at higher GDP per capita, stronger democratization and financial market liberalization. For example, South Africa has the highest transparency and independence indices, while Zimbabwe has the worst (Figure 7). However, Zambia, Tanzania and Mozambique all have stronger monetary policy frameworks than their GDP per capita would predict, suggesting that best practice frameworks such as the SADC Central Bank Model Law are achievable even for countries with a lower level of economic development.

Figure 7: SADC central bank transparency and independence December 2011

Key Implications

Although most countries are currently performing well under the convergence criteria, it is unclear whether this will remain the case going forward given differing vulnerability to a variety of shocks to fiscal revenue and questionable political commitment in the absence of a formal enforcement framework.

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C. Integration Readiness Scores

In the discussion above, several macro-criteria have been analyzed which affect the prospects for SADC monetary integration in general and individual country’s macro-preparedness in particular. In order to integrate over these disparate elements, we construct a simple aggregate “macro” ranking to broadly compare SADC countries on macro-variables insofar as they relate to successful monetary integration (Table 10, the full methodology is described in Appendix C). In order consider the two sides of the coin represented by Mundell I (synchronicity of shocks as a prerequisite for an optimum currency area) and Mundell II (gains from risk-sharing)—which pull in opposing directions—we provide two rankings.

The first (Mundell I) aggregates over measures of quality of fiscal and monetary institutions, compliance with convergence criteria with the correlation of GDP growth rates of individual countries with SADC as a whole—presented in the first column of Table 10. The second (Mundell II) aggregates over the same measures of quality of fiscal and monetary institutions and compliance with convergence criteria, but instead of synchronicity of shocks, adds the gains from risk-sharing quantified in Section A.1 rather than the GDP growth correlations. This measure is presented in the right column of Table 10.

We caution that these scores should be interpreted as a method of ranking each country’s preparedness (i.e. an ordinal score), rather than providing an absolute measure out of seven as to how ready a country is to join a monetary union.

Table 10: Macro-preparedness scores, with and without risk-sharing

We acknowledge that simply aggregating over disparate elements with equal weights is crude and subjective. However, the method produces consistent results. The scores are essentially unchanged under either the Mundell I or Mundell II. Moreover, the results are robust to using a weighting system (not shown), which

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gives the Mundell scores twice the weight as the policy quality and convergence compliance variables (as opposed to equal weights for each).

Some interesting findings emerge from this analysis. First, the CMA countries (barring Swaziland) all score relatively well on these rankings, suggesting that close economic ties have made this grouping a potentially apt “nucleus” for further integration.

Second, using a threshold of four, the top six countries under either Mundell I or II or the same (though their relative ranks are different). These are Angola, Botswana, Mauritius, Namibia, South Africa, and Zambia. Interestingly, while South Africa does rather well on the Mundell I—given its high correlation with SADC GDP—it comes near the bottom of the Mundell II top six, since it stands to gain little from mutual risk-sharing. The converse is true for Angola, given its highly volatile and relatively uncorrelated output fluctuations as a result of oil exports.

Botswana is the most obvious candidate to join the CMA-nucleus given its membership of SACU and relatively strong policymaking institutions. However, its score is somewhat reduced by the low correlation of its growth and REER to the SADC average (see Box 1:“Whither Botswana).

Key Implications

Aggregate measures of policy quality, adherence to convergence criteria, and either of synchronicity of business cycle or gains from risk-sharing suggest that certain countries are better-prepared to move forward with integration than others.

While Lesotho and Swaziland do not score very well on these measures, a history of robust institutional cooperation and successful pegging to the Rand has made them a part of a well-functioning monetary union, the CMA, for several decades. Their integration with South Africa (rather than SADC) and their gains from risk-sharing are high. As such, the CMA can still constitute a good starting nucleus for integration.

In the near term, Mundell I arguments are likely more relevant. Gains from risk-sharing are only realized once advanced forms of fiscal cooperation are in place, which are undoubtedly well into the future. Even so, as we note, the rankings of the most suitable countries do not change substantially under the two measures.


Box 1: Whither Botswana? At first glance, it is perplexing that Botswana—a member of both SADC and SACU—is not a member of the CMA, the common currency area of South Africa, Lesotho, Namibia, and Swaziland. Botswana’s decision to conduct ostensibly independent monetary policy is further complicated by the fact that the Pula stays essentially pegged to the Rand through a heavy weight in its basket of currencies (see figure).

But on a variety of dimensions, Botswana is different from its CMA neighbors. Botswana has enjoyed decades of prudent economic policy, leading to per capita growth averaging 6.0% (as compared to 1.2% for the remainder of SACU). Botswana even overtook South Africa in terms of per capita GDP around 2000.1 Given Botswana’s independent success, its reluctance to fully commit itself to the South African model of economic integration is more understandable.

Analysis in this report indicates that Botswana’s output fluctuations are relatively uncorrelated with those of South Africa and the rest of SACU. While these fluctuations are not as countercyclical as those of other SADC countries, they suggest relatively strong disincentives for rapid integration. Moreover, we find that the real effective exchange rate (REER) in Botswana tends to move counter-‐cyclically with other SACU countries. Given the importance of mineral and precious metal exports in Botswana’s economy, the impact of these negative REER correlations is likely to be further hesitation about integration.

Additional answers may lie in comparative demographics. Progressing to a common market would increase factor mobility, and Botswana has a very high GNI per capita and relatively small population compared to all its neighbors besides Namibia. Botswana has reason to be worried that if it relaxed its borders, the tens of millions of people living under the poverty line in surrounding countries would flow in looking for work and a higher quality of life.

Despite all this, Botswana still faces modest incentives to enhance integration. The International Finance Corporation rates Botswana the second-‐most expensive country in SADC for cost of trade, after only Zimbabwe (2011). This lack of trade infrastructure, exacerbated by Botswana’s landlocked status, forces it into trade relations with neighbors to the south and east. Although monetary integration may not be in Botswana’s interest, the exigencies of trade will continue to ensure participation in SACU and perhaps the rest of SADC in the future.


Contextual Obstacles III.

The prior section demonstrated the heterogeneity of macroeconomic fundamentals among SADC countries, arguing that these divergences make the current “one-size-fits-all” approach to regional integration deeply problematic and impractical. This section contends that an analysis of macroeconomic fundamentals does not tell the full story about the challenges to regional economic integration in Southern Africa. Accordingly, we set economic indicators into a larger political and institutional context, assessing the various barriers that have thwarted SADC countries in their attempts to meet convergence criteria. These contextual barriers are broken into four categories: political obstacles, legal obstacles, intraregional trade obstacles and data quality obstacles. Each shall be dealt with in turn.

We argue that the contextual barriers only exacerbate the problems highlighted in the above analysis of economic indicators. Specifically, the divergent capacities and motivations of the SADC member countries further undermine the viability of a “one-size-fits-all” approach to regional integration. A monetary union is likely to be most successful not only when the member countries have converged on economic targets, but also once there is convergent political will, similarity in legal systems, harmonized regulatory structures, integrated infrastructure, conformist trade policy, and a similarity in institutional/data capacity. Without convergence in these contextual areas, economic integration is unlikely to be successful or beneficial.

A. Political Obstacles

There are two primary political dynamics that have obstructed the SADC countries in their attempts to economically integrate: unstable political commitment from member countries and the dominance of South Africa, each of which highlights a problematic heterogeneity among SADC member countries.

1. Unstable Political Commitment

The fate of regional economic integration in SADC depends on the stability and strength of member countries’ political will; without a consistent belief that forming a monetary union is the preferred growth and stability strategy going forward, member countries will be unlikely to put in the tough work needed to achieve convergence criteria and remain fiscally disciplined.

Unfortunately, there are many reasons to doubt that political will among SADC member countries is reliable and robust. First off, the current crisis in the EU has cast doubt on the prudence of forming monetary unions in general. Second, SADC member states have been and will likely continue to be tempted by alternative strategies for regional integration, such as the Tripartite Free Trade Area (FTA). Third, domestic policymakers may seek to keep domestic populations happy in the short-term, which could render inconsistent their commitment to both regional goals and the long-term fiscal stability needed to effectively achieve monetary union (Crowley 2009). And fourth, the complicated international relations between member countries may have and will likely continue to make it difficult for countries to persuade each other to adhere to economic targets. The widely divergent power dynamics among SADC countries, rooted in the widely divergent sizes of SADC economies, form the context into which the whole project of regional integration is set, and will threaten its viability on nearly every score. For these reasons, political commitment may be unlikely to be a stable or reliable means of driving regional integration forward.


One indicator of political commitment to regional integration may be the extent to which each member country has ratified SADC protocols, which are agreements setting mutual standards, and eliciting pledges to work toward them, in areas ranging from financial instruments to labor mobility to energy infrastructure. As seen in Table 11, ratification of protocols relevant to macroeconomic policy has been underwhelming, with wide variance among countries. While ratification may not serve as a perfect proxy for political commitment, a weak track record on this score does suggest that SADC member countries may be unwilling or unable to incorporate regional agreements into their domestic laws through ratification. The ratification rate among SADC countries ranges from 0% to 90%, reflecting an uneven and largely hesitant commitment to translate stated political commitments into actual policy. There is slightly less variation among SACU countries, which range from 60% to 90%; nevertheless, uniform ratification lacks throughout the region. It could perhaps be assumed that a refusal to ratify means that a country believes some alternative scheme will better benefit them domestically, and has committed to such an alternative instead of to SADC’s regional integration project.

Table 11: Ratification of relevant SADC protocols by country

It is important to remember that SADC’s goals are not simply to create policy protocols in service of macroeconomic convergence. Instead, SADC regional integration began as a political project, aimed at containing an Apartheid-era South Africa. In addition to economic goals, the SADC central body also attempts to set purely political objectives, such as human rights standards, peace treaties and security cooperation. Some countries are far more willing to comply with SADC’s political protocols than others, which could create political tensions and fissures threatening other cooperative efforts. The project of regional economic integration is thus shot through with political contingency, and its success will be tied to both the strength of political commitment from member countries as well as how harmonious relations remain among the member countries.

2. Fears of South African Dominance

South African dominance could be problematic both in shaping policy, and in policy implementation. In terms of policymaking, other countries could fear that South Africa will use its weight to shape SADC’s goals and rules so they benefit South Africa over and above what might be best for the SADC region as a whole or the individual interests of the smaller countries. In terms of compliance with set policy, the smaller countries have grounds to fear that South Africa will be very difficult to police. This fear is somewhat justified by events in the Euro area. When economic heavyweights Germany and France were in violation of fiscal targets,

Labor

SADC Founding Treaty (1992)

Protocol on Legal Affairs

(2000)

Protocol on the SADC Tribunal (2000)

Protocol on Trade (1996)

Protocol on Finance and Investment (2006)

Protocol on Competition

and Consumer Policies (2009)

Protocol on the

Movement of Persons

Protocol on Energy (1996)

Protocol on Shared

Waterways (1995)

Protocol on Transport

and Commun-‐ ications (1996)

Lesotho Yes Yes Yes Yes Yes No Yes Yes Yes Yes 90Namibia Yes Yes No Yes Yes No Yes Yes Yes Yes 80Swaziland Yes Yes Yes Yes No No Yes Yes Yes Yes 80Zambia Yes Yes No Yes Yes No Yes Yes Yes Yes 80Malawi Yes Yes No Yes Yes No No Yes Yes Yes 70Mozambique Yes No Yes Yes Yes No Yes Yes No Yes 70Angola Yes Yes Yes No* Yes No No Yes No* Yes 60Botswana Yes Yes No No Yes No No Yes Yes Yes 60Mauritius No* Yes Yes Yes Yes No No Yes No* Yes 60South Africa No* No No Yes Yes No Yes Yes Yes Yes 60Tanzania Yes Yes No Yes No No No Yes Yes Yes 60Zimbabwe Yes No No Yes No No Yes Yes Yes Yes 60DRC No* No No No No No No No No No 0

* Country has acceded to the treaty, but has not rati fied i t.

Source: SADC Tribunal

Legal Economic Infrastructure

Percent of SADC

Protocols Ratified


they exerted political pressure to change the rules rather than correcting their own behavior (Crowley 2009). South Africa commands an even larger share of regional GDP than Germany and France in the Euro area; its economic dominance will thus likely make it very powerful in determining the rules, pace and success of regional integration (see Box 2: “The MPC of the SADC central bank”). If, for some reason, South Africa decides not to pursue monetary integration, the entire project would likely crumble.

Key Implications

Unstable political commitment has led to underwhelming ratification of protocols calling for common standards in everything from energy infrastructure to financial instruments, meaning that regulatory heterogeneity among SADC countries persists. More streamlined regional standards can only be achieved if countries undertake difficult policy work, yet political will to motivate such work seems lacking. In this heterogeneous climate, the current approach to regional integration is unlikely to be successful.

South Africa is undoubtedly the regional economic powerhouse, a status that affords it great political clout in shaping SADC agreements, the timetable of integration, and the ultimate success of the integration project. This dominance may cause smaller countries to fear they will be overshadowed, further calling into question the wisdom of a “one-size-fits-all” approach to regional integration.

B. Legal Obstacles

1. The Weaknesses Inherent in International Law

Establishing a monetary union in SADC is not merely a matter of calibrating the correct economic and political incentives to facilitate fiscal discipline and regional cooperation. Instead, creating a monetary union also entails devising a supranational regulatory framework, which lays out permissible fiscal behavior, and which will become part of international law. It becomes important to note, then, that the success of a monetary union is threatened by the very nature of the international legal beast: international institutions notoriously possess only weak enforcement mechanisms. For example, the United Nations can only issue resolutions aimed at trying to shame an actor into changing its behavior. International adjudicators often lack the capacity to enforce their judgments, as sovereign states can be unwilling to comply with supranational dictates.

In one very important instance, sovereignty has already trumped supranational governance in SADC. In May 2010, SADC leaders suspended the SADC Tribunal indefinitely after the Zimbabwean government refused to comply with a ruling (Trade Law Center for Southern Africa, 2010). The SADC Tribunal was supposed to be an international adjudicator, with power to hold the sovereign member countries to the commitments they had made supranationally. Suspending it highlights its weakness, suggests that its decisions were ultimately unenforceable. Its suspension bodes poorly for the future of a SADC level adjudicatory body and the rule of international law with respect to regional commitments.

Even without a supranational regulator, it may still be possible to enforce the commitments that member countries make to the region, whether they be fiscal targets, tariff phase-downs or infrastructure agreements. The alternate enforcement vehicle could be domestic courts; if a country ratifies an international agreement,


Box 2: The MPC of the SADC Central Bank As demonstrated by the drawn-‐out reform process of the monetary policy committee (MPC) of the ECB, designing a politically acceptable MPC that also has credibility in making optimal monetary policy decisions for the entire region is challenging.

The greatest obstacle in designing a SADC MPC is how to balance the desire for equality for each member country with the economic dominance of South Africa in the SADC grouping. In 2010, South Africa accounted for 60 per cent of PPP GDP in the region, although it only had 18 per cent of the population. Given this, a MPC with the following design features is recommended, although given the long time frame involved, flexibility in design should be maintained as conditions in SADC member countries evolve:

1. Contains no more than nine voting members. Consensus has firmed around the optimal size for an MPC being five members, with nine members being the absolute maximum (Sibert 2006).1 Below five members, the committee fails to take full advantage of the information aggregation benefits of making decisions by committee. Committees larger than nine run greater risk of becoming inefficient.

2. ‘Hub and spoke’ design. A ‘hub and spoke’ structure is also recommended as a further way of ensuring representativeness and enhancing the credibility of the SADC central bank’s commitment towards a SADC-‐wide inflation target. Like the FOMC’s Board of Governors and the ECB’s Executive Board, the central hub would consist of a small number of members that do not represent a certain country. Instead, the hub would be charged with taking a SADC-‐wide view at all times. Hub members should be chosen on the basis of expertise in monetary policy. It is also common for the Governor of the central bank to be part of the hub rather than a regional representative.

3. Decisions are made by majority vote and national central bank representatives have rotational voting power

where countries with higher shares of GDP are rotated out less frequently. A rotational structure appears to offer the best compromise between equality and representativeness. This structure has the benefit of reducing the size of the committee towards the optimal size range of five to nine and allows the MPC to better reflect economic power in the region.

One possible structure for a nine-‐member hub and spoke rotational system is a hub of three members, and six rotating regional members. The regional members would be drawn from four rotating groups, broadly based on GDP weights:

• Group 1: 3 permanent voting members from South Africa (60% SADC GDP) • Group 2: 1 permanent voting representative from Angola (13% SADC GDP) • Group 3: 1 rotating voting representative from Tanzania, Botswana, DRC and Mozambique (16% SADC GDP) • Group 4: 1 rotating voting representative from the remaining nine countries (11% SADC GDP).

Voting shares and membership of these groups should be determined by rules that are flexible to changes in countries’ relative GDPs.

4. The voting record is not made public. The transparency of a published vote may expose a committee member to pressure from their home country to vote in line with the interests of that country, rather than in the interests of the SADC economy as a whole. As summarized by (Fujiki 2005):

“for a committee that prizes solidarity and strives for group ownership of any decision it makes, while potentially many interest groups put pressure on their action, it does make sense to suppress the vote in the interest of maintaining group harmony” (p. 45).


the agreement is then absorbed into the domestic body of law, violations of which are actionable in domestic courts. However, there are several barriers to domestic enforcement of regional agreements in SADC. First, the SADC Treaty, which is the main legal document governing economic and political commitments among the SADC member countries, has only been ratified by two-thirds of member nations (Trade Law Center for Southern Africa 2010). Ratification of other SADC protocols has been similarly uneven, as is discussed above. And second, there are three different types of legal systems in the SADC region, cleaving along colonial legacy lines. Incompatible legal systems mean that enforcement of regional commitments will likely be far from uniform and coordinated.

Legal systems are thus unlikely to offer much supportive backbone to the regional integration project in SADC.

2. The Lack of a Reliable Enforcement Mechanism to Ensure Fiscal Discipline

Fears about unreliable enforcement are particularly salient in a monetary union because, in order for the SADC countries to be induced to join a monetary union, they need to be convinced that the other countries to which they are binding their economic prospects will be well behaved. Fiscal imprudence from one country could mean damaging spillover effects or the need for other member countries to fund a bailout (Beetsma and Bovenberg 1998). Given the fiscal risk-sharing inherent in a monetary union, member countries have great reason to fear that other member countries will be fiscally undisciplined, over-borrowing or overspending, lulled by the likelihood of a bailout (Beetsma and Uhlig 1999). To curb the powerful incentives toward fiscal indiscipline, some sort of supranational regulatory framework is needed in order to ensure that countries comply with their commitments. Academic theorizing and the experiences of other monetary unions, however, suggest that it is very difficult to determine exactly what that mechanism should be and unclear whether rules will actually be enforced.

Unfortunately for SADC, all of the potential enforcement mechanisms are problematic. Countries could rely on political persuasion to ensure fiscal discipline in a monetary union, but as discussed above, political will is likely to be unreliable and unstable (Crowley 2009). Moreover, the power differentials of SADC member countries and international tensions may make it very difficult to enforce compliance. It is also unlikely that relying on market pressures would lead to fiscal discipline (Eichengreen and Wyplosz 1998). The SADC member states are mostly developing economies, subject to adverse shocks, comparatively thin, reliant on external factors, and lacking well developed labor and capital mobility—they therefore do not function as well as, for example, the United States market, where market discipline is a more effective policing tool.

Economic sanctions, handed down by a centralized surveillance body, could have the most prohibitive power, however economic sanctions would likely be very difficult to enforce in practice. One problem is that economic sanctions are most likely to be imposed during tough economic times, when the temptation to bail out the violating country may be the strongest. A centralized body may therefore be unlikely to impose sanctions, as they could only exacerbate a crisis. An economic crisis could also mean that a sanctioned member would be unlikely to pay sanctions were they imposed. Additionally, there may be reasonable disagreement about whether a violation of fiscal restrictions is actually imprudent; counter-cyclical policy may not actually be fiscal indiscipline, but instead a wise decision aimed at strengthening an economy. For this reason, adjudicators would likely need to conduct a detailed case-by-case assessment, which would likely be administratively burdensome and costly, not to mention possibly inconclusive. And finally, an adjudicator may lack the ability to enforce its own decisions; sovereign countries may simply refuse to comply or the adjudicator could bow to political pressure from economic heavyweights.

The experiences of other monetary unions reinforce the purported difficulty of enforcing economic sanctions in a monetary union. Despite numerous instances of excessive debts among member states, the economic sanctions mechanism embedded in the Stability and Growth Pact (SGP) of the European Monetary Union


(EMU) has never been enforced. And regardless of multiple cases of noncompliance in the Caribbean Monetary Union and the West African Economic Monetary Union (including one instance in which every member country was in violation of fiscal restrictions), neither monetary union has ever invoked their economic sanctions mechanisms.

This discussion suggests, then, that it may be impossible to take out an insurance policy against the fiscal indiscipline of other member countries when entering a monetary union, making it very risky for the SADC countries to tie their economic fates to one another.

Key Implications

In order for monetary integration to be attractive and beneficial for the SADC countries, there needs to be some assurance that agreements about common standards and permissibly fiscal behavior will be adhered to and enforced.

For various reasons, however, current legal structures in SADC have little enforcement capacity and thus can do very little to alleviate the risks associated with SADC’s current approach to regional integration.

C. Barriers to Intra-‐Regional Trade

Although it is not the focus of this report, enhancing intraregional trade is an important pillar of the current SADC approach to regional integration. Unfortunately, trade in the region is currently hindered by several mutually reinforcing issues: (1) incomplete compliance with the SADC tariff phase-down schedule, (2) “hard” infrastructure challenges, such as weak roads and communications systems, and (3) “soft” infrastructural challenges, such as incompatible administrative policies that cause long delays at border crossings. Barriers to intra-regional trade vary widely by country, suggesting that compliance with liberalization will continue to be uneven in the future. We find that this situation again casts doubt on the wisdom of a “one-size-fits-all” approach to regional integration.

1. Incomplete Compliance with the SADC Tariff Phase-Down Schedule

SADC is attempting to become a free-trade area, but compliance with the phase-down schedule has been mixed (Table 12). According to the regional integration strategy as currently defined by SADC, creation of an FTA is a crucial precursor to a monetary union. It appears that some countries are much closer to FTA status than others—notably, tariff reduction targets have been met by SACU for several years, while countries like Angola and Zimbabwe have fallen far behind. A framework for further integration that recognizes this fact, rather than unrealistically pushing forward even more, is most advisable at this point.


Table 12: Compliance with the SADC Tariff Phase-Down Schedule

2. “Hard” Infrastructural Challenges

In the context of regional trade, inadequate regional infrastructure—including quality of roads, energy generation and sharing, communications systems, and management of waterways—can be the most important barrier to transporting goods across borders. The time and cost of transport is a major burden to the land-locked countries, as internal transport often costs as much or more than the cost of shipping a product overseas (Imani Development 2007). Deficient infrastructure raises the costs of production and distribution. In terms of transportation, estimates show that transport costs constitute an average of 30% to 40% of the total costs of imports and exports in Southern Africa, compared to about 4% in Europe (European Community - Southern African Region 2008), and that post-harvest food losses could be as high as 30% of total production due to poor infrastructure (African Development Bank Group 2011).

Many SADC countries are landlocked, making road and rail networks very important in linking these countries to both regional and global markets. However, high transaction costs are being incurred from inadequate transport infrastructure, inefficiencies in customs procedures as well as poor quality and costly logistics due to weak competition among service providers. For example, Shoprite—one of the largest retailers in the region—reports that each day one of its trucks is delayed at a border costs the company US$500 (World Bank - Africa Region 2011). . The quality of trade and transport-related infrastructure in most SADC countries (except South Africa) is lower than most other regions in the world, and far below the average level of the world (Figure 8).

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Figure 8: World Bank logistics performance index, overall 2009

3. “Soft” Infrastructural Challenges

Aside from weaknesses in the actual physical structures constituting infrastructure, there are also multiple administrative issues that tamp down intraregional trade, generally related to a lack of consistency and efficiency in customs processes (Imani Development 2007) (Table 13). Primary reasons for these trade barriers include protection of local industries, corruption, lack of harmonization, and insufficient intra-regional negotiation on key protocols.

Table 13: Non-tariff barriers to trade

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Cumbersome customs documentation and procedures are one of the most worrisome issues in the region. World Bank reports indicate that Shoprite spends roughly US$5.8 million annually in documentation and processing fees, merely to secure US$13.6 million under SADC’s preferential trade options (Gillson 2010). All the document requirements can be up to 1,600 documents accompanying each truck Shoprite sends with a load that crosses a SADC border (Gillson 2010). This kind of cost and effort would be close to impossible for small businesses in the neighboring countries to meet, thereby diminishing their ability to trade intra-regionally.

SADC has committed to eliminate NTBs and harmonize the overlapping regulatory frameworks that currently prevent the region from becoming a true FTA. However, poor infrastructure and NTBs continue to threaten the regional integration project, highlighting the cleavages among SADC member countries. Some countries are further along than others, and we contend that further integration, particularly in the direction of monetary union, would be fraught with difficulties until some of these more immediate issues are resolved.

Key Implications

SADC’s current integration strategy calls for the creation of an FTA as a precursor to establishing a monetary union. However, there is wide variance among member countries when it comes to compliance with tariff reduction targets, “hard” infrastructure, and “soft” infrastructure, like incompatible customs procedures.

SACU, however, has fully complied with tariff reductions, and while “hard” and “soft” infrastructural barriers persist, the capacity for intraregional trade appears stronger within SACU than SADC-wide.

In this context, monetary union is unlikely to prove feasible until the smaller issues discussed above are resolved.

D. Statistical Quality

SADC’s ability to make prudent policy that could help to pave the way toward monetary policy is significantly undermined by the lack of reliable data. This problem pervades much of the region, but is much more intense in some countries than others. Out of this heterogeneity in data quality grows heterogeneity in policymaking capacity, suggesting that a “one-size-fits-all” approach to integration is inappropriate for the SADC member countries. This section will pay particular attention to the divergence in statistical capacity among SADC countries, as evidence of a larger trend of poor data quality.

The 2003 SADC RISDP states that statistics are a priority intervention area, with the goal of “providing relevant, timely, accurate and comparable statistical information for planning, policy formulation, implementation, monitoring and evaluation of SADC integration activities” (p. xiv). However, progress in achieving this goal has been slow, with little improvement in statistical capacity measures on average across the region (Figure 9). Significant barriers remain, including disparities in statistical capacity and resources allocated to data collection across countries, and a lack of a legal framework for data collection in some countries.


Figure 9: Measures of statistical capacity 2011

Consistent and timely data is crucial in order to set cohesive economic policy for the region as a whole. For example, when setting monetary policy, at a minimum an inflation-targeting supranational central bank following a Taylor-rule requires timely and accurate data on inflation and GDP. Using untimely or inaccurate data as inputs undermines the credibility and effectiveness of monetary policy decisions. In addition, in the absence of timely data from less developed countries, monetary policy decisions by a supranational central bank may become biased towards policy setting that is optimal for the more developed countries that do provide timely economic data.

Data quality is determined by underlying methodology and coverage of source data. The World Bank indices suggest that statistical quality varies significantly between countries. Adherence to internationally recommended standards and methods appears to be the biggest challenge, with only five countries (Seychelles, Tanzania, Mauritius, Malawi and South Africa) achieving a score for methodology greater than 50.

Data availability and timeliness vary significantly between SADC countries and between indicators. Unsurprisingly, there appears to be a close link between GDP per capita and the timeliness and availability of economic statistics, with South Africa, Mauritius and the Seychelles standing out as having the widest coverage and timeliest economic statistics.

Of the different economic indicators, inflation data has by far the best coverage and timeliness. All SADC countries produce monthly CPI releases, with most statistical agencies publishing the data within a month. This is encouraging for the prospects of an inflation targeting regional central bank. National accounts data has the next best coverage, but there are significant differences in frequency and timeliness across countries. Only five countries produce quarterly GDP data (although these countries do account for around three-quarters of SADC GDP measured on a PPP basis). Labor market surveys are generally conducted in irregular, infrequent intervals, probably due to their political sensitivity and measurement difficulties in countries with high employment in the informal sector and no unemployment benefits. The exceptions are the countries with the highest levels of GDP per capita (South Africa, Botswana, Mauritius and the Seychelles) where labor data is published according to a regular schedule. Timely data on government balances is typically difficult to find, with the exception of Tanzania and the Seychelles. This is potentially a problem for any enforcement mechanism that mandates a maximum fiscal deficit.

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Since 1995, the Council of Central Bank Governors (CCBG) has been charged with maintaining a database of economic and financial statistics that is available on their website. However, significant gaps remain in the database (Table 14). This is unsurprising in the sense that this data comes from national sources, so you would expect gaps in the dataset where no data exists. This indicates a lack of prioritization in the maintenance of a regional database by some member countries.

Table 14: Data coverage in the Council of Central Bank Governors database Percentage of filled data cells in each category (darker shading indicates a higher percentage)

Key Implications

Unavailability of data, heterogeneity in statistical capacity, and uneven compliance with international best practices in data management mean that different SADC countries have differently able to make and assess policy. The countries with weaker data quality are likely less ready to integrate regionally.

Angola Botswana DRC Lesotho Malawi Mauritius MozambiquePopulation & Employment 0 70 60 10 0 40 20National Accounts 24 0 100 67 0 73 6Price Indices 33 33 50 33 0 50 33Balance of Payments 42 0 58 65 0 0 96Government Finance 56 85 48 81 0 81 0Central Bank Accounts 85 70 75 60 0 70 70

Namibia Seychelles South Africa Swaziland Tanzania Zambia ZimbabwePopulation & Employment 0 0 90 0 0 20 20National Accounts 0 0 88 0 0 48 48Price Indices 0 33 100 33 0 50 33Balance of Payments 65 79 82 0 89 76 63Government Finance 0 81 96 30 56 70 63Central Bank Accounts 60 65 85 0 40 70 45Source: CCBG


Policy Recommendations IV.

The above analysis highlights the diversity of economic development, institutions, and policy making capacity within the fourteen SADC nations. The problems member countries have faced in meeting their integration targets suggest that the barriers discussed in the preceding sections have been too formidable to overcome with a lockstep approach. We offer the following seven recommendations as a path forward for integration in the SADC region.

1. Employ a ‘Variable Geometry’ Approach to Integration

Variable geometry is an approach to convergence that accepts that countries are currently at different stages of development and allows them to define their own accession timetables. This allows frontrunners to push the frontiers of integration, while also providing time for countries that are not currently in a position to join a monetary union to develop and assess the benefits of further integration. Although variable geometry as a strategy has been officially adopted by SADC as an approach to integration, the approach is only referenced in passing in the RISDP and does not appear to be recognized in the timetables announced to date. Another benefit of the variable geometry approach is that countries can pause as they see fit along the SADC roadmap to a single currency without impeding those striving for this ultimate goal.

The CMA and SACU are the natural candidates for nuclei around which the variable geometry approach can build. The economic analysis conducted in this report suggests that the most promising candidates for early accession are Mauritius and Angola. However, Angola’s unwillingness to even join the trade union confirms that the decision to further integration is a complex one and there is definitely no ‘one-size-fits-all’ approach. Indeed the economic fundamentals must be combined with an analysis of political will and institutional capacity when deciding when, with whom, and with what speed to move forward.

2. Prioritize the Depth of Integration Before Breadth

Regional economic integration arrangements, particularly in sub-Saharan Africa, have tended to proceed before economic fundamentals were in place. The variable geometry approach discussed above helps to solve this problem. Another solution is to prioritize depth of integration—between a smaller set of countries—over breadth. Including broad swathes of countries in regional arrangements, while politically appealing, is unlikely to provide appreciable benefits in the near- or medium- term future. A more realistic approach would be to focus on generating realistic, actionable targets that result in true integration.

For example, the Tripartite FTA talks could be a significant step towards broadening regional integration, but even the smaller SADC trade union is still beset by problems. Further, there are extremely low levels of trade between the EAC, COMESA and SADC, meaning that the potential for increases would only be in the longer term. Therefore it seems most prudent to focus limited resources on strengthening the ties between the more proximate neighbors in the region.

3. Develop More Tailored Fiscal and Debt Convergence Criteria

Using the same convergence criteria for all countries in this heterogeneous region results in restrictions that can be either too lax or too binding, depending on the context and development needs of the country.


Therefore, we recommend that convergence criteria should be more tailored to take into account these factors.

However, it will be necessary to develop a cohesive framework for determining these tailored convergence criteria to avoid political pressure on the SADC secretariat from individual countries seeking more lenient criteria. A framework would also help provide weights for inputs in cases where there are opposing forces. For example, when considering the debt limit criteria, ideally this should take into account both the quality of the policymaking environment (as measured by indices such as the CPIA, for example), as well as the likely interest rates on the debt. In some cases this may lead to a tension, for example, where poorer fiscal institutions suggest the more stringent debt limits are appropriate, but at the same time, the concessional nature of the majority of loans to these countries suggests that their carrying capacity is higher than other countries facing the same level of debt but with non-concessional loans.

Regular and credible monitoring mechanisms need to be developed to ensure that forward looking analysis of the fiscal stance in individual countries, and their debt sustainability outlook going forward, is regularly conducted and updated. In line with recommendation (1) above, only those countries where there is sustained progress towards fiscal and debt goals consistent with stable monetary integration should be proposed and accepted for addition to the CMA / SACU nucleus.

4. Develop Realistic Legal Enforcement Mechanisms

Despite the improvements brought by the HIPC initiative, countries in Southern Africa are still prone to economic mismanagement. As the EU crisis has demonstrated, monetary union without credible legal commitment to fiscal discipline is highly problematic. Countries in SADC should reprioritize the currently defunct SADC Tribunal. Further, they should sign onto credible legal commitments, such as financial penalties, for failure to obey Maastricht-style criteria on fiscal policy and trade-related liberalization that to which they have previously agreed. Failure to do so signals that further steps toward integration are unrealistic at present.

5. Strengthen Policies for Economic Diversification

SADC countries should continue to strengthen policies directed at economic diversification, particularly for economies dominated by few resource exports. Aside from the conventional wisdom that economic diversification is a good in itself; there are two key benefits of economic diversification for furthering the regional integration project in particular. First, reduced reliance on one or two commodity exports will reduce the effects of commodity price volatility on economic growth in the region, increasing the correlation in growth rates between countries and increase the benefits to monetary integration (under the Mundell I argument for OCAs). Second, increased diversification could boost intraregional trade as a wider variety of products are available.

6. Increase the Ratification Rate of SADC Protocols

To be successful, any regional integration scheme needs more than mere statements of political commitment; instead, member countries need to ratify protocols on economic, institutional, and legal agreements so they can actually be enforced. The ratification rate among SACU countries of relevant protocols ranges from 60% to 90%, thus displaying an uneven and largely underwhelming commitment to backing up stated political commitments with actual policy. If the SACU or CMA countries are going to function as a nucleus for further integration, the protocol mechanism could be one way of harmonizing the regulatory climates of the


various countries, while also allowing member countries to hold one another accountable for their fiscal commitments.

7. Develop Selected Regionally-Linking Infrastructure Projects

The easy flow of goods, services, and production factors is a prerequisite for successful economic integration. Trade volumes along SADC’s major transportation arteries are likely to continue increasing, particularly as landlocked countries in the northern areas of SADC continue their stabilization and development. Investment in selected infrastructure projects, like a viable north-south corridor, will enhance the integration effort dramatically.

8. Prioritize Timely, Accurate and Verifiable Collection of Statistics

A SADC Protocol for Statistics would refocus attention on the importance of data quality at the regional level and provide the legal framework for data collection in the region. In the absence of such a protocol there should be greater cooperation between the CCBG and the SADC Statistics Committee in maintaining the SADC statistical database and harmonizing statistical methodologies. This should be combined with a policy of continued assistance for improvements in the capacity of national statistics offices in less developed countries from bilateral and multilateral organizations.


Conclusion V.

This report has argued that the current SADC approach to regional monetary integration is not realistic, and ridden by numerous economic, political, and institutional constraints. That constraints have been binding is evidenced by the multiple targets that have been missed, reflecting diverging economic and political incentives within countries in the post-commitment phase. Indeed, 2010 saw the missing of the target for the formation of the customs union—a practical intermediate step towards monetary integration—and its resetting to a distant 2017. It is clear that the ambitious goal of monetary integration is still only plausible in the distant future, should SADC decide to continue to pursue it. Even so, in this report we have sought to propose several medium term policy recommendations that can make the constraints less binding. We have also proposed the variable geometry model as a realistic policy alternative to pursue the region’s integration goals.

Going forward, we continue to believe that strengthening regional integration will likely lead to positive growth spill-overs, and give the region greater leverage in global economic forums. However, recent economic developments in Europe and elsewhere have led to serious reservations about the conceptual foundations of regional integration. These developments have also underscored the rather stringent prerequisites of macroeconomic discipline in individual countries and/or binding legal agreements. The variable geometry approach that we recommend here makes sense from this point of view. If anything, the crisis has revealed the dangers of proceeding too rapidly with economic integration, especially where macroeconomic fundamentals are not in place or the legal basis to enforce discipline in a union is absent. A more modest approach to integration, while admittedly slower, errs on the side of caution, expanding a given grouping only insofar as countries meet prudent criteria—whether they are macroeconomic or institutional. It also potentially saves countries and the region enormous economic costs, inasmuch as it reduces the probability that a regional agreement will be subject to crisis. From this point of view, it is at least arguable that SADC’s difficulties with achieving its RISDP integration targets have yielded a positive outcome inasmuch as they give countries time for a more careful consideration of the economic merits and sequencing of further integration.


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Appendix A: Construction of the Central Bank Transparency Index

The central bank transparency index methodology outlined in (Eijffinger and Geraats 2006) consists of five categories of transparency: political, economic, procedural, policy and operational. Within each category there are three components that can receive scores of 0, 0.5 or 1. While some of the questions underlying the index are unambiguous, e.g. does the central bank have a quantitative target, some rely more on subjective judgment, e.g. does the central bank regularly provide an evaluation of the policy outcome in light of its macroeconomic objectives. Therefore, the scores calculated in this report may not match up exactly with scores calculated by other authors. However, they should be internally consistent and can therefore be interpreted as a transparency ranking across SADC central banks.

Looking across the subcomponents of the index, SADC central banks have progressed the most in political transparency, with an average score of 1.8 (Table A.1). Almost all SADC central banks have a piece of legislation mandating their independence and stating their formal objectives. At the other end, on average, SADC central banks are weakest in economic and procedural transparency. Economic transparency is poor because very few central banks have the capacity to produce inflation and output forecasts and data are not timely. Low procedural transparency is due to very few central banks publishing minutes or a voting record.

Table A.1: SADC Central Bank Transparency Indices December 2011

Political Economic Procedural Policy Operational TotalSouth Africa 3.0 1.5 1.0 2.0 2.0 9.5Mauritius 1.5 1.5 2.0 2.0 2.0 9.0Botswana 2.0 1.0 1.0 2.0 2.0 8.0Mozambique 3.0 0.0 1.0 2.0 1.5 7.5Namibia 1.5 1.0 2.0 2.0 0.5 7.0Tanzania 3.0 0.5 0.0 2.0 1.5 7.0Zambia 1.5 1.0 1.0 1.0 2.0 6.5Seychelles 2.5 0.5 1.0 0.0 2.0 6.0Angola 2.0 0.5 1.0 2.0 0.0 5.5Swaziland 0.5 1.0 0.0 2.0 0.5 4.0Lesotho 1.0 0.5 0.0 2.0 0.0 3.5Malawi 1.5 0.0 0.0 0.0 0.0 1.5Zimbabwe 1.0 0.0 0.0 0.0 0.0 1.0Average 1.8 0.7 0.8 1.5 1.1 5.8Note: DRC, Madagascar and excluded because of non-English websites.Sources: Central bank websites


Appendix B: Quantifying Asymmetries on the way to Integration

The quantifications of asynchronous shocks discussed extensively in Section II rely on a framework developed by Kalemli-Ozcana, Sørensen and Yoshac (2001) and extended by Demyanyk and Volosovych (2008). The authors develop two intuitive measures of the “asymmetry” of country i’s economic shocks as a means of assessing the gains the country may potentially enjoy by virtue of risk-sharing in a fully integrated monetary union. Although our analysis tends to focus on asymmetries as an obstacle for integration, the quantitative method is still applicable.

The first measure is simply the conventional correlation coefficient of country i’s annual per-capita GDP growth with that of the prospective region of integration:

!! =!"#(Δ ln!"!!,! ,Δ ln!"!!"#$,!)

!! !"!"!!,!!! !"!"!!"#$,!

where Δ ln!"!!,! is the time series of year-on-year first log differences in real per-capita income (measured, for the purposes of our study, in year 2000 US$ from 1995-2010).

The second measure (not derived here but available in the original papers) is described by Demyanyk and Volosovych 2008 (280-81):

KSY use the standard assumptions and consider a group of N infinite horizon endowment economies inhabited by a representative risk-averse individual. For each country i, they compare the expected utility of consuming the country’s own per capita endowment with that of consuming the country-specific portion of the world endowment under full risk-sharing. The difference represents potential utility gains from risk-sharing. The gains are expressed as the permanent percentage increase in the level of each country’s consumption.

This yields a measure of asymmetry as follows:

!! = 100×1!(12!!! +

12!! − !"!!)

!ℎ!"! ! = 0.02

!!! = !"# Δ!"#$!!,!

!! = !"# Δ!"#$!!"#$,!

!"!! = !"#(Δ!"#$!!,! ,Δ!"#$!!"#$,!)

where GDP is deflated by the CPI for country i to represent consumption gains available to a representative consumer. In this second measure, note that all figures are converted to constant 1995 US$ for cross-country comparability.


This formula is intuitively satisfying because it shows that the log utility gains of consumption from perfect risk-sharing vary negatively with the degree of fluctuation covariance with the region as a whole (i.e., the more a country moves with the region, the less it has to gain from risk-sharing since it is already well-correlated with the region).

These measures, of course, fall strictly within the “Mundell II” framework, as they view fundamental economic asymmetries as creating potential room for risk-sharing. Therefore, it is important to remember the extent to which these measures will show a positive bias for a country like Angola, which, because of its enormous and relatively countercyclical fluctuations in output, will seem like a good candidate for risk-sharing. Other considerations—monetary policy flexibility, countercyclical fiscal expansions, etc.—are ignored.


Appendix C: Construction of Readiness Index

As noted in the text, we have aggregated over the key macro-dimensions which help measure a country’s aptness for monetary integration to arrive at a single number out of 7. We should note this is merely useful in making cross-country comparisons, rather than a quantitative indicator of the absolute level of macro-preparedness for integration. As also noted, we present two rankings—one incorporating Mundell I arguments (proxied by GDP growth correlation with SADC) and the other incorporating Mundell II arguments (proxied by the gains from risk-sharing quantified in section A.1).

The underlying data for this and the scoring methodology is presented on the following page (Table C.1).

We use the following scoring methodology for the common components of the two rankings:

Fiscal and Monetary Policy Quality (2 points): Scores out of 1 for Central Bank Quality (based on the authors’ work in Appendix A with scores divided by 15) and for Fiscal Policy Index (based on Gollowitzer 2011).

Convergence Compliance (4 points): One point each is awarded for compliance with SADC convergence criteria of public debt (60% of GDP), primary deficit (-5% of GDP), inflation, and current account deficit (-9% of GDP).

These are summed to arrive at a number out of 6. Then, we add the following for each measure:

Mundell I: To arrive at the Mundell I ranking score, we add to this the growth correlation with SADC GDP over the period 1994-2009 giving the Mundell I score out of 7.

Mundell II: To arrive at the Mundell II ranking score, we add to this the gains from risk-sharing derived in Appendix C, divided by 100, to arrive at the Mundell II score out of 7.


Table C.1: Data for the Macro Preparedness Ranking

Mundell I

MundelI II

Fiscal Policy

Qua

lity

Central B

ank

Inflation

Prim

ary Deficit

(% of G

DP)

Curren

t Accoun

t Deficit

Deb

t (% of

GDP)

GDP Growth

Correlation

Gain(%)

Ango

la0.60

0.37

13.72

-‐4.90

8.85

35.02

0.84

197.43

Botswan

a0.42

0.53

8.11

-‐10.94

-‐4.89

13.23

0.27

16.15

DRC

0.24

0.00

46.22

-‐5.17

-‐6.85

33.78

0.50

24.66

Leso

tho

0.52

0.23

5.85

-‐3.86

-‐17.75

34.07

0.17

2.97

Malaw

i0.48

0.10

8.43

-‐5.40

-‐1.25

37.41

0.18

23.44

Mau

ritius

0.54

0.60

2.52

-‐1.98

-‐8.20

50.47

0.10

2.40

Mozam

biqu

e0.55

0.50

3.26

-‐5.51

-‐10.52

37.79

-0.08

10.92

Nam

ibia

0.78

0.47

8.78

-‐1.67

-‐1.27

18.82

0.65

5.87

Seyche

lles

0.37

0.40

31.87

3.04

-‐31.62

83.11

0.22

13.98

South Africa

0.68

0.63

7.13

-‐5.14

-‐2.78

33.83

0.99

1.08

Swazilan

d0.43

0.27

7.45

-‐6.43

-‐18.55

17.53

0.27

1.14

Tanzan

ia0.66

0.47

11.83

-‐4.80

-‐10.20

37.10

0.57

1.13

Zambia

0.56

0.43

13.39

2.59

3.80

24.63

0.45

6.81

Policy Quality

Convergence Compliance

Documents

REGIONAL INTEGRATION IN SOUTHERN AFRICA€¦ · All SADC countries could, however, take steps to prepare for further integration in the future by: • Developing granular and disciplined