gaining from trade in south africa

Gaining from Trade inSouthern Africa

Complementary Policies to Underpin theSADC Free Trade Area

Edited byCarolyn Jenkins,

Jonathan Leape and Lynne Thomas

Gaining from Trade in Southern Africa

jenkins et al/90731/crc 20/6/00 10:09 am Page 1

Also by Jonathan Leape

BUSINESS IN THE SHADOW OF APARTHEID (edited with Bo Baskin and StefanUnderhill)

PRIVATE CAPITAL FLOWS TO AFRICA: Perception and Reality (with NilsBhinda, Stephany Griffith-Jones and Matthew Martin)


Gaining from Trade inSouthern AfricaComplementary Policies to Underpin theSADC Free Trade Area

Edited by

Carolyn JenkinsResearch OfficerCentre for the Study of African EconomiesUniversity of Oxford

Jonathan LeapeDirectorCentre for Research into Economics and Finance in Southern AfricaLondon School of Economics

and

Lynne ThomasResearcherCentre for Research into Economics and Finance in Southern AfricaLondon School of Economics

in association withCOMMONWEALTH SECRETARIAT


First published in Great Britain 2000 byMACMILLAN PRESS LTDHoundmills, Basingstoke, Hampshire RG21 6XS and LondonCompanies and representatives throughout the world

A catalogue record for this book is available from the British Library.

ISBN 0–333–77777–8

First published in the United States of America 2000 byST. MARTIN’S PRESS, LLC,Scholarly and Reference Division,175 Fifth Avenue, New York, N.Y. 10010

ISBN 0–312–23608–5

Library of Congress Cataloging-in-Publication DataGaining from trade in Southern Africa : complementary policies to underpin theSADC free trade area / edited by Carolyn Jenkins, Jonathan Leape, and LynneThomas.

p. cm.“First published in Great Britain 2000 by Macmillan Press”—T.p. verso.Includes bibliographical references and index.ISBN 0–312–23608–51. Africa, Southern—Commercial policy. 2. Free trade—Africa, Southern. 3.

Africa, Southern—Economic integration. 4. Structural adjustment (Economicpolicy)—Africa, Southern. 5. Southern African Development Community. I. Jenkins, Carolyn M. (Carolyn Marion) II. Leape, Jonathan. III. Thomas,Lynne, 1969–

HF1613.3 .G35 2000382'.0968—dc21

00–031126

Editorial matter, selection and Chapter 1 © Carolyn Jenkins, Jonathan Leape and LynneThomas 2000Chapters 2–9 and Appendices © Commonwealth Secretariat 2000

All rights reserved. No reproduction, copy or transmission of this publication may be madewithout written permission.

No paragraph of this publication may be reproduced, copied or transmitted save with writtenpermission or in accordance with the provisions of the Copyright, Designs and Patents Act1988, or under the terms of any licence permitting limited copying issued by the CopyrightLicensing Agency, 90 Tottenham Court Road, London W1P 0LP.

Any person who does any unauthorised act in relation to this publication may be liable tocriminal prosecution and civil claims for damages.

The authors have asserted their rights to be identified as the authors of this work in accordancewith the Copyright, Designs and Patents Act 1988.

This book is printed on paper suitable for recycling and made from fully managed and sustainedforest sources.

10 9 8 7 6 5 4 3 2 109 08 07 06 05 04 03 02 01 00

Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire


v

Contents

Foreword ix

Acknowledgements xi

List of Abbreviations xii

Notes on Contributors xiv

1. Gaining from Trade in Southern Africa 1Carolyn Jenkins, Jonathan Leape and Lynne Thomas1.1 Introduction 11.2 The Southern African Development

Community and trade integration 41.3 The relationship between openness to trade and

economic growth in Africa 71.4 Regional integration, economic convergence and

growth 91.5 Policies to underpin the FTA: an overview 111.6 Concluding comments: beyond the FTA 20

2. The Macroeconomic Policy Framework 24Carolyn Jenkins and Lynne Thomas2.1 Policy credibility 252.2 Analysis of country profiles and the

identification of potential conflicts withregional trade liberalisation 27

2.3 Cross-country comparisons 412.4 Fiscal policy 452.5 Monetary policy 472.6 Exchange rate policy 482.7 Conclusions and recommendations 54

3. Taxation and Fiscal Adjustment 58Jonathan Leape3.1 Introduction 583.2 The need for fiscal adjustment 613.3 Fiscal adjustment measures: tax rate increases 65

JEN-FM.QXD 3/31/00 10:04 AM Page v

3.4 Fiscal adjustment measures: broadeningthe tax base 71

3.5 Fiscal adjustment measures: enhancingcontrol of expenditure 80

3.6 The need for tax coordination 83

4. Constraints on Foreign Direct Investment 89Richard Hess4.1 Introduction 894.2 Significant constraints 914.3 Other constraints 97

5. Microeconomic Policies 102Gavin Maasdorp5.1 Sensitive industries and employment effects 1025.2 Mitigating the effects of job losses 1105.3 Human resource development 1155.4 Transport and communications 1175.5 Development corridors 124

6. Export Promotion Arrangements 128Nora Hill6.1 Introduction 1286.2 WTO agreement on subsidies and

countervailing duties 1306.3 Current incentives in SADC 1326.4 Overcoming negative perceptions 1346.5 Conclusions 136

7. Compensatory Mechanisms 140Carolyn Jenkins7.1 Introduction 1407.2 The case for compensation 1407.3 International experience 1437.4 Review and assessment of the SACU

revenue-sharing mechanism 1467.5 Alternatives to fiscal compensation 1507.6 Concluding comments 157

vi Contents

JEN-FM.QXD 3/31/00 10:04 AM Page vi

References 158

AppendicesA1 Review of Taxation Policies and Government Revenue 163

Richard HessA2 Constraints on Foreign Direct Investment by Country 210

Richard HessA3 Export and Investment Incentives by Country 237

Nora Hill

Index 260

Contents vii

JEN-FM.QXD 3/31/00 10:04 AM Page vii

This page intentionally left blank

Foreword

The Economic Affairs Division of the Commonwealth Secretariat has,in the past few years, provided considerable support to the process oftrade liberalisation among the SADC member countries. That workhas included a number of studies on the likely impacts of trade policychanges on trade flows within the region. Trade policy, however, is atits most effective when the appropriate framework of complementaryeconomic policies is implemented. This study examines an overalleconomic framework to sustain and promote more liberal tradingarrangements in SADC.

The analysis focuses on several key issues. The role of macroeconomicpolicy coordination at the regional level is examined in some detail.Fiscal adjustments, in particular, are a subject of concern in manyregional trading arrangements and SADC is no exception; this studyanalyses this issue. The process of developing an adequate competitiveframework in the region requires, among other things, the removal ofconstraints on cross-border investments. The study assesses the progresswhich has been made in this direction. While trade liberalisation createsopportunities, it also requires appropriate policies to utilise those oppor-tunities. The study also examines export promotion measures, initiativesto overcome sectoral adjustment difficulties and arrangements whichcan facilitate adequate distribution of the gains from trade liberalisation.

Since the latter part of 1998, SADC governments have been engaged,through the SADC Trade Negotiating Forum, in an intensive processto reduce tariff and non-tariff barriers in the context of the SADC TradeProtocol (concluded in August 1996). To reap the full benefits of thetrade agreement, nevertheless, the framework of complementary poli-cies described in this study should be created. The main conclusionsand recommendations were presented to the SADC Trade NegotiatingForum, on 26 January 1999, in Harare. This study incorporates thecomments made at this meeting.

The study has been prepared by a team of economists led byDr Jonathan Leape, Director, Centre for Research into Economicsand Finance in Southern Africa (CREFSA), at the London School ofEconomics. He has been ably supported by Dr Carolyn Jenkins andLynne Thomas of CREFSA, and Professor Gavin Maasdorp, RichardHess and Nora Hill of Imani Development.

ix

JEN-FM.QXD 3/31/00 10:07 AM Page ix

The continuing support provided by Mr A.T. Pallangyo, former Directorof the SADC Industry and Trade Coordination Division (SITCD), andhis colleague, Mr Nestor Rweyemamu, for our programme of work onregional cooperation in the sub-region is much appreciated. Dr JohnEyers, Deputy Director, had overall responsibility for the project whichwas undertaken under the supervision of Dr Jackson Karunasekera,Chief Programme Officer, Economic Affairs Division.

Rumman FaruqiDirector

Economic Affairs DivisionCommonwealth Secretariat

Marlborough HousePall Mall

London SW1 5HX

x Foreword

JEN-FM.QXD 3/31/00 10:07 AM Page x

Acknowledgements

The idea for this book originated with the announcement by policy-makers in the Southern African Development Community (SADC)of their intention to create a Free Trade Area in the region. Followingconsultations with the SADC Industry and Trade Coordinating Division(SITCD), the Commonwealth Secretariat commissioned a study to inves-tigate what complementary economic policies SADC member statesshould pursue if they are to maximise the gains from entering into aregional free trade agreement. The study was carried out by the Centrefor Research into Economics and Finance in Southern Africa at theLondon School of Economics, with the Southern African-based consul-tancy group, Imani Development. The conclusions and recommenda-tions of the report were presented to the SADC Trade NegotiatingForum in Harare in January 1999.

This book, which is based on that report, is published in the beliefthat the study is of broad interest to policy-makers and researchersconcerned with Southern Africa and also to those concerned with tradeliberalisation and development. The key theme of the book – theimportance of consistency between trade reform and the wider eco-nomic policy framework, including institutional development – is ofgeneral relevance to developing and emerging economies.

The authors wish to thank the Commonwealth Secretariat for theirfinancial support and the interest shown in the project from inceptionto completion. In particular, John Eyers, Dick Gold and JacksonKarunasekera provided helpful advice throughout the project. We arealso grateful for support from SADC, especially Mr A.T. Pallangyo at theSITCD in Dar-es-Salaam, who promoted the project; Drs P. Ramsamyand M. Stahl at the SADC Secretariat in Gaborone, who provided help-ful comments; and Ms B. Kunene at the SADC Finance and InvestmentSector Coordinating Unit in Pretoria, who was invariably supportive. Inaddition, government officials in SADC member states and participantsat the Trade Negotiating Forum were generous with their time, theirinformation and their interest in the project.

The study on which this book is based was carried out in the firsthalf of 1998. Final revisions to the chapters were made following theSADC Trade Negotiating Forum in Harare in early 1999.

xi

JEN-FM.QXD 3/31/00 10:07 AM Page xi

List of Abbreviations

ADB African Development BankAEC African Economic CommunityBLNS Botswana, Lesotho, Namibia and SwazilandBOT Build Operate TransferCARICOM Caribbean Community and Common MarketCBI Cross-Border InitiativeCEAO Communauté Economique de L’Afrique de l’OuestCEN Capital Export NeutralityCIN Capital Import NeutralityCMA Common Monetary AreaCOMESA Community of Eastern and Southern AfricaCREFSA Centre for Research into Economics and Finance

in Southern AfricaDBSA Development Bank of Southern AfricaERDF European Regional Development Fund EPZ Export Processing ZoneEMIA Export Marketing and Investment AssistanceFDI Foreign Direct InvestmentFISCU Finance and Investment Sector Coordinating UnitFTA Free Trade AreaEU European UnionGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGNP Gross National ProductGSP Generalised System of PreferencesGST General Sales TaxGVM Gross Vehicle MassIDZ Industrial Development ZoneIMF International Monetary FundMERCOSUR Mercado Commún del SurMSME Micro, Small and Medium-sized Enterprises MTEF Medium Term Expenditure FrameworkNGO Non-Governmental OrganisationNSB National Standards BureauOAU Organisation of African Unity

xii

JEN-FM.QXD 3/31/00 10:07 AM Page xii

OECD Organisation for Economic Cooperation andDevelopment

RILS Regional Industrial Location StudySABS South African Bureau of StandardsSARA Southern African Railways AssociationSARC Southern African Rail CorporationSACU Southern African Customs UnionSADC Southern African Development CommunitySARS South African Revenue ServiceSDI Spatial Development InitiativeTRIMS Trade-related Investment MeasuresUEMOA Union Économique et Monétaire Ouest-AfricaineVAT Value Added TaxWEF World Economic ForumWTO World Trade Organisation

List of Abbreviations xiii

JEN-FM.QXD 3/31/00 10:07 AM Page xiii

Notes on Contributors

Richard Hess, based in Zimbabwe, is Managing Director of the ImaniDevelopment Group, a specialist economic, trade and investment con-sultancy firm operating throughout Southern Africa. He has extensiveexperience of regional integration initiatives in Africa. He has acted asan adviser to the Secretariats of SADC and COMESA for over a decade.

Nora Hill is the Managing Director of Imani-Capricorn EconomicConsultants, Durban. She has wide-ranging experience in internationalmarketing and in export and investment promotion. Her current workincludes Southern African and COMESA trade and industrial projectsand the International Competitiveness programme for the InternationalTrade Centre (UNCTAD/WTO).

Carolyn Jenkins works at the Centre for the Study of African Economies,University of Oxford, and at the Centre for Research into Economics andFinance in Southern Africa, London School of Economics. She has been aconsultant to governments and international institutions on macro-economic issues, trade policy and regional integration in Southern Africa.

Jonathan Leape is founding Director of the Centre for Research intoEconomics and Finance in Southern Africa at the London Schoolof Economics and Lecturer in Economics. He has undertaken numer-ous studies of economic and financial policy issues facing Southand Southern Africa and has acted as consultant for a wide range ofinstitutions.

Gavin Maasdorp is Emeritus Professor, Economic Research Unit,University of Natal, and a Director of Imani-Capricorn EconomicConsultants, Durban. He has 35 years’ experience as a consultant inSouthern Africa, and has published widely on trade, transport andother aspects of economic integration and development in the region.

Lynne Thomas is a Researcher with the Centre for Research intoEconomics and Finance in Southern Africa at the London School ofEconomics. Her research focuses on macroeconomic convergence inSouthern Africa; the role of regional integration in promoting growth;and the characteristics of capital flows in Southern Africa.

xiv

JEN-FM.QXD 3/31/00 10:07 AM Page xiv

1Gaining from Trade inSouthern AfricaCarolyn Jenkins, Jonathan Leape and Lynne Thomas

1

1.1 Introduction

Over the past three decades, economic growth in most of the countriesof Southern Africa has been too slow to generate significant improve-ments in the standard of living or to lift large fractions of the popula-tion out of poverty.1 Explaining Africa’s poor growth performance and,more generally, the sharp differences in growth performance acrosscountries and regions has been the focus of at least 14 studies in the1990s. One conclusion to emerge from these studies is that opennessto trade is associated with higher rates of economic growth. These find-ings have reinforced an increasing conviction among policy-makers inSouthern Africa that regional trade liberalisation is an important stepin efforts to improve growth performance throughout the region.

Historically, Southern Africa has been characterised by relativelyclosed economies. In part, restrictive trade policies have been driven bya perceived need to protect weak domestic industries. They have alsobeen used as an instrument for balancing otherwise unstable macro-economic regimes. Since the beginning of the 1990s, extensive unilat-eral trade liberalisation has occurred across Southern Africa – eitherthrough aid-supported structural adjustment programmes or, in thecase of the Southern African Customs Union (SACU), through agree-ment with the World Trade Organisation. More recently, attention hasturned to the role of regional trade liberalisation in encouraging fastereconomic growth across Southern Africa – these ideas have culminatedin the proposal for a Free Trade Area (FTA) encompassing the SouthernAfrican Development Community (SADC).

International interest in economic cooperation is spawning newregional initiatives in every continent.2 Africa does not lag behind the

JEN-01.QXD 3/31/00 10:08 AM Page 1

world in setting up these arrangements; in fact, the world’s oldest cus-toms union exists in Southern Africa, and the list of both past and pre-sent multilateral economic agreements is probably longer than that ofany other continent. There are successful examples, notably the SACUand the (Rand) Common Monetary Area (CMA), and some partiallysuccessful arrangements in francophone Africa, but Africa’s record ofcreating workable regional frameworks is generally poor. Almost allregional trade initiatives in Africa have achieved very little, in spite oftheir political appeal.

Why has Africa fared so badly in creating sustainable regionalarrangements? One important factor is weaknesses in the designs ofsuch arrangements. Many schemes were designed without taking intoaccount members’ divergent interests and the conflicting obligationsstemming from overlapping membership of different regional arrange-ments; without considering the feasibility of implementation for par-ticipating countries; and without assessing members’ incentives tocomply and their scope for substituting non-tariff barriers for tariffs. Asecond key factor has been the persistence of domestic policies thatconflict with the proposed trade reforms. Incompatible macroeco-nomic or fiscal policies, for example, can quickly frustrate any attemptat trade liberalisation by creating an unsustainable internal or externalposition. A third crucial factor has been the failure to devote sufficientattention to the problems created by weak national institutions andinfrastructure. Too often, reform packages have been modelled onarrangements in other, typically more developed regions without regardto their institutional and infrastructural prerequisites. Compoundingthese three factors has been a structure of demand and productionwhich historically has been too similar across many African countriesto generate substantial trade creation.3

The 1994 democratic elections in South Africa, and the new govern-ment’s greater orientation towards the region, has created a new oppor-tunity for constructive regional cooperation. Although the obstacles, insome cases, are daunting, governments throughout Southern Africa arenow looking to broader economic cooperation as a solution to smallmarkets and generally weak economies. With the participation of therelatively large and sophisticated economy of South Africa, the pro-posed SADC Free Trade Area represents a potential vehicle for success-ful and wide-ranging cooperation.

If a Southern African free trade area is to enhance intra-regionaltrade, the problems of divergent national interests, of conflicts gener-ated by overlapping memberships of other regional initiatives and of

2 Carolyn Jenkins, Jonathan Leape and Lynne Thomas

JEN-01.QXD 3/31/00 10:08 AM Page 2

adequate sanctions for non-compliance will have to be addressed at thepoint of design.

Success in enhancing intra-regional trade, however, also poses policychallenges that go far beyond negotiating the details of a regional tradeagreement. For any such agreement to be successfully implementedand sustained, the trade policy reforms must be complemented by ini-tiatives in other, purely domestic policies which might otherwise con-strain the process and reduce the benefits of regional trade integration.

It is these complementary policies that are the focus of this book,which examines the non-tariff policy framework that will best supportintra-regional trade liberalisation within SADC.4 It considers the poli-cies and initiatives that need to be in place for member countries tomaximise the benefits of the FTA. The analysis is organised around sixkey policy areas:

� macroeconomic policy,� fiscal adjustment,� foreign investment,� microeconomic policies (including infrastructure and education),� export promotion,� compensatory mechanisms.

Two key themes run through the analysis: the crucial importance ofpolicy coordination and the need for institution-building. The two arethoroughly complementary – indeed, certain policies and initiativesfall under both headings.

The issue of policy coordination arises from the broad range ofpotential conflicts between domestic economic policies and reformstrategies, on the one hand, and trade reforms, on the other. One suchset of conflicts are those arising from incompatibilities between differ-ent policies. In the area of macroeconomic policy, for example, incon-sistencies between exchange rate policy and the trade regime couldundermine trade reforms by choking off the expected increase inexport demand. At the same time, budgetary pressures that might arisefrom a failure to undertake appropriate fiscal adjustments in the face ofthe likely loss of customs revenue could make regional trade reformsunsustainable. A second set of conflicts are those arising from the inap-propriate sequencing of reforms. For example, a failure to address theimpediments created by exchange controls – or by bureaucratic invest-ment approval procedures – could inhibit the expected increase incross-border investment, and thereby curtail the benefits of the FTA.

Gaining from Trade in Southern Africa 3

JEN-01.QXD 3/31/00 10:08 AM Page 3

It is this first dimension of policy coordination – focusing on thecompatibility of domestic economic policies with the proposed tradepolicy reforms – that is the principal focus in the analysis that follows.A second dimension that is likely to be of more importance in themedium term is the coordination across member countries of domesticpolicies that have direct effects on cross-border transactions. The bene-fits of moves towards a more integrated regional market will not befully realised if the resulting trade and investment flows are heavily dis-torted by sharp differences between countries in tax, regulatory andother policies. While the case for full harmonisation of policies is weak,especially in the short term, the case for a degree of coordination acrossmember countries is likely to grow as the regional market develops.

Evidence from diverse sources points to the need for a comprehen-sive strategy for institution-building as an integral part of any reformprogramme aimed at achieving a more integrated regional market.Recent research into Africa’s poor economic performance has high-lighted the crucial role of weak institutions in inhibiting investment(see Aron, 1998, for a useful survey of this literature). In addition, anexamination of regional agreements throughout Africa underscoreshow the ability of member countries to implement and benefit fromsuch agreements is often circumscribed by insufficient institutionalcapability. In the case of the SADC FTA, the need for institution-buildingaffects all policy areas. In the area of fiscal policy, for example, there isa need to improve tax enforcement and compliance, while in the areaof foreign investment there is a need to increase the efficiency, skilllevels and permit-granting authority of investment centres.

In the next section of this introductory chapter, the development ofSADC and of the proposed FTA are reviewed briefly. The relationshipbetween trade openness and economic growth and the role of regionalintegration is then discussed. The remainder of the chapter is devotedto providing an overview of the issues that arise and the policies thatcould be adopted in each of the six areas identified above to maximisethe benefits that each member country derives from the proposed FTA.

1.2 The Southern African DevelopmentCommunity and trade integration

SADC evolved out of the Southern African Development Coordina-tion Conference (SADCC) established in 1980. The latter’s objectiveswere to reduce the dependence of the region on the rest of theworld (especially South Africa) and to promote regional cooperation in


JEN-01.QXD 3/31/00 10:08 AM Page 4

development projects. SADCC was never intended as a regional tradearrangement. It worked rather well in bringing regional political lead-ers together, and as a means for procuring foreign aid.

In 1992 the Southern African Development Coordination Conferencechanged its name to the Southern African Development Communityand broadened its concerns to facilitating regional economic integra-tion. The 1992 Windhoek Treaty lays out SADC’s aspirations for regionalintegration. Integration initiatives are to be given content in a series ofprotocols, which will include steps to achieving closer economic coop-eration in the region. The viability of SADC as an economic commu-nity was enhanced by the accession to membership in August 1994 ofSouth Africa, which generates around two-thirds of Southern Africa’sGDP. In mid-1996 a trade protocol was signed, which committed thethen 12 members to a programme of phasing out customs duties andother equivalent measures in the process of establishing a free tradearea early in the next decade.


The Southern African Development Community

The current membership of SADC is set out below. The originalmembership of SADC consisted of ten countries; South Africa andMauritius jointed SADC in 1994; and DR Congo and Seychellesjoined in 1998.

The size of the SADC economy amounted to US$198 billion in1997. More than two-thirds of the regional economy is accounted forby South Africa, which contains just over 20 per cent of the SADCpopulation. The next largest economy is the Democratic Republicof Congo at 10 per cent of the total (although DR Congo has thelargest share of the population at around one-quarter), thenZimbabwe at 4 per cent. These economies contrast with Lesotho,Malawi, Mozambique and Swaziland which each represents around1 per cent or less of the SADC total.

The figures presented in the table highlight the large disparitieswhich exist across the regional economies – in terms of both the sizeof economies and relative well-being (as measured by GNP percapita). These disparities are accompanied by a considerable diver-gence of macroeconomic policy frameworks and performance, asshown in the chapter by Carolyn Jenkins and Lynne Thomas. Animportant finding of this chapter is that countries which, in the past,

JEN-01.QXD 3/31/00 10:08 AM Page 5

The SADC trade protocol calls for the establishment of a Free TradeArea within eight years of ratification, with the gradual elimination oftariffs and non-tariff barriers to trade over this period. Following theadoption of the protocol in 1996, SADC trade ministers and officialshave been working towards a programme for the implementation ofthe FTA. The establishment of the FTA is expected to mean the freeingof around 90 per cent of intra-regional trade, in line with the rules ofthe World Trade Organisation which state that ‘free trade’ should cover‘substantially all’ trade.

Although the draft protocol applies provisions to all membersequally, there will almost certainly be a substantial degree of asymme-try in the period of phase-down of tariffs, with smaller SADC membersgaining a more rapid access to the South African market (or, more


have been relatively more open to trade have had stronger eco-nomic growth (although they are also countries that have had amore stable macroeconomic environment).

SADC indicators (1997)

GDP (in Share of Population Share of SADC 1996 GNPUS$m) SADC GDP (m) population per capita ($)

(%) (%) purchasingpowerparity

Angola 7,785 3.9 11.6 6.1 1,030Botswana 5,238 2.6 1.5 0.8 7,390DR Congo 19,828 10.0 48.0 25.2 790Lesotho 953 0.5 2.1 1.1 2,380Malawi 2,326 1.2 10.1 5.3 690Mauritius 4,136 2.1 1.1 0.6 9,000Mozambique 2,270 1.1 18.3 9.6 500Namibia 3,159 1.6 1.6 0.8 5,390Seychelles 521 0.3 0.1 0.05 not availableSouth Africa 132,646 66.9 43.3 22.8 7,450Swaziland 1,138 0.6 0.9 0.5 3,320Tanzania 5,358 2.7 31.5 16.6 not availableZambia 5,115 2.6 8.5 4.5 860Zimbabwe 7,905 4.0 11.7 6.2 2,200

Total 198,378 100.0 190.1 100.0

Source: African Development Report 1998, African Development Bank; World Develop-ment Indicators 1998, World Bank.

JEN-01.QXD 3/31/00 10:08 AM Page 6

correctly, the SACU market). The importance of asymmetric liberalisa-tion in ensuring the development of a sustainable trade agreement isemphasised in this book. Increased access to the South African marketwill accelerate the long-term positive effects of the FTA associatedwith growth of the export sector, while delaying the short-term adverseimpact on customs revenue and on import-substitution sectors. Ineffect, smaller (non-SACU) countries will have the benefits of greateraccess to a larger market, while still retaining protection for domesticindustries in the transitional period. Moreover, it is envisaged that dur-ing this transitional period outward investment, particularly fromSouth Africa, will foster the development of industrial capacity inneighbouring countries. This should improve the potential for two-waytrade within the region, which is currently heavily skewed towardsSouth Africa (exports to the region from South Africa outnumber SouthAfrica’s regional imports by a multiple of six).

The appeal for South Africa of this proposal is the dual advantage ofincreasing neighbours’ demand for South African exports and, in thelonger run, the creation of jobs in the region, which should reduce theflow of cross-border jobseekers to South Africa. In September 1998, theSouth African government published a proposed trade offer to SADCfor consultation within the country. Under this offer almost three-quarters of South Africa’s imports from SADC would be eligible for freeaccess to the South African market with immediate effect. By the endof year five of the eight-year transition period to the FTA, this wouldrise to 87.6 per cent. Additional proposals exist for the treatment ofgoods deemed to be ‘sensitive’ to tariff liberalisation such as sugar,clothing and vehicles (SACOB, 1998).

1.3 The relationship between opennessto trade and economic growth in Africa

Over the past 30 years, economic growth in Africa has comparedpoorly with that of other developing regions. During the 1980s, aver-age annual growth in sub-Saharan Africa was just 1.7 per cent com-pared to an average of 3.1 per cent for all developing countries; in thefirst half of the 1990s, this gap narrowed slightly (to 2.0 per cent versus2.9 per cent), but economic growth has generally been insufficient togenerate substantial improvements in well-being across the region.5

Regional trade liberalisation is seen as an important step in efforts toimprove growth rates in Southern Africa – in the long term, liberalisa-tion is expected to generate a significant increase in intra-regionaltrade and cross-border investment.


JEN-01.QXD 3/31/00 10:08 AM Page 7

The importance of an open trade environment in explaining eco-nomic growth performance has been demonstrated in a variety of con-tributions to the economic literature. Since 1990 at least 14 majorstudies have been undertaken to explain Africa’s growth performance –or lack of it. All use growth and investment regressions, which examinethe statistical relationship between either the rate of growth of theeconomy or the rate of investment and a range of explanatory variables.Many more studies have been done for other regions, both developedand developing. One overriding conclusion to emerge worldwide is thatopenness to trade is strongly associated with higher rates of economicgrowth, or, conversely, that a lack of openness to trade is correlatedwith poor growth performance.6

In a review of African growth performance, Collier and Gunning(1999) point out that Africa is less open than other regions to trade,partly due to policy and partly due to natural barriers, such as land-locked countries; the better studies take both sets of constraints intoaccount in the analysis. There is no doubt that African governmentshave had particularly restrictive trade policies in the past. Dollar (1992)constructed an index of trade policy, which found that not only wasAfrica the area with highest trade restrictions, but the gap betweenAfrica and the next most restrictive area, the Middle East, was widerthan that between the Middle East and the most liberalised region, theFar East. Almost all the studies of Africa find that impediments to tradehave been detrimental to African growth performance, reducing theannual growth rate by 0.4–1.2 percentage points.

Trade appears to promote investment, both domestic and foreign. Instudies of the determinants of capital formation, trade liberalisationhas been found to generate higher investment across all developingcountries. This is also found to be the case in studies which are con-cerned only with investment in Africa.7 International trade facilitatestechnology transfers, the exchange of information and opportunitiesto realise economies of scale, and trade agreements provide greater cer-tainty for trade policy generally, especially in countries which have ahistory of reversing moves towards unilateral liberalisation. All of thisreduces the risks of, or raises the returns to, investment. Greater vol-umes of investment is one of the reasons for the observed positive rela-tionship between openness to trade and economic growth.

Clearly more liberal trade does not explain everything about a coun-try’s economic growth rate. There is a variety of other important explana-tory factors, including human capital (education and health), the typeof investment undertaken (not only the volume), political stability, the


JEN-01.QXD 3/31/00 10:08 AM Page 8

presence or absence of market distortions, diversification away from adependence on primary (especially non-mineral) exports and location.In Africa, the magnitude and persistence of external shocks, deficientpublic service provision and political and economic instability havealso been found to correlate negatively with growth. For trade liberali-sation to yield higher economic growth, complementary policies aretherefore needed to create an accommodating environment for growth.

1.4 Regional integration, economicconvergence and growth

Regional integration, if properly implemented, can go some way (butnever all the way) to giving smaller economies access to some of thebenefits of more open policies: access to a larger market and henceopportunities for economies of scale; access to greater competition andhence opportunities for improving efficiency; and access to foreigncapital and technology. In other words, regional trade liberalisationenables smaller members to reap some of the gains from trade vialarger markets and improved efficiency, without exposure to non-regional competition. Moreover, there is evidence that regional tradegroups form ‘convergence clubs’, where poorer members catch up with(converge on) richer ones through the process of trade.

The growing literature on economic convergence appears to be mov-ing towards a consensus that trade rather than monetary integrationdrives the process of catch-up by poorer economies of richer ones. Ifthis is the case, then a full programme of intra-SADC trade liberalisa-tion should precede any moves towards monetary and fiscal policy har-monisation. However, it is not yet clear whether the same processes areat work in Africa as elsewhere.8

Preliminary evidence for SADC shows that there has been a generalpattern of divergence between the members, with the exception of thefive countries of the SACU, which have very clearly converged over the30 years for which data are available (Jenkins and Thomas, 1997).Jenkins and Thomas use three measures to determine whether SouthernAfrican countries are converging on each other. Evidence of conver-gence would mean that cross-country disparities in income per headare being reduced; alternatively, if economies are actually diverging, itimplies that the rich are getting richer while the poor get poorer. Allthree measures provide the same conclusion: that, within SADC as awhole, economies diverged over the 30 years from 1960 to 1990, butclear convergence has occurred between the members of SACU.


JEN-01.QXD 3/31/00 10:08 AM Page 9

There is no reason to expect that the SADC countries should haveconverged, as free trade in the Community is a very recent ideal.However, within the customs union movements of goods have beenfree for most of the twentieth century and the smaller members havegrown rapidly, particularly since the early 1970s. Access to the SouthAfrican market has probably allowed smaller members to escape thelimitations imposed by small domestic markets. Although this evi-dence is not conclusive in itself – and there may be reasons other thanregional free trade which account for it – the trend is at least consistentwith that of other regions, both developed and developing.

One of the implications of the notion of convergence clubs is thatthere may be limits to the extent to which growth performance viaregional arrangements can be enhanced: ‘catch-up’ implies that thebenefits in terms of economic growth are greater the lower the initiallevel of income. In other words, the richest member is constrained inthe extent to which economic growth can be accelerated by the forcesdriving catch-up. This means that regional integration should not beperceived as an alternative to more general trade liberalisation, which iscrucial if African countries are to grow, but rather as one step in aprocess of greater integration into international markets. For this rea-son, continued progress in liberalising vis-à-vis the rest of the world isimportant for the entire region. Here, two initiatives are of particularimportance: the free trade agreement between South Africa (and theother members of SACU) and the European Union (EU); and the nego-tiations on the successor to the Lomé Convention, through whichSADC members (with the exception of South Africa) have preferentialaccess to the EU market.

After negotiations lasting almost five years, South Africa (and SACU)and the EU reached agreement in March 1999 to establish a Free TradeArea. The negotiating process was drawn out by considerable problemsin agreeing the coverage of trade liberalisation and it became clear overtime that the ambitious initial aims for the agreement would not beachieved (Stevens, 1997). Nevertheless, this agreement offers benefitsfor both South Africa and the region (although, as with any trade liber-alisation, there are concerns about the short-term impact on domesticproducers). For South Africa, it offers the potential (long-term) oppor-tunity for stronger growth and convergence with higher-incomeeconomies; for the rest of SADC, it is clearly in their interests for theirdominant neighbour to improve its growth performance.

The Lomé Convention, the current version of which expires in 2000,has previously provided preferential access to the EU for around 70


JEN-01.QXD 3/31/00 10:08 AM Page 10

African, Caribbean and Pacific (ACP) countries on a non-reciprocal basis.It now seems likely that the renegotiated Lomé agreement will be funda-mentally different in scope – including the principle of reciprocity ofaccess to markets. For SADC, perhaps the most important change beingproposed by the EU is that new agreements will be reached withregional (trade) groups as opposed to individual countries – in effect,Lomé will be reorganised through the establishment of a series of FTAswith developing regions. While the EU’s proposals currently face consid-erable opposition from the ACP group, they nevertheless underscore thepotential importance of the SADC FTA as the basis on which a newLomé agreement could be negotiated by Southern African countries.

The moves towards regional integration in Southern Africa have alsobeen influenced by growing fears of African marginalisation at a timewhen much of the rest of the world is embracing regionalism eitherthrough the expansion or formation of large trade blocs (such as envis-aged by the EU for the future of Lomé). Regional trade in SADC is alreadyhigh by African standards but the share of regional trade is low comparedto other groups in the developing world. Intra-SADC exports amountedto 10.4 per cent of total SADC exports in 1996, compared to 22.8 percent in MERCOSUR and 23.2 per cent in ASEAN. In blocs containing rel-atively rich partners, the share is even higher – for example, in NAFTAthe share was 47.5 per cent in 1996. In general, regional trade groupshave experienced some success in increasing the share of intra-regionaltrade – most notably, MERCOSUR’s intra-regional trade rose from 8.9 percent of total exports in 1990 to 22.8 per cent by 1996, although over thisperiod its total exports to the rest of the world remained static, suggest-ing that some trade diversion was occurring. If the SADC FTA is imple-mented successfully, then a further challenge will be building onincreased intra-regional trade to improve global competitiveness.

1.5 Policies to underpin the FTA: an overview

The focus of this book is on the set of complementary policies that willenable the countries of Southern Africa to gain greatest benefit fromthe proposed regional free trade area. Trade policy is just one elementof the economic policy framework, each component of which needs tobe consistent if the full benefits of trade liberalisation are to be realised.

1.5.1 Macroeconomic policies

International experience has shown that inconsistencies betweenmacroeconomic policies and the trade regime can undermine trade


JEN-01.QXD 3/31/00 10:08 AM Page 11

liberalisation, whether regional or unilateral. In Chapter 2, CarolynJenkins and Lynne Thomas argue that, where inconsistencies exist,trade policy is inevitably subordinate to fiscal or external balance con-siderations. Where severe budget or current account deficits emerge, it ispossible that any move towards trade openness would be reversed inorder to achieve short-term balance. They identify two critical indicatorsof policy compatibility in SADC: the budget deficit and the realexchange rate.

One of the goals of regional trade liberalisation is the diversificationof the export base away from dependence on primary commoditiestowards non-traditional exports. This will inevitably require newinvestment. However, where the government deficit is large, the needto raise interest rates to maintain macroeconomic balance increasesboth the direct cost and the risk of investment. Where the authoritiesseek to finance public sector deficits in a non-inflationary way byborrowing domestically, private investors are crowded out of access toaccumulated domestic savings. To avoid this, governments may borrowoffshore, but this adds to the external debt burden. Clearly, large bud-get deficits are incompatible with the aims of trade liberalisation.

An appropriate exchange rate policy is of crucial importance in sup-porting trade liberalisation initiatives. A removal of trade restrictionsmust be accompanied by currency depreciation to provide some short-term protection for domestic producers. Depreciation of the domesticcurrency should alleviate balance of payments problems and over timeencourage export-producing sectors. Where the domestic (real) exchangerate is overvalued – either because the government has large interna-tional debt obligations and will not devalue or because price inflation ishigh – there will be a reluctance to invest in the production of processedexports. An overvalued currency is therefore also incompatible with thefreeing of international trade.

The successful removal of trade restrictions, therefore, requires bothgovernment deficit reduction and the elimination of currency overvalua-tion. An assessment of the macroeconomic policies of each SADC mem-ber state shows that some countries are implementing policies that placethem in a position to take advantage of the opportunities presented by aFTA, while others are not. Jenkins and Thomas argue that at least half ofSADC members need to pursue a sustained tightening of the fiscal stanceif they are to gain from the FTA. In addition, governments should aim atpreventing overvaluation of the real exchange rate. Jenkins and Thomasshow that rapid nominal depreciation in several SADC countries duringthe 1980s and 1990s has not been sufficient to offset the effects of


JEN-01.QXD 3/31/00 10:08 AM Page 12

inflation, resulting in appreciation (or, at least, a considerably slowerdepreciation) of the real exchange rate. They argue that it is crucial thatinflationary pressures be brought under firmer and sustained control ifexchange rate policy is to be used to support the SADC FTA. Moreover,where inflationary pressures arise from monetisation of the fiscal deficit,this provides further emphasis of the importance of fiscal discipline.

1.5.2 Taxation and fiscal adjustment

The fiscal implications of the FTA and appropriate strategies for fiscaladjustment are analysed by Jonathan Leape in Chapter 3. The higherlevels of investment and growth stimulated by the FTA should, in the-ory, yield fiscal benefits. In practice, however, there may be adverse fis-cal effects arising from two different sources. First, the losses incustoms revenues due to falling tariffs on intra-regional trade and theeffects of trade diversion are likely, for many countries, to outstrip anygains in other tax revenues (arising from increased levels of economicactivity generally). Second, the potential gains in tax revenues areunlikely to be fully realised due to institutional weaknesses in regionaltax systems. In light of the importance of maintaining fiscal balance,these revenue losses must be addressed through fiscal adjustments.

The FTA will, of course, have a direct negative impact on customs rev-enues. Evidence is presented on the degree of dependence on customsrevenues and the likely effects of the FTA on these revenues – takinginto account its effects on trade creation, trade diversion and growth.While the effects vary significantly across SADC members, virtually allcountries will need to put in place some fiscal adjustment measures.Failure to do so risks undermining the fiscal position of member coun-tries, thereby threatening the long-run sustainability of the FTA.

It is important to note that the timing of these adjustments would beaffected by the proposed asymmetric implementation of the FTA,whereby import tariffs in South Africa and the other SACU memberswould be reduced more rapidly than those in other member countries.Although an asymmetric phase-in may not affect countries’ long-run fis-cal positions under the FTA, it would generate increased revenues duringthe phase-in period, giving countries considerably more flexibility indeciding when and how to implement the necessary fiscal adjustments.

The FTA will also lead to changes in the sectoral and regional struc-ture of individual economies that are likely to affect the overall level oftax revenues. The growth in cross-border trade and investment will leadto a contraction of some traditional, especially import-substituting,industries that have been historically important sources of tax revenue.


JEN-01.QXD 3/31/00 10:08 AM Page 13

The narrowness of tax systems throughout the region means, however,that the offsetting expansion of existing and emerging export indus-tries may not yield the expected benefits in increased revenues fromthose sectors. Overall revenues could therefore fall, unless revenueauthorities respond by broadening their tax structures to capture thehigher levels of spending and income generated by new export indus-tries and by higher levels of economic activity more generally.

Leape explores a range of fiscal adjustment measures that can beused to offset the losses in customs revenue as well as measures thatcan ensure that governments secure the full fiscal benefits of higherlong-run growth. These include both policy coordination measures, suchas increases in tax rates or steps to broaden the tax base, and institution-building measures such as improved tax enforcement and enhancedcontrol of expenditure.

For most countries it is unlikely to be desirable to offset any revenueshortfall by raising direct tax rates which are already high by interna-tional standards. A more appropriate response to a fall in taxes oninternational trade is some combination of increases in other indirecttaxes, especially sales or value-added tax. The chapter presents broadestimates of the magnitude of increases in sales tax rates that may berequired in each SADC country if this option is chosen. For some coun-tries, the estimated adjustment is found to be small; for others, suchadjustment would imply high tax rates, suggesting that complemen-tary strategies should be explored.

It is important that governments intensify efforts to improve taxenforcement and compliance. Four complementary approaches thatshould be considered are: granting administrative independence to rev-enue authorities; undertaking high-profile campaigns against tax eva-sion; increasing documentation for business transactions with thepublic sector and establishing unique taxpayer identification numbers;and simplifying tax laws and reducing excessively high tax rates.

Leape assesses a range of strategies to broaden the base of direct andindirect taxation. The scope for an increased role for presumptive taxa-tion is examined as a means of expanding the direct tax base. Efforts tobroaden the indirect tax base are also considered, including takingaction to eliminate exemptions and reducing the number of multiplerates. It is argued that countries that are successfully operating a gen-eral sales tax should consider shifting to a value-added tax. Moreover,in Angola and in Mozambique, priority should be given to introducinga general sales tax or VAT in establishing broad and effective sourcesof revenue.


JEN-01.QXD 3/31/00 10:08 AM Page 14

Finally, the chapter considers institutional measures to enhance effec-tive control of expenditure as a means of reducing the fiscal burden.Drawing on promising recent developments in the region, it discussesthe potential role of cash budgets and medium-term expenditureframeworks.

1.5.3 Tax harmonisation or tax diversity?

Moves towards greater regional integration are inevitably accompaniedby debate on the potential role of tax harmonisation in reducing dis-tortions to cross-border trade and investment. This regional policycoordination issue is also examined in the chapter by Leape. He arguesthat the costs of full harmonisation exceed the benefits. Althoughthere may be scope for a degree of coordination, harmonising tax rateswould be a difficult task and might create new disparities. A degree oftax diversity is therefore preferable to harmonisation. In the mediumterm, member countries should identify situations in which indirecttax differences are sufficiently significant to warrant some coordinationof tax policy; and in the longer term, it might be desirable to introducepermissible tax rate ‘bands’ for broad-based consumption taxes.

Given the importance of cross-border investment to achieving theaims of the FTA, there is a need for further research into the effects oftax differences across countries on intra-regional investments and thepossible merits of tax coordination measures such as double taxationagreements, withholding taxes and coordinated investment incentives.

1.5.4 Constraints on foreign direct investment

With most governments dissaving through persistent fiscal deficits, thesource of funds for investment in the region is primarily privatesavings. Data on private savings are poor, but there has been little orno growth in recorded private savings over the past decade: most coun-tries (with some notable exceptions) have savings rates below 10 percent, and some have even been dissaving. Where the policy environ-ment is liable to change, the risk of holding savings in all but a highlyliquid form is too high, especially for poor households. Moreover, therisk of making irreversible investments is too high for firms.

An alternative source of finance for capital formation is private for-eign investment, but this also requires a stable political and economicenvironment, a point emphasised by Richard Hess in Chapter 4. In fact,foreign investors tend to require an even greater level of security thandomestic investors who are familiar with local conditions. Hess arguesthat the SADC region faces a problem in terms of the perceptions


JEN-01.QXD 3/31/00 10:08 AM Page 15

of international investors. Investment over the last decade has beeninsufficient to help generate high economic growth and has been con-centrated mostly in a few sectors within a small number of countries.

Five critical areas are identified as the most significant and com-monly encountered constraints on foreign direct investment in theregion: (i) unstable political and economic environments; (ii) bureau-cracy and inefficiency; (iii) a lack of transparency; (iv) inadequate infra-structure, notably for telecommunications, transport and the provisionof electricity and water; and (v) high taxation.

Hess emphasises the need for policy coordination and argues thatthe single most important feature required to attract significantregional and foreign investment is a stable macroeconomic and politi-cal environment. Policies planned for the economy need to be clearlystated and deviations should be minimal. Institution-building is alsocritical: excessive bureaucracy needs to be addressed – investment cen-tres, with qualified staff, need to be given greater authority to issue per-mits and licences, and all permit applications should be dealt withwithin a given time frame. Privatisation of utilities and infrastructureshould be initiated or undertaken more quickly. Where full privatisa-tion is not possible, other partnership possibilities between the stateand the private sector should be developed. Tax reform and increasedefficiency are also important.

A range of further weaknesses that contribute to poor investor percep-tions are identified. In response, a broad range of measures that couldcontribute to reversing these perceptions are recommended. Theseinclude: (i) a strengthening of private sector representative organisa-tions in the region; (ii) reform of visa requirements and procedures;(iii) liberalisation of exchange control accompanied by regional linkagesbetween capital markets and the further development of money mar-kets; (iv) harmonisation of standards for safety and quality within theregion; (v) an increase in resources for skill-based training; (vi) the estab-lishment of productivity centres – or use of centres in neighbouringcountries – with the objective of enhancing productivity; (vii) a reviewof business legislation aimed at modernising the regulatory environ-ment; and (viii) an updating of land ownership and tenure legislation.

1.5.5 Microeconomic policies

There are also important microeconomic policies that need to be inplace to enhance the effectiveness of the FTA through encouraging pri-vate sector investment and also to mitigate any adverse employmenteffects. In Chapter 5, Gavin Maasdorp argues that economic growth is


JEN-01.QXD 3/31/00 10:08 AM Page 16

closely related to the micro-behaviour of the economy and the function-ing of markets. The removal of tariffs under the FTA will have a differen-tial effect on sectors, sub-sectors and firms in each member country.Those sectors, sub-sectors and firms which are strong, efficient and com-petitive will be able to exploit economies of scale in the enlarged marketof the FTA and expand their output, while those which have reliedheavily on protection may be less able to compete in the FTA market.

Maasdorp shows that, in aggregate, the employment effects of theFTA are likely to be comparatively small, in terms of both gains andlosses – certainly smaller than already experienced under general tradeliberalisation. In certain sectors in some countries the outcome foremployment will be more serious. Direct mitigation of employmentlosses could be achieved in several ways. For example, employmentcreation which is sufficiently rapid to absorb displaced workers shouldbe facilitated through assistance to micro, small and medium-scaleenterprises; streamlined procedures for new foreign investors; tradeand investment promotion; the encouragement of dialogue betweenprivate sector entrepreneurs in the region; national retraining pro-grammes; and a streamlined competition policy. As a general rule,labour market flexibility is likely to be important during the transitionto the FTA. Maasdorp suggests that the regionalisation of labour mar-kets in SADC should be avoided, as it would be disadvantageous forcountries other than South Africa.

In addition to direct measures to alleviate job losses, it is argued thatappropriate micro-level interventions to remove supply-side constraintson enterprise would encourage investment and thereby enhance thelonger-term benefits of the FTA. These institution-building interven-tions include the provision of physical infrastructure in transport andcommunications, education and training, and finance; the transfer oftechnology and information; and market development activities.

In particular, Maasdorp recommends that, at a national level, expen-diture on primary schooling should be given priority since it has beenshown to be positively correlated with the growth of non-traditionalexports. Also, common standards should be instituted for professionaland apprentice accreditation in the region.

To support the process of trade, he further recommends the encour-agement of competition between different modes of transport throughthe elimination of subsidies; the introduction of requirements for allmodes to at least recover full user costs; the promotion of shipping;and the policing of unroadworthy vehicles, overloading, poor drivingand the conveyance across borders of stolen goods. The regionalisation


JEN-01.QXD 3/31/00 10:08 AM Page 17

of air and rail networks is important, and should help not only effi-ciency but also reduce the burden carried by taxpayers of loss-makingutilities. Moreover, delays facing rail and road operators at border postscould be minimised by joint inspections, the harmonisation of docu-mentation and improved staff efficiency.

Finally, Maasdorp recommends that the widespread coverage bycellular telephone networks and electronic mail should be achievedbefore the completion of the SADC FTA as an important part of facili-tating communication across the region.

1.5.6 Export promotion

In Chapter 6, Nora Hill emphasises the importance to the process ofdevelopment and to employment creation of the expansion of manu-factured exports. The ‘curse of resources’ has caused most African coun-tries to rely on the export of raw materials, resulting in the lethargicdevelopment of manufacturing in these countries. The establishmentof an export sector begins with a readily available supply of inputsfeeding into a developing manufacturing sector which, ideally, in turn,develops an export market as production becomes more competitive.Linkages should be developed sequentially within an industry to allowbusinesses to be established at all levels. This suggests that productionfor export should not be isolated from the pipeline development of theindustrial sector in a holistic development strategy.

Generally, investment in production for export responds to a sus-tained improvement in domestic economic fundamentals, and investorstend to be motivated by lower costs and higher efficiency of produc-tion. Complementary to this, Hill argues that an aggressive exportpromotion package should be part of a country’s trade policy, which is,in turn, part of the restructuring of industry within an economy.However, she also argues that compatibility with the rules of the WorldTrade Organisation (WTO) is an important criterion for any new initia-tive, as any measure that is not compatible with WTO rules isinevitably temporary.

A range of export incentives are currently available in SADC coun-tries, some of which are incompatible with WTO rules. Hill suggeststhat exemptions should be sought to allow a time-limited phase-downof the most effective of these measures. This would allow SADC mem-bers to build export capacity with a measure of support. She empha-sises that any new measures adopted should be WTO-compatible, inorder to eliminate for producers the measure of uncertainty which isattached to operating under rules which can only be temporary.


JEN-01.QXD 3/31/00 10:08 AM Page 18

A range of measures and reforms that could be introduced to facili-tate the expansion of exports under the FTA are highlighted. Forexample, harmonisation and rationalisation of export marketing pro-grammes could be desirable and cost-saving. Governments should con-sider providing (time-limited) grants to exporters for marketing. Exportcredit guarantee schemes should be undertaken by the private sector.The immediate removal of bureaucratic controls on exports andexporters is essential. An appropriate exchange rate policy is crucial –as argued in the chapter by Jenkins and Thomas.

Hill also identifies a role for SADC in supporting exporters. A SADCdepot could be established to collate and maintain an informationaldatabase for exporters. In addition, SADC will play an important rolein promoting the region as a market for trade and an investment loca-tion and in encouraging private sector contacts through its sector coor-dinating units.

Finally, Hill emphasises the importance of harmonisation of ‘rules oforigin’ conditions in trade agreements between SADC members withrules of origin to be set out in the FTA agreement. This will yield a sim-plified monitoring and policing framework and thus should contributeto more efficient procedures for trade.

1.5.7 Compensatory mechanisms

Several SADC member states have suggested that the revenue-sharingformula currently operating in the SACU may be a precedent for com-pensating smaller countries for the costs of trade diversion which willinevitably occur in the FTA. In Chapter 7, Carolyn Jenkins shows thatthere is no strong economic case for payment of compensation by netintra-regional exporters within a free trade area. The SACU revenue for-mula cannot be considered a precedent for SADC, because the SACU isa full customs union. In this case, there is a strong argument for pay-ment of compensation by South Africa, which is the net exporter to aregion protected by a common external tariff. Nevertheless, there areother mechanisms that can offer compensation for the adverse effectsof the FTA or that can yield a sharing of the gains from liberalisation.

In an FTA, there may be reasons, both political and economic, toenhance the intra-regional flows of resources from core to peripheraleconomies in order to redistribute the gains from freeing regionaltrade. The point of offsetting payments is not the provision of an alter-native source of revenue for cash-constrained governments, but anequitable distribution of benefits between private economic agents.This is particularly true where core economies attract most foreign


JEN-01.QXD 3/31/00 10:08 AM Page 19

direct investment from outside the region. Jenkins argues that it wouldbe more appropriate to remove exchange controls on intra-regionalflows of funds, beginning with controls on foreign direct investment.This will enable private capital in larger economies, especially SouthAfrica, to seek profitable investment opportunities in neighbouringcountries. Alternatively – or in addition – the reduction of regional dis-parities could be facilitated through investment incentives and infra-structural and educational development. Infrastructural developmentin particular is likely to advance the aims of the FTA. One option forfunding such regional investment is to establish a regional fund withcontributions from governments in proportion to their regionalexports, topped up with donor funds. Jenkins argues that co-financingand private sector involvement should be required for regional infra-structure projects funded by such an initiative and that decisions onthe use of funds should be made by a supranational body. Related tothis recommendation, the coordination of donor support is importantfor tackling industrial polarisation.

Mitigating the effects of trade diversion could include allowing freemovement of labour within national economies. If labour can movefrom areas or industries that decline to those that grow, income andremittance flows will redistribute the gains from the new industrialgrowth areas. However, it is noted that with high unemployment ofunskilled labour in most countries in the region – and shortages ofindigenous skilled labour in all of them – free movement betweeneconomies is unlikely to be appropriate within SADC in the nearfuture. Another compensating mechanism is the proposed asymmetricphasing in of the FTA, which will provide non-reciprocal access for aperiod of time to the market of the largest economy, South Africa. (Thisissue was further discussed above.)

1.6 Concluding comments: beyond the FTA

Generally speaking, African countries lag the fast-growing economiesof Asia and those of Latin America on most of the important determi-nants of growth. Many of these are directly or indirectly the result ofinstitutional weaknesses (in governance and in legal systems) or ofdomestic policy (with respect to education, macroeconomic stabilityand openness to trade). Thus, responsibility for the key policies andstrategies associated with more rapid growth rates lies in the hands ofindividual governments. There are, however, facilitating measures whichcan be implemented on a regional basis – regional trade liberalisation is


JEN-01.QXD 3/31/00 10:08 AM Page 20

one of these. But the formation of a SADC free trade area should not beadopted as an alternative to a more general removal of trade restric-tions; this would ultimately risk impeding long-run growth. Instead,the SADC FTA should be viewed as a means of improving competitive-ness in Southern Africa so that, in the longer term, the region can takeadvantage of wider trade and investment opportunities.

Policy-makers could consider the FTA a first step in forming a customsunion in Southern Africa. The economic literature demonstrates thatwhile a customs union is always welfare-enhancing through its trade-creation effects, an FTA may in some circumstances be welfare-reducingthrough effectively increasing protection and generating trade diversion.

on welfare grounds, a free trade agreement can yield no benefitsthat are not attainable under a customs union, and can generateadditional welfare costs that are not incurred under customs union.Therefore, all else equal, customs union arrangements are strictly …superior to free trade agreements. Moreover, for the same reasonsthat customs unions dominate free trade agreements in terms ofwelfare, the political economy of free trade agreements is likely tobe less conducive to multilateral trade liberalization than is a cus-toms union.

(Krueger, 1997: 171)

It is more costly to administer a free trade area with its internal rules oforigin than a customs union. Internal rules of origin, which establishthat goods shipped between partners do in fact originate in partnercountries, are necessary in a free trade area. These need to be policed,which raises administrative costs. They also provide opportunities fordomestic producers to lobby for protection in a non-transparent way.Moreover, such rules of origin enable countries to ‘export’ protection toeach other in order to avoid trade deflection (which occurs when goodsor services enter through the member country with the lowest tariffrate and are trans-shipped). In addition to other sources of trade diver-sion, rules of origin can provide incentives for producers in one partnercountry to purchase higher cost inputs than are available from the ‘restof the world’ in order to satisfy rules of origin allowing export of theoutput produced to a member country duty-free (Krueger, 1997: 178).

For the largest and richest members, especially South Africa, tradeagreements should not be limited to regional arrangements. The SADCFTA should be one of a series of trade arrangements in which SouthernAfrican countries participate. A shift away from non-reciprocal trade


JEN-01.QXD 3/31/00 10:08 AM Page 21

preferences with the EU, for example, should be considered by morecountries than South Africa and SACU. A SADC–EU FTA (such as couldbe established under the EU’s vision of the renegotiated Lomé arrange-ments) may be considered as one way for all members to enhance theirgrowth potential. In this way, South Africa will not be limited by thesmallness and lack of diversity in production of its neighbours.Following an agreement with the EU, the region could also look toexpanding a network of reciprocal FTAs to encompass both highincome economies and fast growing developing regions (Jenkins, 1997).

In the meantime, SADC policy-makers are still in the process ofestablishing a framework for the introduction of the regional FTA. It ishoped that this book will contribute to ongoing policy discussions andhelp to facilitate the transition to a sustainable FTA through broaden-ing the debate beyond tariff structures to those complementary policiesthat are likely to play a crucial role in the success of any arrangementsaimed at increasing regional trade and investment. The overviewof complementary policies presented in this chapter highlights theoverarching importance of a coherent strategy for policy coordinationand institution building. Such a strategy, bringing together all thepolicy areas discussed above, can provide a sound foundation for trade,investment and growth. In this respect, the policies discussed in thisbook may also prove vital in achieving the aims of any wider trade lib-eralisation pursued by SADC members.

Notes

1 This is not universally the case: Botswana and Mauritius have rankedamongst the world’s faster-growing economies over the past 30 years.

2 That regional economic integration is fashionable does not, of course, implythat it is necessarily an appropriate strategy to pursue. Economic research isbuilding some consensus on the conditions under which policy coordina-tion or trade blocs may be optimal. Many of the most recent developmentsin the theoretical and empirical literature on macroeconomic policy coordi-nation apply to developed economies and the existence of a range of institu-tions is assumed. While these findings have important implications fordeveloping countries, the creation of institutions becomes more importantin creating a framework for policy coordination, as discussed below.

3 See Berg (1988); Collier and Gunning (1996); Decaluwé et al. (1995); De Meloet al. (1993); Elbadawi (1995); Fine and Yeo (1994); Foroutan (1993).

4 This study was commissioned and the initial fieldwork undertaken beforethe Democratic Republic of Congo and Seychelles joined SADC. The detailedanalysis therefore focuses on 12 of the current 14 members of SADC,although the key findings are relevant to all.


JEN-01.QXD 3/31/00 10:08 AM Page 22

5 These data mask a significant variation in the economic growth of countriesin the region. Within SADC, growth rates in the 1980s ranged from 10.3 percent in Botswana to 0.8 per cent in Zambia; in the first half of the 1990s,growth was 7.1 per cent in Mozambique compared to�6.6 per cent in DRCongo.

6 See, for example, Edwards (1993); Sachs and Warner (1997); Sala-i-Martin(1997). These findings are not undisputed (Krishna et al., 1998; Rodriguezand Rodrik, 1999). Trade policies are, to some extent, endogenous, so thedirection of causation may not be obvious. Moreover, protection of manu-facturing often produces high growth initially, but slower growth in thelonger run.

7 Sachs and Warner (1995); Bhattacharaya et al. (1996); Collier and Gunning(1996).

8 There is no evidence of worldwide convergence, but within smaller groups ofcountries or states, like the OECD countries, or the US states, or Japaneseprefectures, members with lower incomes per head appear to be convergingon the richer members (Barro and Sala-i-Martin, 1991; Dowrick and Nguyen,1989). The members of these groups are very open to one another. It hasbeen argued that all countries which are open and integrated in the worldeconomy are, in fact, members of the ‘convergence club’ (Sachs and Warner,1995: 41).


JEN-01.QXD 3/31/00 10:08 AM Page 23

2The MacroeconomicPolicy FrameworkCarolyn Jenkins and Lynne Thomas

24

International experience shows that inconsistencies between the macro-economic policy package and the trade regime tend to undermine tradeliberalisation, whether regional or unilateral. In spite of a proliferationof regional trade agreements in Africa, intra-African trade appears to bea smaller proportion of total African trade in the 1990s than it was inthe 1970s (Foroutan, 1993). Studies have shown that an inhospitablemacroeconomic environment, overvalued exchange rates and currencyinconvertibility have been among the most important constraints onthe expansion of African trade (Berg, 1988; O’Connell, 1997).

Governments have a measure of control over policy instruments andover the general direction of policy. They have almost no control overprivate sector response to changes in policy initiatives. The behaviourof private agents is, however, critical to the success or failure of achange of strategy. For this reason, the credibility of a policy packageand the extent of risk involved in changing private behaviour is moreimportant than the announcement of new initiatives in isolation. It isextremely important that, when a programme of SADC trade liberalisa-tion is implemented, it opens up profitable new investment opportuni-ties and provides access to cheaper sources of goods and services, andthat there is minimal risk of these new opportunities evaporating inthe foreseeable future.

The next section distinguishes the components of a credible policypackage and identifies those variables that indicate that a trade liberali-sation may not be sustainable in the longer term. Thereafter, the cur-rent macroeconomic policy situation in SADC member countries isreviewed, paying particular attention to the indicators that identifywhether a regime is compatible with trade liberalisation. The aim is toidentify areas of weakness in the macroeconomic environment that

JEN-02.QXD 4/1/00 10:05 AM Page 24

would need to be changed prior to entering a regional free trade agree-ment or that may be exacerbated with a freeing of intra-regional trade.Finally, each of the main elements of the policy package (fiscal, mone-tary and exchange rate policy) is examined in more detail, in order tomake clear why changes may be necessary. The chapter concludes withrecommendations.

2.1 Policy credibility

Even a well-intentioned policy package will fail if investors believe thatit is neither credible nor sustainable (Rodrik, 1989). Fixed investmentwill be deterred, with potential investors preferring to remain liquidwhile they are uncertain which sectors of the economy will be prof-itable. Necessary conditions for policies to be credible are that they arecompatible and sustainable over time. These are explained immedi-ately below.

A compatible set of policies is a configuration of monetary, fiscal,exchange rate and aid policies which result in external balance. Areserve-constrained government has limited choices: it must reduce theavailability of domestic credit; or it must choose a combination ofexchange rate, trade restrictions and expenditure taxes, which will bringabout a balance-of-payments equilibrium for a given budget deficit.In many African countries, where fiscal deficits are comparativelylarge and external debt problems may be substantial (and devaluationtherefore undesirable), exchange rate overvaluation is made compati-ble with the balance-of-payments constraint by imposing importcontrols. This creates a bias against the production of exports. Whenexternal debt problems necessitate an export drive, this is incompati-ble with the fiscal stance. At the same time, the combination ofimport controls and monetisation of the deficit (whether partial ortotal) drives up the money supply. It would be possible to resolve thegeneral disequilibrium caused by incompatible policies by price infla-tion. If inflation is restrained by price controls, this generates excessdemand, especially for consumer goods. Inflation and/or shortages aretherefore clearly the result of an inconsistent set of macroeconomicpolicies.

Many Southern African countries have now removed most price con-trols and are liberalising their trade and foreign exchange regimes. Thisdoes not eliminate potential sources of policy incompatibility. Theremoval of trade restrictions requires the elimination of currency over-valuation and deficit reduction. If a government continues to run large

The Macroeconomic Policy Framework 25

JEN-02.QXD 4/1/00 10:05 AM Page 25

budget deficits, the burden of adjustment is carried by monetary policy,which must be tightened to prevent inflation. Although this is betterthan accommodating the fiscal expansion, it compounds the difficul-ties of the private sector by crowding it out of access to domestic credit.This contributes to the lack of private sector investment response tothe freer economic environment. Countries that continue to run largebudget deficits, therefore, undermine much of the benefit that couldbe gained from economic liberalisation – including the freeing of inter-national trade.

The other requirement for policy credibility is that the response ofprivate agents should not alter the incentive of the government toadhere to the new policy. For example, following trade liberalisationthe trade balance frequently worsens as importers respond quickly tothe greater ease of access to international markets, while it takes muchlonger for producers to switch from domestic to foreign markets.Governments often find it difficult to maintain trade liberalisationunder these conditions, especially if it is important to run currentaccount surpluses for servicing the foreign debt, and policy changesmay be reversed. If private agents believe that trade policy will changeas circumstances change, they will treat the policy as incredible.1

Whenever trade policy is subordinate to fiscal or external balanceconsiderations, it is possible that any move towards trade opennesscould be reversed. If trade restrictions or exchange controls are dictatedby macroeconomic concerns, then a trade liberalisation which is pur-sued on efficiency grounds may fail in the absence of complementarymacroeconomic policy adjustments:

policy-makers in SSA have faced strong pressures to subordinatetrade policy to fiscal or external balance. Under these conditions,unilateral trade liberalisation amounts to a move to an unsustain-able counter-factual. It is likely to be incompatible unless accompa-nied by an adjustment of the fiscal fundamentals and/or a move toan accommodative exchange rate policy that allows a rise in the rateof inflation.

(O’Connell, 1997)

The combination of foreign exchange reserves, current account bal-ance, debt and deficit position of the government and stability indica-tors, like inflation, is therefore an indicator of the long-term credibilityof the macroeconomic policy package. In the following section, this setof indicators is considered for each SADC member country in turn.

26 Carolyn Jenkins and Lynne Thomas

JEN-02.QXD 4/1/00 10:05 AM Page 26

2.2 Analysis of country profiles and the identification ofpotential conflicts with regional trade liberalisation

This section analyses the macroeconomic frameworks of each SADCmember country. A profile of the economic policy and stability indica-tors of each SADC member country is constructed, and the areas wherecurrent policy is most likely to inhibit the effectiveness of trade liberal-isation are identified.2 This will enable us to suggest which areas needmost urgently to be addressed.

2.2.1 Angola3

Angola’s macroeconomic policy package is evidently inconsistent andunsustainable. High recent growth rates are largely explained by off-shore oil production by foreign companies. As a percentage of GDP, thefiscal deficit is huge, although it has shown some recent improvement.


Table 2.1 Key indicators – Angola

1980–9 1990–5 Most recent

Real GDP growth (%) 4.6 �0.4 8.0 (1997)GNP per capita 843 623 270 (1996)(current US$)

Budget deficit/surplus �11.1 �20.8 �7.8 (1996)(% GDP)

Inflation (%) n/a 870.8 1,500 (1997)Money supply n/a n/a n/agrowth (%)

Real lending rates n/a n/a n/aDepreciation against 0.0 �75.3 �92.2 (1996)US$ (nominal)

Exports plus imports 53.7 80.3 117 (1996)(% GDP)

Current account �0.6 �10.4 �9.2 (1996)(% GDP)

Aid (% imports) 8.5 21.1 12.0 (1996)External debt (% GNP) n/a 393.8 307.8 (1996)Reserves (months 0.9 1.1 (1996)of imports)

Source: Publications from the African Development Bank, Economist IntelligenceUnit, International Monetary Fund, OECD and World Bank. Notes: Many observations are unavailable; some series date from 1985 or 1987 only.The unreliability of data on Angola means that these indicators should in general beused with caution. Data for the most recent period are not necessarily consistent withprevious observations (as they are taken from a range of sources) and should also beused with caution.

JEN-02.QXD 4/1/00 10:05 AM Page 27

Monetary policy is largely inactive, completely swamped by the needto finance the budget deficit. Monetisation of the deficit is generatinghyperinflation in a situation of acute shortages. External debt is threetimes annual GNP, which makes it critical that the domestic savingsrate rise and that the country run a current-account surplus in place ofthe existing deficit. Large annual nominal depreciations are insufficientto support an export drive, given the very high rate of price inflationwhich causes the real exchange rate to appreciate. The absorption ofdomestic resources to finance the deficit and service the external debt isequally inconsistent with the needed investment in export capacity.Until a greater degree of economic stability is achieved, trade policy willremain subordinate to macroeconomic imperatives. Under these condi-tions, trade liberalisation – even if limited to the region – will simplynot produce the desired growth and diversification response, althoughit may help to alleviate the shortages of many consumer commodities.

2.2.2 Botswana


Table 2.2 Key indicators – Botswana


Real GDP growth (%) 11.0 5.0 4.9 (1997)GNP per capita 1,218 2,763 3,210 (1996)(current US$)

Budget deficit/surplus 7.7 5.7 5.4 (1997)(% GDP)

Inflation (%) 10.8 12.5 9.3 (1997)Money supply 20.3 8.7 9.1 (1997)growth (%)

Real lending rates 0.7 0.3 4.4 (1997)Depreciation against �7.0 �6.5 �4.3 (1997)US$ (nominal)

Exports plus imports 121.5 124.8 91.0 (1996)(% GDP)

Current account 0.7 7.2 16.0 (1995)(% GDP)

Aid (% imports) 15.6 5.4 3.6 (1996)External debt (% GNP) 26.2 17.2 12.9 (1996)Reserves (months 8.9 21.1 35.0 (1996)of imports)

Source: Publications from the African Development Bank, Bank of Botswana,International Monetary Fund, OECD and World Bank.Note: Data for the most recent period are not necessarily consistent with previousobservations (as they are taken from a range of sources) and should be used withcaution.

JEN-02.QXD 4/1/00 10:05 AM Page 28

Botswana’s macroeconomic situation is clearly sustainable: an averageof around two years’ worth of imports in the foreign exchangereserves over most of the decade; large budget and current account sur-pluses; a small external debt; high economic growth and restrainedgrowth in the money supply. The economy is already very open, asmembership of the SACU gives reciprocal free access to a regional mar-ket almost 32 times the size of its own. Its exchange control regimeis very liberal. Given current difficulties in the world diamond market,it is critical that Botswana diversify its export base if it is to maintainits historically rapid economic growth. The country is in a goodposition to exploit the opportunities presented by regional tradeliberalisation.

2.2.3 Democratic Republic of Congo


Table 2.3 Key indicators – Democratic Republic of Congo


Real GDP growth (%) 1.8 �7.3 �5.0 (1997)GNP per capita 357 158 160 (1996)(current US$)

Budget deficit/surplus n/a n/a n/a(% GDP)

Inflation (%) 58.0 5,444.5 175.5 (1997)Money supply 176.8 2,530.0 407.2 (1995)growth (%)

Real lending rates n/a n/a n/aDepreciation against �37.6 �91.0 �78.1 (1995)US$ (nominal)


Current account �5.3 n/a n/a(% GDP)

Aid (% imports) 22.3 24.7 2.9 (1996)External debt (% GNP) 76.3 170.9 212.0 (1996)Reserves (months 1.5 n/a n/aof imports)

Source: Publications from the African Development Bank, Economist IntelligenceUnit, International Monetary Fund, OECD and World Bank. Notes: Several observations are unavailable. The unreliability of data on DR Congomeans that these indicators should in general be used with caution. Data for the mostrecent period are not necessarily consistent with previous observations (as they aretaken from a range of sources) and should be used with caution.

JEN-02.QXD 4/1/00 10:05 AM Page 29

DR Congo is not currently in a position to take advantage of regionaltrade liberalisation. The DR Congo’s macroeconomic position is evenmore extreme than that of Angola: a large external debt; minimal for-eign exchange reserves; severe hyperinflation and runaway money sup-ply growth (although some recent improvement here is evident); andsharp and sustained economic contraction. The economy is tightlyclosed, but, until the macroeconomy is stabilised, there is no trade pol-icy (more or less liberal) that will facilitate the establishment andgrowth of the formal economy.

2.2.4 Lesotho

Although much of Lesotho’s economic growth has been generated by asingle project in recent years, the macroeconomic policy packagedemonstrates sustainability. On average, foreign exchange reserves,


Table 2.4 Key indicators – Lesotho


Real GDP growth (%) 3.9 5.4 7.2 (1996)GNP per capita 450 592 660 (1996)(current US$)





Current account 2.1 9.6 14.3 (1994)(% GDP)


Source: Publications from the African Development Bank, Economist IntelligenceUnit, International Monetary Fund, OECD and World Bank.Note: Data for the most recent period are not necessarily consistent with previousobservations (as they are taken from a range of sources) and should be used withcaution.

JEN-02.QXD 4/1/00 10:05 AM Page 30

albeit low, have risen in the 1990s, reaching five months of importsin 1995, and monetary and fiscal policy have been tightened underthe rolling structural adjustment programme, which commenced in1988. The external debt position is manageable, although as a per-centage of GNP it rose quickly between the late 1980s and mid-1990s.This is an area of potential future problems, and needs to be broughtunder control. Because of its location, membership of SACU is proba-bly more important to Lesotho than a SADC free trade area.Microeconomic adjustments may be needed if the country is to diver-sify its export base.

2.2.5 Malawi

In spite of some effort in recent years to implement a cash budget,Malawi has run fiscal deficits which are, on average, more than12 per cent of GDP for almost two decades. The improvement seen in


Table 2.5 Key indicators – Malawi









Source: Publications from the African Development Bank, International MonetaryFund, OECD and World Bank.Note: Data for the most recent period are not necessarily consistent with previousobservations (as they are taken from a range of sources) and should be used withcaution.

JEN-02.QXD 4/1/00 10:05 AM Page 31

1996 and 1997 (where the deficit fell to 5.5 and 7.4 per cent) followsestimated deficit ratios of more than 25 per cent in 1994 and 15 percent in 1995. It is not surprising that the rate of inflation is high, as thelarge deficit is accommodated by a rapid growth in the money supply –although the estimated figures for 1997 suggest a considerable improve-ment. The large current account deficit has only been sustainablebecause nearly 80 per cent of imports have been financed by aid in thefirst half of the 1990s. Even so, the currency is depreciating against theUS dollar at an average rate of nearly 20 per cent each year. The exter-nal debt-to-GNP ratio is in excess of 100 per cent and foreign exchangereserves are low. Part of the problem is that the economy has beensubject to a range of shocks, including the periodic withdrawal of aidflows in order to apply pressure for political liberalisation. It is possiblethat the growth rate of an average of 3.5 per cent a year in the 1990s(masking large swings in growth, year-on-year) is largely aid-financedgovernment spending, which can only be maintained for as long asdonors are willing to accept slippage in attaining macroeconomic or‘good governance’ targets. Given economic instability, trade policy islikely to be dictated by macroeconomic considerations, which willmake changes in trade policy incredible to private investors. A SADCfree trade area is important to Malawi, but under existing conditions,its benefits will probably be undermined.

2.2.6 Mauritius

Economic indicators suggest that the macroeconomic package adoptedby Mauritius is consistent and sustainable. In spite of a tightening of fis-cal policy and higher real interest rates in the 1990s, economic growthhas accelerated. Inflation has fallen. Marginally higher money supplygrowth in the 1990s is not fuelling inflation, but accommodating anaverage annual economic growth rate in excess of 5 per cent. As a pro-portion of GNP, total external debt has fallen significantly. Mauritiushas pursued export promotion since 1971, although import liberalisa-tion commenced only in 1994. Vigorous promotion of exports, particu-larly in export-processing zones, has been very successful, and two-waytrade, as a proportion of (substantially increased) income, has grown.The exchange control regime was liberalised in 1992. The entire policypackage is highly supportive of increasing external trade globally. Itwill therefore enable Mauritius to take advantage of the opportunitiescreated by a SADC free trade area.


JEN-02.QXD 4/1/00 10:05 AM Page 32

2.2.7 Mozambique

There is currently considerable optimism about Mozambique’s eco-nomic prospects. Since the end of the civil war in the early 1990s, andwith the adoption of a rolling structural adjustment programme from1987, the country has grown each year by an average rate of nearly5 per cent (albeit with significant variation in growth rates, year-on-year). In spite of considerable improvements, however, the macroeco-nomic package remains unsustainable without huge injections offoreign aid. About 60 per cent of the budget shortfall, which averagesaround one quarter of GDP, is financed by foreign aid; as a percentageof total imports, foreign aid, on average, exceeded 140 per cent infirst half of the 1990s (although this ratio fell sharply in 1996).Consequently, the external debt-to-GNP ratio is rising very rapidly.There is some monetisation of the deficit; the official exchange rate hasbeen depreciating at a rate in excess of 30 per cent per annum (butappears to have stabilised in 1995–7); and shortages of most consumer


Table 2.6 Key indicators – Mauritius










JEN-02.QXD 4/1/00 10:05 AM Page 33

commodities persist. The rate of inflation has consequently been high,but has recently been dramatically reduced. The trade regime is being lib-eralised. Participation in a SADC free trade area will reinforce thisprocess, but continuing injections of foreign aid and foreign directinvestment (especially from South Africa) will be needed to support thebalance of payments. Slippages in meeting macroeconomic policy targetswill jeopardise both of these sources of foreign capital, and underminethe entire structural adjustment process, including trade liberalisation.

2.2.8 Namibia

After independence in 1990 Namibia’s government committed itself toa tight fiscal regime and to strict control over foreign borrowing. Thiscommitment has wavered, and the deficit has grown as a proportion ofGDP compared to the 1980s. Namibia is a member of the CommonMonetary Area, and monetary (and exchange rate) policy, which is rel-atively tight, is controlled by the South African Reserve Bank. However,


Table 2.7 Key indicators – Mozambique




Inflation (%) 45.1 47.5 6.4 (1997)Money supply n/a n/a n/agrowth (%)

Real lending rates n/a n/a n/aDepreciation against �16.8 �34.3 �1.4 (1997)US$ (nominal)




Source: Publications from the African Development Bank, International MonetaryFund, OECD and World Bank.Notes: Some observations date only from 1985 or 1988. Data for the most recentperiod are not necessarily consistent with previous observations (as they are takenfrom a range of sources) and should be used with caution.

JEN-02.QXD 4/1/00 10:05 AM Page 34

the new, independent central bank has been instrumental in develop-ing an independent money market which guides domestic interestrates. The current account balance has largely been in surplus, in spiteof average fiscal deficits of almost 7 per cent of GDP, which suggests thatthe private sector is being squeezed by the high real interest rates (aver-aging 6.9 per cent between 1990 and 1995, and reaching 10.6 per cent in1997). Trade liberalisation is proceeding under SACU’s WTO commit-ments, and Namibia is pursuing export promotion and the creation ofan export-processing zone. If Namibia’s private sector is to take advan-tage of new opportunities in the SADC free trade area – or existing onesin SACU and further afield – the government will need to ensure that itsspending does not continue to crowd out private investment.

2.2.9 South Africa

The potentially inflationary effects of South Africa’s worsening fiscalposition in the early 1990s have been controlled by very tight monetary


Table 2.8 Key indicators – Namibia




Inflation (%) 13.0 11.8 8.8 (1997)Money supply n/a 25.0 3.5 (1997)growth (%)

Real lending rates n/a 6.9 10.4 (1997)Depreciation against �9.0 �5.8 �3.8 (1997)US$ (nominal)


Current account n/a 3.6 2.6 (1996)(% GDP)

Aid (% imports) 4.7 9.1 9.6 (1996)External debt (% GNP) n/a 12.9 11.2 (1995)Reserves (months n/a 1.0 1.6 (1995)of imports)

Source: Publications from the African Development Bank and Economist IntelligenceUnit, International Monetary Fund, and World Bank.Note: Data for the most recent period are not necessarily consistent with previousobservations (as they are taken from a range of sources) and should be used withcaution.

JEN-02.QXD 4/1/00 10:05 AM Page 35

policy, which has reduced inflation and stemmed the depreciation ofthe rand (with the notable exception of 1996). This has inevitably hadcrowding-out effects. The external debt-to-GNP ratio has fallen consid-erably since the mid-1980s (although with South Africa’s re-entry intointernational capital markets, this ratio has recently grown), but lim-ited foreign exchange reserves give little scope for a loosening of mon-etary policy. The government recognises the need to reduce the fiscaldeficit, introducing specific targets in June 1996 and achieving a reduc-tion in the deficit to 4.3 per cent in 1997. This is crucial for enablingthe private sector to appropriate its own surpluses for investment inexport capacity. The economy remains relatively closed, in spite ofalmost two decades of trade liberalisation. Reintegration in the worldeconomy and import liberalisation under the 1994 WTO agreement areaccelerating the process, but the private sector is struggling against thehigh costs of borrowing, uncertainty, lack of information about exportmarkets, and foreign competition. Because of its relative size, South


Table 2.9 Key indicators – South Africa







Current account 0.9 0.8 �1.5 (1997)(% GDP)

Aid (% imports) n/a 1.1 1.1 (1996)External debt (% GNP) 32.9 16.5 21.2 (1997)Reserves (months 1.6 1.3 2.0 (1997)of imports)

Source: Publications from the African Development Bank, International MonetaryFund, OECD, South African Department of Finance and Reserve Bank and World Bank.Note: Data for the most recent period are not necessarily consistent with previousobservations (as they are taken from a range of sources) and should be used withcaution.

JEN-02.QXD 4/1/00 10:05 AM Page 36

Africa stands to gain disproportionately more than its neighbours froma SADC free trade area in terms of expanding volumes of two-waytrade. However, also because of its relative size, the SADC arrangementsare less important to South Africa’s overall growth rate than they are tothat of the rest of the region (Jenkins, 1997).4

2.2.10 Swaziland

Like Lesotho and Namibia, Swaziland’s membership of SACU and theCommon Monetary Area restricts its ability to make economic policyindependently. Like these countries, therefore, monetary policy istight, and the trade and foreign exchange regimes are being liberalised.During the 1990s Swaziland’s budget moved from surplus to deficit.Growth is modest. The macroeconomic regime is broadly supportive oftrade liberalisation, and the government needs to focus on microeco-nomic interventions and labour policies (see later) to foster diversifica-tion into non-traditional exports.


Table 2.10 Key indicators – Swaziland


Real GDP growth (%) 4.7 2.3 2.5 (1997)GNP per capita 889 1,133 1,120 (1996)(current US$)





Current account �7.1 3.2 �2.4 (1996)(% GDP)


Source: Publications from the African Development Bank, Central Bank of Swaziland,International Monetary Fund, OECD and World Bank.Note: Data for the most recent period are not necessarily consistent with previous obser-vations (as they are taken from a range of sources) and should be used with caution.

JEN-02.QXD 4/1/00 10:05 AM Page 37

2.2.11 Tanzania

Tanzania’s economy still displays evidence of macroeconomic imbal-ance, in spite of improvements in the overall policy regime. Budgetdeficits remain high (and have increased in recent years), as has depen-dence on aid. The external debt ratio has grown in the 1990s and, onaverage, over two-thirds of imports have been financed by aid (althoughnotably this ratio fell to around 38 per cent in 1996). In the first half ofthe 1990s, money supply growth generally accelerated, and price infla-tion averaged 30 per cent, even though real interest rates have beenraised from being highly negative to significantly positive. This was due,in a large measure, to monetisation of at least part of the deficit. In morerecent years, inflation has improved but remains high, with real interestrates increased. The macroeconomy therefore remains hostile to privateinvestment, and attempts to generate higher rates of economic growththrough a free trade area will probably be undermined.


Table 2.11 Key indicators – Tanzania





Real lending rates �9.2 6.8 11.3 (1997)Depreciation against �23.3 �15.3 �4.6 (1997)US$ (nominal)





JEN-02.QXD 4/1/00 10:05 AM Page 38

2.2.12 Zambia

Zambia’s economic policy history has been characterised by externalshocks, attempts at stabilisation and subsequent policy reversals. In the1990s a ‘cash budget’ was introduced in an attempt to control unsus-tainable government expenditure and to bring down inflation, whichwas in excess of 100 per cent per annum. As inflation fell dramatically inthe mid-1990s, real interest rates soared equally dramatically, setting offa series of liquidations. The economy is still precariously unstable, criti-cally dependent on aid to service its high debt: a large fraction ofimports are financed by aid inflows, which creates considerable difficul-ties when disbursements of aid are withheld. Trade and foreign exchangemarkets are fully liberalised, and firms with access to offshore finance aregrowing. However, the macroeconomic policy regime is likely to remainincredible to investors, both because of current instability and because ofpast reversals. At the same time, the extremely tight monetary stance iscrushing firms with access only to the domestic financial market.


Table 2.12 Key indicators – Zambia


Real GDP growth (%) 1.3 �0.4 4.6 (1997)GNP per capita 454 400 370 (1996)(current US$)



Real lending rates �13.2 �33.8 17.5 (1997)Depreciation against �21.8 �43.9 �11.5 (1997)US$ (nominal)


Current account �12.3 n/a �6.5 (1997)(% GDP)



JEN-02.QXD 4/1/00 10:05 AM Page 39


2.2.13 Zimbabwe

The effectiveness of Zimbabwe’s structural adjustment programme hasbeen undermined by the inability of the government to reduce the fis-cal deficit, which averaged 10 per cent of GDP in the first half of the1990s and shows little sign of being reduced substantially. In the 1980sthe authorities managed to finance this in a non-inflationary way byborrowing from the domestic private sector. In the 1990s, however, agreater proportion of the deficit has been financed by money creationand by foreign borrowing. Attempts by the Reserve Bank of Zimbabweto restrain the growth of the money supply have therefore been under-mined. The currency has depreciated against the US dollar by anannual average of almost 20 per cent in the 1990s, with more rapiddepreciation in recent years. Although some exporters have been ableto take advantage of the opportunities presented by trade liberalisa-tion, the credit squeeze has made it difficult to expand export capacity.

Table 2.13 Key indicators – Zimbabwe










JEN-02.QXD 4/1/00 10:05 AM Page 40

The unsustainability of the macroeconomic policy regime will limit thegains to the economy of regional trade liberalisation, even thoughZimbabwe’s relative size means that two-way trade with its neighbourswill probably increase.

2.3 Cross-country comparisons

Examining stability indicators by country gives an indication ofwhether the macroeconomic policy regime in each economy is com-patible with or likely to undermine regional (or unilateral) trade liber-alisation. From the information presented in the preceding section, itis evident that some countries are implementing policies that placethem in a position to take advantage of the opportunities presented bya FTA, while others have a macro-policy package that makes them hos-tile to private sector investment (which is needed if freer regional tradeis to generate economic growth and job creation). It is also clear thatsome countries are generally performing better than others. In thissection, we explore whether these factors coincide, or whether betterperformance and trade- and investment-friendly policies tend to becompletely randomly associated.

It is possible to group SADC countries by different criteria: for exam-ple, SACU and non-SACU members, or open and closed economies, orthose that export mineral or agricultural products. An obvious startingpoint for this study is to examine countries by whether or not theyhave higher trade to GDP ratios. It is expected that those economieswhich are more dependent on international trade have macroeco-nomic policies that are more supportive of trade liberalisation.5 Fromexperience elsewhere, it is also expected that open economies growfaster and have higher investment ratios.6 In fact, we grouped SADCcountries by all the criteria suggested above, and found that using anindicator of the importance of foreign trade to the economy yieldedthe most consistent pattern with fewest exceptions.

Table 2.14 contains summary information of macroeconomic poli-cies pursued in SADC member states over the period 1990–5, compar-ing economies that have engaged in more external trade with thosethat have been comparatively closed to international trade. The rela-tive importance of foreign trade is measured by the ratio of averagetwo-way trade (exports plus imports) to GDP over the period 1990–5.Countries are judged to have a more open trade regime when this ratioexceeds 1. In order to provide a reasonable comparison of the extent towhich countries engage in international trade, countries that have


JEN-02.QXD 4/1/00 10:05 AM Page 41


Table 2.14 SADC economic policy and stability indicators, 1990–5

More open economies1 Closed economies1

Range Average Range Average

Real GDP growth (%) 2.3 to 5.4 4.4 �0.4 to 3.5 1.5Consumer price 8.2 to 12.9 11.6 11.8 to 117.9 43.0inflation (%)

External debt to 12.9 to 42.2 27.4 16.5 to 222.0 121.5GNP (%)

Investment to 19.9 to 82.3 37.0 12.9 to 32.8 20.1GDP (%)

Savings to �26.7 to 31.5 10.8 2.9 to 19.7 11.1GDP (%)

Number with SAPs one (of five) five (of eight)SAP broadly on one (of one) zero (of five)target

Aid greater 3.5 to 15.4 zero 1.1 to 95.2 seven (ofthan 20% of imports (of five) eight)

Trade policyOpenness: exports 119.7 to 172.6 138.2 44.9 to 83.3 64.1�imports/GDP (%)

Current account �2.6 to 9.6 3.6 �14.8 to 0.8 �9.2to GDP (%)

Fiscal policyDeficit/surplus �6.9 to 5.7 �1.8 �13.3 to �6.5 �9.7to GDP (%)2

Monetary policyMoney supply 8.7 to 25.0 14.9 16.3 to 61.0 35.3growth (%)

Lending rates 0.3 to 9.4 five �33.8 to 6.8 five (of six)positive (of five)

Central bank zero (of four) three (of eight)operationalindependence

Exchange rate policyRegular zero (of five) three (of six)overvaluation occurs

Premium onparallel rate (%) 4.2 to 10.5 7.6 4.2 to 68.9 29.4

Exchange control one oneregime free3

Exchange control four fourregime liberal

JEN-02.QXD 4/1/00 10:05 AM Page 42

recently experienced civil war (Angola, DR Congo and Mozambique(all very closed)) are excluded from the quantitative statistics, as theyare typically the most significant ‘outliers’ in the data set.

It is important to note that the information in Table 2.14 doesnot imply that opening up the economy will restore macroeconomicstability. In other words, grouping countries as more open and moreclosed does not imply causation of the macroeconomic conditionsdescribed in the table. Rather it illustrates that maintaining openness tointernational trade is generally consistent only with a more stablemacroeconomy. Under these conditions, trade policy is less likely to besubordinated to the imperatives of internal and external balance.

There are several points to be noted from Table 2.14 relating to keyfeatures of SADC policy frameworks, or to distinctions that may bedrawn between those SADC economies that have been more ‘trade-friendly’:

� The more trade-reliant economies have, on average, grown signifi-cantly faster than the closed economies. Average annual growth inthe period 1990–5 was 4.2 per cent for the more open economiescompared to 1.5 per cent in the closed economies. This is entirelyconsistent with recent findings for developing countries generallyand Africa specifically (reviewed in Collier and Gunning, 1997). Atthe same time, inflation rates have been higher in the more closed


Table 2.14 continued

Sources: Updated and amended from Jenkins and Thomas (1997). Qualitative data are pri-marily from interviews and are based on the subjective opinions of government employeesor economic advisers; also from reports from the Economist Intelligence Unit and theInternational Monetary Fund. Where clear information is unavailable, countries areexcluded. Quantitative data from: World Data CDROM, 1995, African Development Indicators,various issues, Global Development Finance, 1997, World Bank; International Financial StatisticsYearbook, 1997, Staff Country Reports, various issues, International Monetary Fund;Geographical Distribution of Financial Flows to Aid Recipients, various issues, Organisation forEconomic Cooperation and Development; Country Reports, Country Profiles, various issues,Economist Intelligence Unit; various central bank publications from Botswana, Swaziland,Lesotho, South Africa and Zimbabwe.Notes: 1 Open economies are: Botswana, Lesotho, Mauritius, Namibia and Swaziland; closedeconomies are: Angola, DR Congo, Malawi, Mozambique, South Africa, Tanzania, Zambiaand Zimbabwe. ‘Open’ is defined as exports plus imports as a proportion of GDP greaterthan or equal to 1. To avoid distortion of averages, Angola, DR Congo and Mozambique areexcluded from quantitative data presented.2 Budget deficit figures refer to deficits excluding grants.3 Exchange control regime: Zambia and Mauritius are counted as having free regimesalthough Mauritius maintains a small number of minor restrictions.

JEN-02.QXD 4/1/00 10:05 AM Page 43

group of economies, corresponding with larger government deficitratios and higher money supply growth.

� Average savings rates are very similar in both groups, but the aver-age investment ratio is considerably higher in the group that tradesmore.

� Aid dependence has been high in around half of SADC countries, asevidenced by the large disparities between the savings and invest-ment ratios coupled with persistent government deficits and, theexternal counterpart to this, the large proportion of importsfinanced by aid. Significantly, this applies to every one of the moreclosed economies except South Africa. Nearly two-thirds of SADCcountries are undergoing structural adjustment with funding fromthe World Bank and/or IMF, and many of these programmes havebeen in place for about a decade. The countries undergoing donor-supported structural adjustment include only one of the more openeconomies (whose programme is broadly on track) and all excepttwo of the closed economies, whose compliance with externallyimposed policy requirements is patchy.

� The range of policy variables shows that there has been considerablevariation in domestic policies: for example, the relative sizes of thebudget deficits, the range of real lending rates, and the number ofcountries which have regularly permitted overvaluation of their cur-rencies. More conservative policies and greater stability have tendedto be evident in the group of economies that engage more in foreigntrade (with the possible exception of South Africa which is classifiedas comparatively closed) in spite of the fact that most of the closedeconomies (apart from Angola and South Africa) are currently engag-ing in structural adjustment under IMF/World Bank sponsorship.

� In most countries the exchange control regime has been liberalisedconsiderably – completely in two (non-CMA) countries.

From the information in Table 2.14, the following weaknesses inmacroeconomic policy in the SADC region can be deduced. Most obvi-ously and importantly, on average, the fiscal stance has been weak:very few countries have managed to keep their deficit-to-GDP ratiosbelow 5 per cent – although there have been considerable improve-ments in more recent years. At the same time, the external debt-to-GDP ratios are high, and in many cases rising. Where countriescontinue to run expansionary fiscal policy with a growing governmentdebt-to-GDP ratio, eventually that debt must be monetised, makingrestrictive monetary policy impossible, evidenced by rapid growth in


JEN-02.QXD 4/1/00 10:05 AM Page 44

the money supply. A weak fiscal stance has therefore undermined thegoals of monetary, financial and trade liberalisation in many countries.Moreover, despite a greater degree of market determination of officialexchange rates, three countries have regularly allowed overvaluation tooccur. The large discrete corrective adjustments which become neces-sary cause problems for exporters and importers. The following sectionsdraw out, in more detail, implications for macroeconomic policy-makingin the context of regional trade liberalisation.

2.4 Fiscal policy

One of the problems to emerge from the country policy profiles is thatof large and persistent budget deficits and the related problem ofindebtedness. This serves to undermine the effectiveness of regionaltrade liberalisation in the following ways.

One of the goals of regional trade liberalisation is the diversificationof the export base away from dependence on primary commoditiestowards non-traditional exports. Even if there is spare capacity in theeconomy as a whole, existing capacity may need upgrading, and newinvestment is required for the production of value-added exports.However, the imperative of raising interest rates in order to maintainoverall macroeconomic balance in the face of fiscal imbalance raisesboth the direct cost and the risk of investment which is required in theexport sector in order to take advantage of improved access to neigh-bouring markets. If the authorities do seek to finance public sectordeficits in a non-inflationary way by borrowing domestically, privateinvestors are crowded out of access to accumulated domestic savings:savings in the financial system are lent to the government and conse-quently are not available for private investment. To avoid this, govern-ments will borrow offshore, but this adds to the external debt burden.

Not all SADC countries publish data on investment by ownership.However, in the case of two SADC countries for which data are availablefor a reasonable period, it is revealing how private surpluses are used tofinance public sector deficits. Table 2.15 records trends in average pri-vate savings and investment ratios and in public and private savingsgaps (the difference between savings and investment) for South Africaand Zimbabwe in the years for which data are available. Note how pri-vate investment has fallen as the public sector savings gap has widened.

In South Africa, private savings as a percentage of GDP rose steadilyover three decades from the beginning of the 1960s, falling again inthe 1990s. Private investment absorbed almost all accumulated savings


JEN-02.QXD 4/1/00 10:05 AM Page 45

in the 1970s, and the public sector deficit was financed by inflows offoreign capital and a depletion of reserves. However, as access to for-eign capital was restricted in the next two decades, private savings wereincreasingly used to finance the public sector savings gap, to the detri-ment of private investment.

A similar pattern is observed in Zimbabwe, where, after generatingsurpluses in the mid-1970s, general government (primarily central gov-ernment) began to dissave heavily from 1977 onwards. A comparison ofthe private and public sector savings gaps at the bottom of Table 2.15shows the extent to which private surpluses have been financing publicsector dissaving. The exception was the period immediately after inde-pendence, when an excess of absorption over national income wasfinanced by large net inflows of foreign borrowing, amounting to anannual average of 4.4 per cent of GDP. As public sector dissaving hasincreased, private investment has fallen seriously in spite of a higherpropensity on the part of the private sector to save.

In both South Africa and Zimbabwe, therefore, where the authoritieshave sought to avoid inflationary financing of the deficit, this has beenat the cost of private sector investment. If this situation persists inthese and other SADC countries, trade liberalisation, including the pro-posed SADC free trade area, will not have the desired effect on job-creating investment in producing value-added exports. In South Africaa concerted attempt is being made to reduce the deficit relative to GDP.


Table 2.15 Average trends in private savings and investment ratios, and privateand public sector savings gaps for South Africa and Zimbabwe, per cent of GDP

Private Private Private Public Capital Changessavings investment savings gap1 savings gap1 inflows in reserves2

South Africa1960–9 17.4 16.2 1.2 �1.4 0.6 �0.41970–9 19.9 19.3 0.6 �3.1 1.8 0.71980–9 22.2 18.5 3.7 �3.0 �0.7 �0.01990–6 20.0 14.5 5.5 �5.1 �0.2 �0.2

Zimbabwe1975–9 15 11 4.7 �5.9 n/a1980–4 13 10 3.3 �8.8 4.4 1.21985–90 22 8 12.63 �10.83 �0.1 �1.7

Source: South African Reserve Bank, Central Statistical Office (Harare).Notes: 1 The difference between savings and investment; a minus sign indicates a deficit.2 A minus sign indicates an increase in reserves.3 Data of investment by type of ownership are available only until 1987.

JEN-02.QXD 4/1/00 10:05 AM Page 46

This should release resources for more private sector investment in pro-ductive activities.

Second, when controls on imports are reduced, public sector dissav-ing, if not financed by private sector saving, can trigger a worseningcurrent account balance. This is inconsistent with the need to runcurrent-account surpluses to finance the servicing of external debtwhere there are insufficient reserves or inadequate net capital inflows.If the exchange rate depreciates to restore external balance, the foreigndebt-service burden increases further. If the exchange rate does notdepreciate, the overvaluation creates a bias against exports. A simula-tion of the effects of the SADC free trade area (Evans, 1997) finds thatthe trade deficit of most of the smaller SADC countries is likely towiden. In preparation for the opening of the regional economy, there-fore, deficit countries must reduce aggregate public expenditure inorder to diminish pressures on the balance of payments.

Tariff reduction can itself reduce state revenues, exacerbating the fis-cal position – although the extent of the decline in revenue dependson (i) the importance of regional trade in overall trade; (ii) the effec-tiveness of tax collection at the border; and (iii) the relative responsive-ness of import volumes to liberalisation. The tax regime is consideredin a separate chapter. However, it should be noted that, unless theeconomy’s response to a free trade area significantly increases the vol-ume of taxed production or imports, a fall in revenue must be antici-pated. A corresponding reduction of state expenditure to offset thisshortfall should be implemented.

It is very clear that, in most SADC countries, the fiscal position isincompatible with either unilateral or regional trade liberalisation.Member countries are unlikely to benefit significantly from increasedaccess to neighbouring economies while their governments drainresources from the private sector. South Africa is an exception onlybecause of its relative size within SADC: it has the capacity to increaseits exports to the region without necessarily requiring large-scale invest-ment in additional capacity. However, with respect to larger markets inthe rest of the world, South Africa faces exactly the same difficulties inmaximising the gains from its WTO commitments or the potentialgains from the agreement with the European Union.

2.5 Monetary policy

In almost all SADC countries monetary policy is subservient to theimperative of restoring macroeconomic balance in the face of fiscal


JEN-02.QXD 4/1/00 10:05 AM Page 47

deficits, or, in the case of Lesotho, Namibia and Swaziland, it is outsidethe control the authorities because of monetary integration arrange-ments.7 In most member countries, recent changes under voluntaryor donor-supported structural adjustment – towards more market-oriented instruments and positive real interest rates – should facilitatefinancial intermediation in the formal economy, and there are no obvi-ous inconsistencies between freeing regional trade and the operation ofmonetary policy.

It is crucial, however, that the primary aim of monetary policy be tocontrol inflation. This is very evident from the next section onexchange rate policy. High inflation increases the risks faced byinvestors. High rates of price inflation are invariably more volatile thanwhen prices increase more slowly, making it more difficult to plan.Moreover, while a producer knows that the range of prices faced forinputs (labour, raw materials, transport, etc.) is likely, on average, torise by the rate of inflation, there is less certainty about whether theprice of the particular commodity produced will rise proportionately.In an environment of financial liberalisation, where interest rates risewith the rate of inflation in an attempt to maintain positive real inter-est rates, the environment is even riskier for producers who borrow:the costs of debt service can rise sharply if inflation suddenly falls, as itdid in Zambia in the mid-1990s.

The control of inflation is, therefore, extremely important for creat-ing a more stable investment climate, and, to the extent that priceinflation is a monetary phenomenon, monetary policy needs to beaimed at slowing down the rate of money creation.

2.6 Exchange rate policy

An appropriate exchange rate policy is of crucial importance in support-ing trade liberalisation initiatives. This is clearly true where exchangecontrols restrict current account transactions: the removal of these con-trols in itself amounts to trade liberalisation, and, if they are notremoved, the elimination of other barriers to trade will not bring aboutthe intended private sector response. SADC member countries haveremoved almost all restrictions on current account transactions. It isessential that all remaining exchange controls on current accounttransactions that affect intra-regional trade be abolished when a coun-try commits itself to the free trade area.

Any removal of trade restrictions must be accompanied by currencydepreciation to provide some protection for domestic producers


JEN-02.QXD 4/1/00 10:05 AM Page 48


(Corden, 1985). Devaluation of the domestic currency should prevent(or reduce) balance of payments problems and assist response from theexport-producing sectors (at least over time) (Coetzee et al., 1997). Inthis section, exchange rate movements of SADC members are reviewedfor their relative stability over time against currencies which dominateexport and/or import transactions, in order to assess whether currentexchange rate trends are likely to be supportive of the FTA.

The usual practice of analysing changes in exchange rates using USdollar or even trade-weighted exchange rates can be misleading wheremost traditional export transactions occur in a different currency(US$) from most non-traditional export and most import transactions(European and regional currencies, especially the rand). In the followingdiscussion, bilateral exchange rates against the US dollar (as an impor-tant currency for commodity export transactions) and the rand (as anincreasingly important currency for import transactions) are examined.8

It should be noted that, when regional currencies are changingagainst the US dollar and European currencies as well as against thedomestic currency, exchange rate policy is complicated.9 In SouthAfrica, for example, as a broad generalisation, there was a substantialreal depreciation of the rand in the mid-1980s against the currencies ofmost of the major industrial countries. The rand depreciated, but byrather less, against some of the country’s newer trading partners in EastAsia. On the other hand, the currency hardly depreciated at all againstsome of South Africa’s immediate neighbours, and also gained a littleagainst a small sample of high-inflation countries (Argentina, Braziland Israel) (Harvey and Jenkins, 1992).10 Where a country faces com-peting priorities for the exchange rate (stability of export earnings,competitiveness, stability of import prices or minimising the cost offoreign debt service), exchange rate policy is even more difficult.

Depreciating exchange rates (particularly against extra-regional cur-rencies) will be required to offset the initial balance of paymentsimpact of the FTA and to encourage investment in the export sectorover the longer term, although members should avoid a series of com-petitive depreciations against each other. The measurement of theextent of real exchange rate misalignment is enormously difficult (seeAron et al., 1997, with reference to South Africa). However, a simpleplot of real and nominal exchange rates is illuminating.

Figure 2.1 plots SADC real and nominal exchange rate indices from1980 to 1996/7 (excluding Angola and DR Congo, for which there areinsufficient data on inflation to construct real exchange rate indices).For all countries except South Africa two indices are presented: rates

JEN-02.QXD 4/1/00 10:05 AM Page 49


Nominal exchange rates Real exchange ratesBOTSWANA

40

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

nominal index: US dollar per local currency

nominal index: rand per local currency

80

90

100

110

120

130

140

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

real index: US dollar per local currency

real index: rand per local currency

LESOTHO

40

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



80

90

100

110

120

130

140

150

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



Figure 2.1 Nominal and real exchange rates for SADC countries

MALAWI

0102030405060708090

100110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



50

60

70

80

90

100

110

120

130

140

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



MAURITIUS

60

70

80

90

100

110

120

130

140

150

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



JEN-02.QXD 4/1/00 10:05 AM Page 50


MOZAMBIQUE

0102030405060708090

100110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



40

50

60

70

80

90

100

110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



NAMIBIA

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



80

90

100

110

120

130

140

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



SOUTH AFRICA

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996


90

100

110

120

130

140

150

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996


SWAZILAND

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



70

80

90

100

110

120

130

140

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



Figure 2.1 (Continued)

JEN-02.QXD 4/1/00 10:05 AM Page 51


against the US dollar and against the rand. The indices have beencalculated from nominal rates expressed as foreign currency per unit ofdomestic currency.

It appears that, although trade flows depend on real bilateral exchangerates, policy in many SADC countries is being driven by nominal rates.This is inevitable in the Common Monetary Area, where the currenciesof Lesotho, Namibia and Swaziland exchange at par with the rand. Forthe other SADC countries, an important factor driving the nominal

TANZANIA

0102030405060708090

100110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



20

30

40

50

60

70

80

90

100

110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



ZAMBIA

01020

304050

60708090

100110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



8090

100110120130140150160170180190200210220230240250

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



ZIMBABWE

01020304050

60708090

100110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



40

50

60

70

80

90

100

110

120

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



Figure 2.1 (Continued)

JEN-02.QXD 4/1/00 10:05 AM Page 52

exchange rate has been the requirements of donor-supported structuraladjustment programmes, which monitor changes in the US dollar rate.The impact of the introduction of programmes can be clearly seen inthe trends of the nominal exchange rates:

� In 1994, the Malawian kwacha depreciated sharply against the USdollar, following a reform of the exchange system required whenthe country resumed its structural adjustment programme in 1993.

� Following the introduction of structural adjustment in Mozambique(1987), the metical exhibited a sharp depreciation, both in nominaland real terms.

� Tanzania maintained a nominal and real depreciation against boththe dollar and rand between 1986 (the start of structural adjust-ment) and 1992.

� The commencement of a new structural adjustment programme inZambia in 1991 initiated a sharp nominal depreciation against theUS dollar.

� Zimbabwe has broadly maintained a real depreciation of theZimbabwe dollar against both the US dollar and the rand since thelate 1980s, with an increasing rate of nominal depreciation evidentwith the start of the Economic Structural Adjustment Programme atthe end of 1990.

With the exception of Botswana, Mauritius and the smaller CMA coun-tries, other regional currencies have also generally depreciated againstthe rand in nominal terms since 1980.

An examination of nominal exchange rates over the past decadewould suggest that exchange rate policy in SADC countries is largelysupportive of trade liberalisation, global and regional. However, a com-parison of nominal and real exchange rate indices reveals that exchangerate policy in the region is not really uniformly supportive of tradeliberalisation. In many of the SADC countries, exchange rate trendshave exhibited real appreciation in the most recent years:

� Malawi’s sharp real adjustment of 1994, which followed an almostcontinuous real appreciation between 1985 and 1991, has proved tobe temporary only, with an almost equally sharp appreciation tak-ing place in 1996 (possibly a correction for overshooting).

� The Mauritian rupee, which has fallen steadily in nominal termsagainst the US dollar, gradually appreciated in real terms against theUS dollar and the rand from the late 1980s (although the real ratehas shown relative stability compared with the rest of SADC sincethe mid-1980s).


JEN-02.QXD 4/1/00 10:05 AM Page 53

� For Mozambique, the stabilisation of the nominal rate in the pres-ence of high inflation at the end of the period has resulted in someappreciation against both the dollar and the rand.

� In Tanzania, rising inflation from 1992 and a slowing of the rate ofnominal depreciation in 1994 has meant that the real exchange ratehas been appreciating against the dollar and rand. (In 1996, therewas a nominal appreciation against the rand.)

� Following a period of real depreciation in the early 1990s, theZambian kwacha exhibited real appreciation against both the dollarand the rand between 1992 and 1995.

� For Zimbabwe, there has been a relatively marked appreciation ofthe currency, particularly against the rand, since the end of 1993.

By comparing the real exchange rate indices with the associated nomi-nal indices, it is clear that, in spite of many SADC countries havingexperienced rapid nominal depreciation during the 1980s and 1990s,this has not been sufficient to offset the effects of inflation, resulting inappreciation (or at least a considerably slower depreciation) of the realexchange rate. For many countries, there is a vicious cycle of inflationfollowed by depreciation which adds to inflationary pressures in animport-dependent economy. For this reason, many countries areunable to preserve a competitive edge from a depreciating currency.This will undermine the development of an export sector, particularlynon-traditional exports to other regional economies. One conclusionto be drawn from this is that it is imperative that inflationary pressuresbe brought under firmer control if exchange rate policy is to be used tosupport the SADC free trade area. If inflationary pressures arise frommonetisation of the fiscal deficit, this is further reason to bring govern-ment spending under control.

It can be concluded, therefore, that the establishment of full currentaccount convertibility is extremely important for Africa’s interna-tional trade, particularly non-traditional trade in locally manufacturedgoods (O’Connell, 1997: 144). Equally important is the achievement ofdomestic stabilisation to end the cycle of inflation and devaluation,enabling countries to adopt an exchange rate policy supportive of tradeliberalisation.

2.7 Conclusions and recommendations

In order to obtain the benefits of the FTA, most SADC members willhave to take action to restore internal balance. For at least half of the


JEN-02.QXD 4/1/00 10:05 AM Page 54

members, this will mean significant and sustained tightening of the fis-cal stance. As a minimum guideline, governments should aim to coverrecurrent expenditure out of revenue. It is very clear that, in mostSADC countries (with some notable exceptions), the fiscal position isincompatible with either unilateral or regional trade liberalisation.Member countries are unlikely to benefit significantly from increasedaccess to neighbouring economies while their governments drainresources from the private sector. South Africa is an exception onlybecause of its relative size within SADC: it has the capacity to increaseits exports to the region without necessarily requiring large-scaleinvestment in additional capacity. However, with respect to larger mar-kets in the rest of the world, South Africa faces exactly the same diffi-culties in maximising the gains from its WTO commitments or thepotential gains from its agreement with the European Union. Untilmacroeconomic balance is attained, the benefits of a SADC FTA willelude at least half of SADC members.

Governments must also aim to prevent currency overvaluation. Anappropriate exchange rate policy is of crucial importance in support-ing trade liberalisation initiatives. For most countries, this will meanbringing inflation under control. Any removal of trade restrictionsmust be accompanied by currency depreciation to provide some pro-tection for domestic producers. Depreciating exchange rates (particu-larly against extra-regional currencies) will be required to offset theinitial balance of payments impact of the FTA and to encourage invest-ment in the export sector over the longer term, although membersshould avoid a series of competitive depreciations against each other.It appears that, although trade flows depend on real bilateral exchangerates, policy in many SADC countries is being driven by nominalrates. In spite of many SADC countries having experienced rapid nom-inal depreciation during the 1980s and 1990s, this has not been suffi-cient to offset the effects of inflation, resulting in appreciation (or atleast a considerably slower depreciation) of the real exchange rate. Formany countries, there is a vicious cycle of inflation followed by depre-ciation which adds to inflationary pressures in an import-dependenteconomy, and many countries are unable to preserve a competitiveedge from a depreciating currency. This will undermine the develop-ment of an export sector, particularly non-traditional exports to otherregional economies. One conclusion to be drawn from this is thatit is imperative that inflationary pressures be brought under firmercontrol if exchange rate policy is to be used to support the SADC freetrade area. If inflationary pressures arise from monetisation of the


JEN-02.QXD 4/1/00 10:05 AM Page 55


fiscal deficit, this is further reason to bring government spendingunder control.

Notes

1 In order to reduce the uncertainty, governments need to limit their opportu-nities for discretion, by creating what are effectively agencies of restraint.These may be either domestic (like central bank independence) or foreign(like donor conditionality or reciprocal free trade agreements).

2 At the time of writing, Seychelles had not yet formalised its membership ofSADC, although its application to join the Community had been approved.Seychelles finances its comparatively large fiscal deficit in a non-inflationaryway via very high real interest rates. As the external debt-to-GNP ratio isdeclining and dependence on aid is also falling, the resources to finance gov-ernment spending are being drawn from the domestic economy. This policycan be maintained as long as the government can continue to service itsdebt, and as long as the private sector is not fully crowded out of accessto resources for investment. As it happens, much of the capital formationin Seychelles is accounted for by foreign direct investment in tourism. Thisprovides the capacity to maintain an annual real growth rate in excess of3 per cent.

3 Angola has been in a state of civil war for nearly three decades. The country’sdata are extremely poor. The figures used are those that have been collectedfrom wide range of sources, but it must be understood that there are largegaps in the time series available and, even where there are data, they areprobably even more unreliable than other sub-Saharan African statistics.

4 This does not mean that the region is not important to South Africa in inter-national trade. It is, particularly for manufactured exports. However, in termsof the contribution to overall economic growth of greater access to a marketwhich is, in aggregate, less than a sixth of the size of its internal (customsunion) market, the region is less important than, for example, the EU toSouth Africa – and relatively less important than access to the South Africanmarket is to the rest of the region.

5 It is significant that, although most small states have high trade to GDPratios, a relatively large number of small SADC countries are extremelyclosed to international trade. Trade restrictions have been imposed by manyof them in an attempt to force external balance on an economy with severemacroeconomic imbalance.

6 At least 14 studies have been done since 1990 trying to explain African eco-nomic performance. All use econometric techniques to examine the relation-ship between the rate of growth of the economy (and/or the rate of privateinvestment) and a range of explanatory variables. The findings point to apositive relationship between economic growth and openness to interna-tional trade (Collier and Gunning, 1999). This corroborates evidence forother countries, both developed and developing.

7 It has been argued (Harvey, 1998) that it may be an advantage to the smallermembers of the CMA to have the discipline of limited access to inflationaryforms of financing.

JEN-02.QXD 4/1/00 10:05 AM Page 56

08 The US dollar is also the normal anchor prescribed by IMF- and WorldBank-supported policy packages.

09 Changes in the exchange rate of countries with which little or no trade isdone may also be relevant, if these countries are competitors, potentialexport markets or potentially cheaper sources of supply.

10 Even these generalisations conceal significant differences both inthe exchange rate movements of individual countries and in short-termfluctuations.


JEN-02.QXD 4/1/00 10:05 AM Page 57

3Taxation and Fiscal AdjustmentJonathan Leape

58

3.1 Introduction

The higher levels of investment and growth stimulated by the proposedFree Trade Area (FTA) should, in theory, yield fiscal benefits. In practice,however, there may be adverse fiscal effects arising from two differentsources. First, the losses in customs revenues due to falling tariffs onintra-regional trade and the effects of trade diversion could, for manycountries, outstrip any gains in other tax revenues (arising from increasedlevels of economic activity generally). Second, the potential gains in taxrevenues are unlikely to be fully realised due to institutional weaknessesin regional tax systems. For this reason, the sustainability of the FTAmay depend on individual countries, first, adopting appropriate fiscalmeasures to offset any losses in customs revenues and, second, reform-ing tax structures so as to secure the full fiscal benefits of increasedgrowth in the longer term. Failure to address any revenue shortfalls dueto decreases in customs revenue will cause a deterioration of countries’macroeconomic positions, which, as discussed in Chapter 2, are alreadyfragile in a number of member countries. Failure to address the struc-tural issues risks undermining the potential benefits of the FTA.

Any strategy for reforming the fiscal system to offset the adversefiscal effects of the FTA must, of course, also take into account otherobjectives. Fiscal reforms should, for example, be aimed at minimising,or at least reducing, the distortionary impact of taxation (and spending)policies on the employment, savings and investment decisions made byindividuals and firms. The administrative costs associated with reformsare also important, as these contribute to the overall effectiveness of thetax system in raising revenue. These other objectives, while important,are beyond the scope of this chapter, which focuses specifically on fiscal

JEN-03.QXD 3/31/00 10:10 AM Page 58

reforms aimed at offsetting the revenue lost through the introductionof the SADC FTA. Similarly, this chapter does not consider the broaderobjective of deficit reduction – this was highlighted in Chapter 2.

Most member countries in SADC depend on customs revenue as asignificant source of government revenue. For this reason, tradereforms must be accompanied by fiscal reforms to address the associ-ated revenue losses. In the case of the proposed FTA, the liberalisationfocuses on intra-regional trade and so affects only a portion of totalcustoms revenue. Indeed, the limited share of total international tradethat is accounted for by trade between SADC countries (excepting themembers of the Southern African Customs Union, SACU) implies thatthe first-order impact on government revenue, and even the impact oncustoms revenue, will be limited.

Moreover, to the extent that the tariff reductions are phased in overtime, the initial effects on revenues could even be positive. If reducingtariff levels leads to higher levels of intra-regional trade as a result oftrade creation, the increased volume of trade could offset the impactof lower tariff levels on customs revenue. However, in the final phasesof implementation, when tariffs are eliminated, the effect on customsrevenue will, of course, be negative, as will the effects of trade diver-sion, as countries substitute SADC imports for extra-regional importsstill subject to import tariffs.

These positive revenue effects during the phase-in period will be sig-nificantly enhanced if the implementation of tariff reductions is asym-metric, along the lines of the proposal that South Africa and the otherSACU members would immediately reduce tariffs on three-quarters ofproducts originating in SADC, while other SADC members would haveeight years to phase down tariffs on intra-SADC trade. Any delay in thetariff reductions in the non-SACU countries will forestall the negative(short-term) adjustment required by the associated revenue losses. Inaddition, the increased access to the SACU market will accelerate thepositive impact associated with the expansion of their export sectors,while delaying the negative impact associated with the contraction ofimport-substituting industries. By accelerating the growth and revenue-enhancing expansion of the export sector, while forestalling the adversegrowth and revenue effects of the contraction of import-substitutingsectors and of the loss of customs revenue, asymmetric tariff reductioncan play an important role in facilitating a sustainable transition tothe FTA. Although an asymmetric phase-in may not affect countries’long-run fiscal positions under the FTA (which are the basis for theanalysis in sections 3.2 and 3.3) it would generate increased revenues

Taxation and Fiscal Adjustment 59

JEN-03.QXD 3/31/00 10:10 AM Page 59

during the phase-in period, giving countries considerably more flex-ibility in deciding when and how to implement the necessary fiscaladjustments.

The FTA will also affect countries’ fiscal positions indirectly, by induc-ing changes in the sectoral and regional structure of individualeconomies. The growth in cross-border trade and investment will lead toa contraction of some traditional, especially import-substituting, indus-tries that have been historically important sources of tax revenue. Thenarrowness of tax systems throughout the region means, however, thatthe offsetting expansion of new and existing export industries may notyield the expected benefits in increased revenues from those sectors.Overall revenues are therefore likely to fall, unless revenue authoritiesrespond by broadening their tax structures to capture the higher levelsof spending and income generated by new export industries and byhigher levels of economic activity more generally.

The full economic benefits of regional trade liberalisation will onlybe realised once the changes in incentives, in the consumption basket,in factors (shifting from the contracting import-substituting industriesto the expanding new export industries), in incomes and in technologyare completely worked through. Experiences with structural adjust-ment – whether externally imposed or ‘homegrown’ – throughout theregion have highlighted the rigidities in the regional economies, fromlow factor mobility to institutional structures that change only slowly.The existence of these rigidities means that member countries can illafford to ignore the need for fiscal adjustment as part of the implemen-tation of the regional FTA. Indeed, it is essential that well-designedmeasures to offset any losses in revenue are put into place in a timelyfashion in order to pre-empt the greater costs that would result from adeterioration in the fiscal position.

Section 3.2 sets out the need for fiscal adjustment arising from thelosses in customs revenue. Country-by-country estimates of the possi-ble magnitude of the losses are presented, and the losses are assessed interms of the overall fiscal effort in each country.

The following two sections set out a ‘menu of fiscal adjustment’ forresponding to revenue losses and for addressing the longer-term needfor changes in the tax structure. Section 3.3 identifies the tax rateincreases that would be necessary in indirect taxes to offset the expectedrevenue losses in each country. The feasibility of such increases in eachcase is assessed. It should be emphasised, however, that the urgency ofsuch measures will decrease if the implementation of the FTA is suffi-ciently asymmetric. While an asymmetric phase-in will not significantly

60 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 60

affect the level of fiscal adjustment ultimately required, its short-runfiscal benefits (discussed above) will give the non-SACU countriessignificantly more flexibility in implementing the desired fiscal adjust-ment measures.

The potential need for tax rate increases identified in section 3.3 canbe reduced and perhaps even eliminated if countries take action tobroaden the tax base and enhance control of expenditure. Moreover,such actions are essential if countries are to secure the full long-run fis-cal benefits of the FTA. Section 3.4 considers three strategies for raisingrevenue – and improving the buoyancy of the tax system – by broaden-ing the tax base. The first is enhancing compliance, and successfulexamples from within and outside the region are explored. The secondis broadening the base of direct taxation, where emphasis is given toexpanding the role of presumptive taxation in the region. The third isbroadening the base of indirect taxation.

While enhancing revenue in both the short and the longer term isessential if countries are to benefit fully from the FTA, recent experi-ence in the region highlights the scope for strengthening the fiscalposition through efforts to improve control of expenditure. This is thesubject of section 3.5, which considers two types of institutionalreform that have recently been adopted in the region: the cash budgetand the medium-term expenditure framework.

Finally, section 3.6 examines the need for tax coordination. The casefor harmonising indirect and direct taxes in the region is assessed andfound to be weak. The arguments in favour of an approach based on‘tax competition’ are similarly found wanting. The section concludesby arguing that there is a case for limited tax coordination, and priori-ties for coordination are identified.

3.2 The need for fiscal adjustment

This section provides estimates of the fiscal adjustment that will be nec-essary in the SADC member countries in order to maintain their currentfiscal stance. For the sake of clarity and simplicity, the analysis focuseson the fiscal impact of the fully phased-in FTA. This means that theanalysis includes the longer-run impact of the FTA on customs revenuesas a result of trade creation, trade diversion and higher growth rates. Italso means, however, that it excludes any initially positive effects on rev-enue during the phasing-in period, including those that would arisefrom an asymmetric phase-in arrangement. These transitional effects aredifficult if not impossible to identify due to limitations in the available


JEN-03.QXD 3/31/00 10:10 AM Page 61

data, difficulties in specifying the short-run dynamics of the traderesponse in different countries and a lack of precise information on thepotential degree of asymmetry in implementation.

The degree of dependence on customs revenue varies significantlyacross SADC countries, as shown in Table 3.1 (column two). Customsrevenues now constitute less than 2 per cent of government revenue inSouth Africa, less than 5 per cent in Angola (although available data aresketchy), and less than 12 per cent in Zambia. In Zambia, the minorrole of trade taxes is due in large part to the comprehensive unilateraltrade liberalisation undertaken as part of its structural adjustment inrecent years. In South Africa, the negligible role of customs revenues isdue primarily to its broad domestic revenue base, although unilateraltrade liberalisation consequent to its WTO agreement in 1993 has alsoplayed a role in recent years. At the other end of the scale, Lesotho,Swaziland and, to a lesser extent, Mauritius exhibit pronounced depen-dence on customs revenues. Customs revenues account for close tohalf of government revenues in Lesotho and Swaziland, and about one-third in Mauritius. In the first two cases, these revenues derive fromthe revenue-sharing arrangements under the SACU. In between thesetwo extremes, customs revenues account, on average, for somethingless than one-quarter of total government revenues, ranging from alow of 15 per cent in Botswana to almost 30 per cent in Namibia.

An obvious approach to assessing the necessary fiscal adjustmentwould be to estimate, country by country, the current level of customsrevenue associated with imports from other SADC countries. Whilesuch an approach might provide a reasonable starting point for theanalysis, it fails to take into account the additional revenue losses thatare likely to occur as a result of trade diversion. To the extent thatimporters throughout SADC are likely, as tariffs on intra-regional tradeare reduced, to substitute regional imports for imports from outside theregion, the level of customs revenue from extra-regional imports willfall. The more willing and able importers are to make such substitu-tions – that is, the greater their elasticity of substitution betweenregional and extra-regional imports – the larger will be the fall in cus-toms revenue from extra-regional trade.

For these reasons, it is obviously desirable to take into account thenegative revenue impact of trade diversion. Estimates in a recent studyof the impact of the SADC FTA by Evans (1997) make it possible to doso. Evans uses a partial equilibrium Regional Trade Model for SouthernAfrica in order to estimate the impact of the proposed FTA on importsand exports from SADC and the rest of the world; domestic production

62 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 62

of importables; employment; and customs revenue. Readers arereferred to Evans’s paper for a discussion of the key assumptions under-lying the model and of various caveats regarding the methodology andquality of data used.

It is worth emphasising that while these estimates provide the bestavailable indication of the likely revenue impact of the FTA, they arenevertheless no more than a starting point for any analysis in this area.In the first instance, the limitations of Evans’s methodology togetherwith the incompleteness of relevant data on the region mean that hisestimates are, at best, illustrative of the direction and order of magni-tude of the effects. Moreover, the estimates focus on customs revenueand thus neglect the possibly significant impact on other sources ofrevenue. In theory, the increases over time in economic activity as aresult of the FTA should translate into higher revenues from incomeand sales taxes. In practice, however, the narrowness of tax structuresin the region means that the fall in personal income and company taxrevenues caused by the contraction of import-substituting industries islikely to outstrip the rise in revenue collected from expanding exportindustries. In addition, SADC countries that are participating in theCross-Border Initiative are already well advanced in a process of tariffreduction on intra-CBI trade with a target of zero tariffs by October2000. As this process progresses, the magnitude of the additional lossesin customs revenue due to the implementation of the SADC FTAdecreases. In this respect, the estimates presented below, which arebased on 1996 revenue figures, will overestimate the revenue lossesassociated with the FTA.

For all these reasons, it must be emphasised that the analysis thatfollows provides only a broad indication of the likely impact of the FTAon revenue and of the scale of policy response that may be required.The methodology of this section, however, illustrates the type of analy-sis that governments will need to undertake in order to decide on theprecise policy response required to offset the loss of customs revenue.

Table 3.1 sets out the estimated impact of the SADC FTA on total gov-ernment revenue in each of the member states, using the estimatesfrom Evans (1997) of the impact on customs revenue together with datafrom other sources. The change in customs revenue is calculated fromthe sum of the country’s revenue from SADC imports and imports fromthe rest of the world, thereby incorporating the effects of expected tradediversion. It is worth noting that Evans also simulates the effect of tradeliberalisation as a result of structural adjustment, where the customsrevenue effects are much stronger than those under the FTA.


JEN-03.QXD 3/31/00 10:10 AM Page 63

Evans estimates the effects of the FTA under two scenarios: (i) zerogrowth in SADC and the rest of the world and no improved access toextra-regional markets; (ii) 3 per cent growth and a 3 per cent increasein access to extra-regional markets. We have based our calculations onthe first scenario – in that respect these findings may be seen as a worst-case outcome. However, it should be noted that Evans’s estimates forthe change in revenue do not differ greatly between the two scenarios.

The countries most significantly affected by the FTA in terms ofexpected lost revenue are Malawi, Mauritius and Zimbabwe (and to alesser extent Zambia). These three countries are estimated to lose morethan 5 per cent of revenue (based on the share of customs revenue intotal government revenue in 1996). Zimbabwe suffers the largestdecline in customs revenue (32 per cent), but this is to some extent off-set by a lower than average reliance on customs revenue. Mauritius, onthe other hand, relies heavily on customs revenue (33 per cent of totalgovernment revenue) and is expected to suffer the largest percentagedecline in overall revenue as a result of the FTA (5.7 per cent).

64 Jonathan Leape

Table 3.1 Estimated impact of SADC FTA on government revenue

(a) (b) (a)�(b)�(c) Tax revenue Total revenuePer cent Customs Per cent per cent of per cent ofchange in revenue change GDP GDPcustoms as per cent in totalrevenue of total2 revenue

Angola �1.8 4.3 �0.08 35.7 36.3Botswana1 �3.0 15.4 �0.46 15.0 37.4Lesotho1 �3.0 45.0 �1.35 47.1 69.3Malawi �23.9 22.0 �5.26 16.0 17.3Mauritius �17.0 33.5 �5.70 16.3 19.0Mozambique �5.8 22.2 �1.29 16.7 18.3Namibia1 �3.0 29.8 �0.89 31.5 36.1South Africa1 �3.0 1.8 �0.05 25.6 26.4Swaziland1 �3.0 49.4 �1.48 33.1 34.7Tanzania �5.8 27.6 �1.60 18.1 20.0Zambia �28.7 11.6 �3.33 31.5 34.2Zimbabwe �32.2 17.2 �5.55 26.4 29.6

Source: Own estimates using data from: Evans (1997) for column 1; Imani Development andIMF Staff Country Reports for column 2, 4 and 5.Notes: 1 Evans (1997) estimates the change in customs revenue for SACU and not the indi-vidual members of the customs union. This estimate has been applied to each of the fivemembers of SACU. SACU countries have customs and excise figures combined.2 1996, except for Angola and Mozambique where data is for 1994 and 1995, respectively.

JEN-03.QXD 3/31/00 10:10 AM Page 64

Although, as discussed above, Lesotho and Swaziland are the mostdependent on customs revenue of all SADC members, and thus poten-tially the most vulnerable to the adverse fiscal effects of trade liberalisa-tion, the very low level of SACU imports from other SADC countriesmeans that the impact of the SADC FTA is relatively small (less than1.5 per cent of total government revenue).

The effects of the FTA on revenue in Angola and South Africa areexceptionally small. In both these cases, this is a result both of the lowshare of customs revenue in overall revenue and of the relatively smallimpact of the FTA on customs revenue in these countries.

While the impact of the FTA on revenue thus varies considerablyacross the region, it is evident that virtually all countries will need toput into place fiscal adjustment measures to offset the expected rev-enue losses. Fiscal adjustment strategies should be given urgent atten-tion to avoid undue and damaging delays in their implementationwhich could undermine the sustainability of the FTA.

3.3 Fiscal adjustment measures: tax rate increases

Tables 3.2 and 3.3 provide a more detailed analysis of the additionalfiscal effort needed in each member country to offset the expected lossin customs revenue. Table 3.2 summarises the structure of the domestictax system in each country. The first column shows the share of totalgovernment revenue raised by ‘sales taxes’, that is, general consump-tion taxes including general sales tax and value-added tax. The secondcolumn shows the share of revenues coming from ‘excise taxes’, that is,specific consumption taxes excluding taxes on international trade. Thethird column shows the revenue share of total indirect taxes (includingsales and excise taxes and excluding trade taxes). The fourth columnshows the share coming from direct taxes, including personal incometax and company tax. (See Bakoup et al., 1995, for a similar analysis ofCBI countries.)

Table 3.2 reveals pronounced disparities across SADC countries in thestructure of the tax base. For example, direct taxes raise less than one-sixth of total revenues in Lesotho and Mozambique, but more than40 per cent in Zimbabwe and Malawi, more than 50 per cent in SouthAfrica and more than 70 per cent in Angola. Conversely, indirect taxesraise between one-quarter and one-third of revenues in most SADCcountries, but less than 5 per cent in Botswana and as much as 50per cent in Mozambique. It is worth noting that the imbalance betweenindirect and direct tax in Mozambique cannot be addressed effectively


JEN-03.QXD 3/31/00 10:10 AM Page 65

in the short term. Improvements in the direct tax base will first requirethe further development of accounting and reporting practices.Addressing the narrowness of the direct tax base in Angola will require abroad programme of institutional capacity building in both the privatesector (through the further development of accounting and reporting

66 Jonathan Leape

Table 3.2 Shares of taxes in total revenue (in per cent)

Sales tax Excise taxes Indirect tax1 Direct tax

Angola n/a n/a 20.9 71.8Botswana 4.0 0.0 4.5 21.0Lesotho 9.9 2.3 11.1 13.4Malawi 20.4 3.1 26.1 45.0Mauritius 9.5 7.9 25.6 26.5Mozambique n/a n/a 50.9 14.1Namibia 18.8 9.1 32.0 26.4South Africa 24.5 4.8 38.6 56.1Swaziland 13.4 n/a 14.4 27.2Tanzania 13.5 9.8 26.2 21.9Zambia 19.7 12.3 43.7 36.4Zimbabwe 19.1 4.5 26.5 42.3

Source: CREFSA estimates based on data from Imani Development, Government FinanceStatistics Yearbook and selected Staff Country Reports, International Monetary Fund.Note: 1 Indirect tax excludes taxes on international trade.

Table 3.3 Estimated increase required to offset the impact of FTA as a percentageof revenue raised by different taxes

Sales tax Excise taxes Indirect tax Direct tax

Angola n/a n/a 0.4 0.1Botswana 11.3 – 10.3 2.2Lesotho 13.7 59.7 12.1 10.1Malawi 25.8 167.7 20.1 11.7Mauritius 60.0 71.8 22.3 21.5Mozambique n/a n/a 2.5 9.2Namibia 4.7 9.9 2.8 3.4South Africa 0.2 1.1 0.1 0.1Swaziland 11.1 n/a 10.3 5.5Tanzania 11.8 16.3 6.1 7.3Zambia 12.5 20.1 7.6 9.2Zimbabwe 29.1 123.3 21.0 13.1

Source: CREFSA estimates using data from Tables 3.1 and 3.2.Note: These estimates reflect the increases necessary if the particular tax were chosen as thesole instrument for fiscal adjustment.

JEN-03.QXD 3/31/00 10:10 AM Page 66

practices) and the public sector (through enhanced capacity in bothpolicy development and in tax collection and enforcement).

These disparities in the tax structure underscore the need for carefulanalysis in each country in determining the appropriate instrument orinstruments for fiscal adjustment.

Table 3.3 sets out alternative instruments for fiscal adjustmentthrough taxation, showing the percentage increase in revenue fromeach type of tax that might be needed to offset the estimated losses incustoms revenues if that tax were chosen as the sole instrument for fis-cal adjustment. For example, the estimates suggest that Namibia mayrequire an increase of either 2.8 per cent in total indirect tax revenues or3.4 per cent in direct tax revenues to offset the drop in customs rev-enues. If the decision were made to use indirect taxes, the adjustmentcould be achieved with either a 9.9 per cent rise in excise tax revenuesor a 4.7 per cent rise in revenues from sales tax (which, in Namibia’scase, is a value-added tax). As discussed earlier, these figures provide, atbest, a broad indication of the direction and magnitude of the adjust-ments required.

It is important to note that the necessary adjustments shown inTable 3.3 could be achieved either by increasing tax rates (as examinedbelow in this section) or by broadening the relevant tax base.Alternatively, increasing the effectiveness of expenditure control wouldreduce the magnitude of the required adjustments.

The estimates indicate that the fiscal adjustment required is greatestfor Malawi, Mauritius and Zimbabwe which, as discussed above, areestimated to suffer the greatest loss of revenue. For Mauritius, offsettingthis loss would mean raising an additional 20 per cent in revenue fromeither direct or indirect tax. The latter would require an increase of60 per cent in the revenue raised by value-added tax or of 70 per cent inexcise tax revenues. For Malawi and Zimbabwe, indirect tax revenuewould have to rise by around 20 per cent, but direct tax revenue by asmaller amount (11 to 13 per cent). Using indirect tax revenues to meetthe revenue shortfall would require an increase of around one-quarterin the revenues raised by the value-added tax in Malawi and of almost30 per cent in the revenues raised by the sales tax in Zimbabwe.

The heterogeneous menu of alternative instruments for fiscal adjust-ments shown in Table 3.3 suggests that different countries should pur-sue different strategies in meeting the revenue shortfall.

For most SADC countries, however, it is unlikely that it will provedesirable to offset the revenue shortfall by raising tax rates on directtaxes – personal income taxes and company taxes. The reasons for this


JEN-03.QXD 3/31/00 10:10 AM Page 67

are twofold. First, marginal tax rates for direct taxes are already rela-tively high by international standards in many of these countries.Increases in these marginal tax rates are likely to cause an unacceptabledegree of distortion to the employment, savings and investment deci-sions of individuals and firms. Moreover, such increases are also likelyto stimulate increased tax evasion.

Second, on the plausible assumption that governments in mostmember countries are broadly satisfied with the current balancebetween direct and indirect taxes in their tax systems, the appropriateresponse to the expected loss in revenues from taxes on internationaltrade (a form of indirect tax on goods and services) is some combina-tion of increases in other forms of indirect taxes. Within the set of indi-rect taxes, the most attractive instrument for fiscal adjustment will, ingeneral, be general consumption taxes (e.g. the general sales tax or thevalue-added tax). The broad base of such taxes means that the neces-sary increase in tax rates is smaller than for specific consumption taxes(such as excise taxes on cigarettes or alcohol), and the risk of distortingparticular markets is correspondingly lower.

It is worth noting the caveat that the required increase in sales taxwill prove more useful as a benchmark for fiscal adjustment the smallerthe adjustment required. Where countries are likely to experience asharp drop in customs revenues, the magnitude of the required fiscaladjustment may require that direct as well as indirect tax revenues beincreased. Furthermore, where the existing tax system is underdevel-oped, and the tax base particularly small, a narrow focus on sales tax islikely to be inappropriate.

In general, however, the appropriate starting point for fiscal adjust-ment to offset the loss of customs revenue in the SADC countries is anincrease in sales (or value-added) tax rates. Table 3.4 provides an indi-cation of the increase in sales tax rates that would be necessary to meetthe estimated revenue shortfall if only this tax were used. These figuresare intended as estimates of the magnitude of the required adjustmentin tax rates, rather than precise recommended changes. Indeed, it isimportant to note that the estimates do not take into account factorssuch as the potentially negative revenue implications of any reductionin demand resulting from higher sales tax rates or, more broadly, of areduction in direct tax revenues from a contracting import-substitutingsector. Nor, on the other hand, do they take into account the poten-tially positive revenue implications of increased yields from direct andindirect taxes due, for example, to an expansion of import activitiesand of emerging export industries.

68 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 68

Finally, it is worth remembering that the figures presented are basedon the revenue loss estimates in Evans (1997) – as mentioned earlier,the data and methodological difficulties associated with modelling theimpact of the FTA mean that these figures can only be considered asbroad indications of the likely effects.

The estimates in Table 3.4 suggest that adjustments of less than1.5 percentage points in the main rate of sales or value-added tax wouldbe required for Botswana, Lesotho, Namibia, South Africa, Swaziland andTanzania. Malawi and Zimbabwe, on the other hand, might need to raisetheir relatively high current rates by significant amounts: from 20 to25.2 per cent in the case of Malawi and from 17.5 to 22.6 per cent forZimbabwe. The rate in Mauritius might have to rise from its relativelylow level of 8 per cent to 12.8 per cent. Overall, the average sales tax rateacross SADC would, according to these estimates, need to increase byjust over 2 percentage points, from 12.7 per cent to about 15 per cent.

The relatively limited adjustment in tax rates required for Botswana,Lesotho, Namibia, South Africa and Swaziland suggests that increases insales or value-added tax provide a useful reference point and may prove


Table 3.4 Estimated increase in sales tax rate required to offset revenueimpact of FTA

(a) (b) (a)�(b)�(c)Sales tax rate Estimated increase Implied rate

necessary

Angola n/a n/a n/aBotswana 10 1.2 11.2Lesotho 10 1.4 11.4Malawi 20 5.2 25.2Mauritius 8 4.8 12.8Mozambique n/a n/a n/aNamibia 8 0.4 8.4South Africa 14 0.03 14.03Swaziland 12 1.3 13.3Tanzania 10 1.2 11.2Zambia 17.5 2.2 19.7Zimbabwe 17.5 5.1 22.6

Source: CREFSA estimates using sales tax rates from Imani Development and datafrom Table 3.3.Note: The calculations are sensitive to the assumption of the current average sales taxrate. Due to data limitations (especially as regards revenue figures), and to the needfor consistency with the Evans study, the average rates used in column (a) are basedon sales (or value-added) tax rates in force in late 1997.

JEN-03.QXD 3/31/00 10:10 AM Page 69

an appropriate strategy for fiscal adjustment. The same is likely to betrue also for Zambia, where the required increase in VAT would be justover 2 percentage points. The small implied increase for Tanzania hasbeen overtaken by events, with the introduction in July 1998 of a value-added tax at a rate of 20 per cent (compared to 10 per cent for the pre-vious sales tax).

In the cases of Malawi and Zimbabwe, however, the high tax ratesimplied by relying solely on sales or value-added tax to meet the revenueshortfall indicate that complementary strategies – especially efforts tobroaden the tax base – should be urgently explored in order to minimiseany increase in marginal tax rates.

The estimated increase in the rate of sales tax in Mauritius is high,but the low sales tax rate means that any increase would help to bringMauritius more in line with other SADC countries. Moreover, overalltax effort in Mauritius is low relative to other countries: tax revenuesare 16 per cent of GDP (see Table 3.1), about half the SADC average.Furthermore, a step increase in the level of general consumption taxescould facilitate a transition in Mauritius away from the heavy depen-dence on trade taxes that has characterised the tax system to date.These and other considerations have led the Mauritian government toreplace the sales tax with a value-added tax at the higher rate of 10per cent, with effect from September 1998. The introduction of thevalue-added tax should work to increase the buoyancy and decrease thedistortions of the tax system. In addition, the higher rate goes someway toward addressing the potential shortfall identified in Table 3.1.

There is a strong case for introducing a general consumption tax (gen-eral sales tax or VAT) in Mozambique. As economic reforms proceedapace in Mozambique, there is an increasing need to establish broad-based, fair, effective and buoyant sources of revenue. The governmenthas taken a major step in addressing this need by committing itself tointroducing the value-added tax in 1999.

The case for introducing a general consumption tax is strong also inAngola, where there is a pressing need for broader and more effectivesources of revenue. As economic and political stabilisation proceeds,Angola needs to move in this direction, although a general sales tax –which is less demanding in terms of taxpayer compliance than a value-added tax – may be the most appropriate first step.

However, all countries in the region could benefit from efforts tobroaden the tax base, through enhanced compliance and other mea-sures, and to increase effective control over expenditure. Success inthese areas, which are the subject of the next two sections, would

70 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 70

reduce – and, in many cases, eliminate – the need for tax increases(such as those shown above in Table 3.4).

3.4 Fiscal adjustment measures: broadening the tax base

There is a strong case for governments throughout SADC to take actionin implementing steps aimed at enlarging the tax base. The immediatemotivation for such action stems from the anticipated need for fiscaladjustment in the face of reduced customs revenues. Prompt and effec-tive actions to broaden the tax base will reduce and could potentiallyeliminate the need for tax increases of the type described in the previ-ous section.

Furthermore, such steps are necessary to ensure that member gov-ernments secure the full fiscal benefits of higher long-run growth.Countries in the region rely, with few exceptions, on overly narrowand distortionary tax structures that are unlikely fully to capture thehigher levels of spending and income that come from the emergenceof new export industries and from higher levels of economic activitymore generally. In the absence of concerted action to broaden the taxbase, countries could experience a downward trend in revenues overtime as traditional sources of revenue decline in importance. In addi-tion, a failure to address some of the more distortionary aspects of cur-rent tax systems and to work towards a more neutral tax structurecould hinder the efficient adjustment of the economy to the changedincentives of the regional free trade area.

More generally, the level of fiscal effort is high, by developing coun-try standards, in more than half the SADC countries, which have ratiosof tax revenue to GDP of 24 per cent or greater (see Table 3.1). In thiscontext, the goals of avoiding excessive tax-induced distortions, attract-ing foreign direct investment and maintaining international competi-tiveness are all served by sustained efforts to broaden the tax base so asto minimise the upward pressure on tax rates. Moreover, firm action bygovernments can reverse the vicious circle of a narrow tax base andweak compliance leading to higher tax rates, an even narrower tax baseand still weaker compliance.

Two complementary and related strategies for broadening the rev-enue base deserve attention. The first is enhanced compliance. The sec-ond are measures to broaden the base of both direct and indirecttaxation. Measures to enhance compliance and measures to broadenthe base of direct taxation typically share the objective of widening therange of individuals (and incomes) caught in the tax net. Measures to


JEN-03.QXD 3/31/00 10:10 AM Page 71

broaden the base of direct and indirect taxation share the objective ofwidening the range of transactions caught in the tax net.

3.4.1 Enhancing compliance

International experience in developed countries shows that the payoffto investing more resources into tax enforcement and other measuresto enhance compliance is substantial. Although reliable evidence onthe returns to such investment in developing countries is not readilyavailable, several considerations suggest that the returns are, if any-thing, higher – perhaps significantly so. The first consideration is thesize of the informal sector in most developing countries. The signifi-cant share of national income typically generated by the informal sec-tor in developing countries suggests that the losses in tax revenue maybe large. The second consideration are the widespread complaints, com-mon in SADC countries, of – in the words of the South African Ministerof Finance – a ‘culture of non-payment’. Cross-country evidence suggeststhat tax evasion exhibits ‘tipping’ characteristics, whereby once evasionreaches a certain threshold it can then become pervasive, as socialenforcement mechanisms break down.

A number of different approaches are available to governments seek-ing to fight evasion. In this section, we review some of these approaches.Most of these focus on enhancing incentives for taxpayer compliance.However, the first focuses on enhancing the incentives for effectiveenforcement by the revenue authorities. All these approaches shareimportant characteristics. First, they are complementary: no matterwhich approach is pursued first, compliance can be further enhanced bypursuing others as well. Second, they all have initial administrativecosts. The gains from attempts to redirect existing spending on enforce-ment are likely to be limited; significant payoffs in improved complianceand higher revenues are only likely to materialise from any of the fol-lowing approaches if new resources are made available.

The first approach focuses on the effectiveness of tax enforcement.Bureaucratic inertia, compounded, in recent years, by increasing pres-sure on civil service salary bills, have, in most countries of the region,undermined the effectiveness of the revenue authorities. As govern-ments attempt to control excessive public sector costs, the revenueauthorities are rarely spared from the across-the-board cuts appliedthroughout the civil service. Yet, to the extent that such cuts cause adeterioration in enforcement, the net effect may, ironically, be a wors-ening of the fiscal position. Moreover, all too often cuts in salaries andstaffing levels create a seedbed for corruption, further weakening

72 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 72

enforcement and undermining taxpayer incentives to comply. Notonly the level of salaries, but also, more generally, the incentive struc-ture for revenue officials needs urgently to be reviewed.

While a variety of measures may be employed to strengthen taxenforcement – including increases in the budget for enforcement aswell as managerial and technical training for revenue personnel – ofmost immediate interest are recent developments in the region involv-ing changes in the institutional structure of the revenue authorities.For example, in 1997, responsibility for the operational managementof the customs service in Mozambique was handed over to the UK-based private company, Crown Agents, under the terms of a three-yearcontract with the government. The objectives of this initiative are toincrease government revenue; encourage legitimate trade; and mod-ernise the customs service for its ultimate return to the Mozambicanauthorities. Since the introduction of this initiative, it has beenreported that revenue collection has improved markedly. A furtherexample is the establishment of the South African Revenue Service(SARS). SARS is an autonomous agency within the public service and isfunded from a percentage of collected revenue. It is accountable to theMinister of Finance but has flexibility in the management of itsresources. To date, the targets set for improved revenue collection havebeen more than met. These two initiatives share key common charac-teristics. Governments were frustrated, in both cases, by the inefficiencyand ineffectiveness of existing revenue authorities and were determinedto take decisive action. The solutions decided upon involved significantchanges in the institutional framework within which they operateaimed at giving them a substantial degree of authority. In both cases thegranting of autonomy was accompanied by the establishment of a clearset of objectives and incentives. And in both cases the result has been asignificant increase in revenues collected.

These examples are by no means unique in the region. For example,Tanzania and Zambia have also, like South Africa, established indepen-dent revenue authorities. Indeed, it is evident that the concept of shift-ing from a tax department within the department of finance to arevenue authority with a substantial degree of independence is gainingground within the region. The success of these examples of institutionalreform suggests that there is scope throughout the region for revenue-enhancing reforms along these lines to the institutions responsible forcollecting taxes and customs duties.

Efforts to enhance enforcement can be reinforced by complementarymeasures to increase compliance, and vice versa. Indeed, there is an


JEN-03.QXD 3/31/00 10:10 AM Page 73

underlying complementarity of all such measures stemming from tax-payer perceptions of whether or not government attempts to fight taxevasion are credible. The more consistent, coherent and sustained thegovernment’s strategy is seen to be, the greater its ultimate effectiveness.Indeed, once a government’s efforts to fight tax evasion are seen to becredible, and of sufficient scale and scope, the tipping phenomenoncited above can work in reverse as a culture of compliance is established.

One potentially effective instrument for increasing compliance is theuse of high-profile campaigns against tax evasion. The value of suchcampaigns is at least twofold. In the first instance, well-targeted enforce-ment actions can directly raise significant amounts of revenue. In addi-tion, however, the signal sent by such actions – where carried outpublicly – can have a significant impact on increasing the credibility ofthe revenue authorities leading to higher levels of voluntary compli-ance. The revenue contribution of this second effect is likely, over time,to outstrip the first.

A recent example in the region of this type of campaign are the exer-cises carried out in 1997 in Zimbabwe by the Department of Taxes andthe Department of Customs and Excise. ‘Operation Tax Net’ involvedspot calls on businesses to check on tax payments. The operationraised Z$30 million in three weeks in Kariba, Z$300 million in Hararein four weeks and Z$126 million in Bulawayo in a similar time period.Under ‘Operation Bhadharai!’ (‘Operation Pay’) in the last quarter of1997, the Department of Customs and Excise is believed to have nettedZ$200 million in additional revenue through closer examination ofgoods. South Africa has used publicity in a different way to improvecompliance. The Minister of Finance announced in his Budget speechin March 1998 that the tax laws would be amended ‘to provide for thepublication of the names of persons convicted of offences in terms ofthese laws’.

Another potentially useful approach to improving compliance is toincrease documentation for business transactions. A pervasive problemin addressing the non-payment of taxes and under-reporting is theabsence of appropriate documentation. Introducing blanket documen-tation requirements for large classes of private transactions is likelyto prove excessively costly, cumbersome and difficult to enforce.Governments can instead, however, focus on transactions in which thegovernment itself has a role – see, for example, Pasha and Iqbal (1994)for a discussion of how this has been implemented in Pakistan. A nat-ural starting point is transactions where the public sector is the pur-chaser of goods and services from the private sector. The large size of

74 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 74

government in most SADC countries suggests that this range of trans-actions is broad.

A second suitable set of transactions are those where the governmentis, instead, the supplier of services to the private sector. In this secondcase, not only can documentation requirements be introduced for thetransactions themselves, but the provision of services can be made con-ditional on the presentation of proof that businesses are keepingproper accounts. In both cases, establishing a system of unique tax-payer identification numbers can greatly enhance compliance andenforcement.

An interesting recent example of how governments can use its trans-actions with the private sector to enhance compliance was the 1997decision by the South African Ministry of Finance to require any indi-vidual or corporate tendering for government contracts or taking partin government initiatives to be a registered taxpayer and sign a declara-tion that their tax affairs are in order. Such declarations were alsorequired from individuals seeking access to the new foreign currencyaccounts, introduced as part of the liberalisation of exchange controls.While the 1997 requirements focused on self-certification, the preva-lence of false declarations (amounting to 17 per cent of total declara-tions associated with foreign currency applications) led the Minister ofFinance in March 1998 to announce that access to foreign currencyaccounts would henceforth require a clearance certificate from the rev-enue authorities prior to the approval of any foreign investment.

A final approach that merits serious attention focuses on the role ofthe government itself in creating incentives for tax evasion. One suchexample, as discussed above, are efforts to enhance the integrity andeffectiveness of the revenue authorities. A second important dimensionis tax law reform. Two aspects are particularly important. The first isthe simplification of tax laws. Experience in Africa and elsewhere inthe developing world highlights the adverse effects of excessive com-plexity in the tax system (Taube and Tadesse, 1996). Complexity affectsboth compliance and enforcement, making it difficult for taxpayers tocomply with regulations and for the authorities to enforce them.Success in reducing this complexity is likely to yield considerable bene-fits in shifting informal sector activity and informal cross-border tradeinto formal (taxed) channels.

The second important dimension for tax reform is reduction in mar-ginal tax rates. The payoff to tax evasion rises in direct proportion tomarginal tax rates. Indeed, it is likely that other measures to enhancecompliance will have only limited success in the presence of excessively


JEN-03.QXD 3/31/00 10:10 AM Page 75

high tax rates, as the incentive to evade taxes will remain high. For thisreason, reductions in excessively high marginal tax rates can sharplyreduce the incentives for evasion and thereby play an important role inan overall strategy to enhance compliance.

3.4.2 Broadening the base of direct taxation

Closely related to the issue of enhancing compliance is the issue ofbroadening the base of direct taxation. This requires, in turn, that theauthorities broaden both the range of individuals and businesses filingand paying tax and the range of types of income (and transactions)that are made subject to tax. This sub-section explores one set of strate-gies which deserves further consideration – presumptive taxation mea-sures – and draws on an insightful recent study of the use of suchmeasures in sub-Saharan Africa (Taube and Tadesse, 1996).

The existence of a large ‘hard-to-tax’ sector throughout SADC, as inAfrica more generally, has resulted in excessively narrow, distortionaryand inequitable direct tax systems for both individuals and companies.One feature of such tax systems is that the burden of direct taxationtends to fall disproportionately on salaried employees. The hard-to-taxsector includes the small-scale agricultural sector, traders, small manu-facturing firms and artisans, and the small-scale businesses in theservice sector (such as taxis, panel beaters, hairdressers, and restau-rants) – all of which typically fall into the informal sector. In many ofthese cases, the individuals and businesses may be hard to tax becausethe activities are mobile (such as traders), small in scale, undocu-mented (cash jobs) or illegal. But, the hard-to-tax sector also includesindividual professionals, such as lawyers and doctors, and larger scaletraders where the incomes generated may be substantial. Estimatesfrom elsewhere in Africa suggest that the size of the informal sector istypically around 30 per cent of GDP, indicating a substantial amountof forgone tax revenue (Taube and Tadesse, 1996).

These problems are, in turn, exacerbated by other factors such aspatchy record-keeping by businesses, poor tax compliance stemmingfrom illiteracy and innumeracy, as well as mistrust of government andineffective tax administration.

Although the scale may differ from country to country, problems inbringing small-scale, informal and cash-based activities into the tax netare common throughout the developing and developed world. Perhapsthe most promising response has been the use of ‘presumptive taxa-tion’. Internationally, three basic types of presumptive taxes have beenemployed. Standard assessments involve lump-sum levies on small-scale

76 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 76

businesses, with different occupations or activities attracting differentlevies. Estimated assessments involve the use of indicators (e.g. numberof employees, amount of floor space) to estimate a taxpayer’s incomeand tax liability. Presumptive minimum taxes involve the collection ofminimum taxes based on turnover or assets.

All three forms of presumptive taxes have been used by SADC coun-tries. Standard assessments are used to tax small farmers in Mozambique,where the size of the tax depends on the type of agricultural activity,number of employees and whether the farmer has a tractor. Estimatedassessments are used in taxing farmers in Lesotho, Swaziland, Tanzaniaand Zambia, and in taxing a range of small businesses in Angola.Presumptive minimum taxes are levied on self-employed professionalsin Malawi, where the tax is levied as a lump sum, and in Zambia,where the tax is based on turnover (Taube and Tadesse, 1996).

On the basis of their review of presumptive taxation in sub-SaharanAfrica, Taube and Tadesse reach three major conclusions. First, pre-sumptive taxes have not received adequate attention as an element oftax policy in Africa. Second, not all forms of presumptive taxation areequally effective in generating revenue, or equally fair, efficient or fea-sible. Third, any effort to increase the scope of presumptive taxationmust include capacity-building in tax administrations. They furtherconclude that the three traditional methods suffer serious shortcom-ings: standard assessments raise too little revenue, are too inequitableand pull too many small-scale business activities into the tax net; esti-mated assessments require too much data and analysis; and minimumtaxes are most suitable as instruments for reducing underreporting bylarger companies.

Two other methods have, however, been used with some success inrecent years and merit serious consideration. As in the above discus-sion of measures to enhance compliance, a common thread in thesesuccessful presumptive taxation measures is their use of transactions inwhich the public sector is already involved. One such group of mea-sures are withholding schemes, where government payments for ser-vices such as rental accommodation, building works and professionalservices are subject to a fixed withholding charge. These schemes helpto capture the income of individuals and businesses not registered withthe tax authorities. For registered businesses, the charge simply servesas a form of downpayment for the actual tax liability.

A second such instrument is graduated business licence fees. Thisapproach exploits the fact that licensing agencies typically have farmore comprehensive listings of traders and service providers than the


JEN-03.QXD 3/31/00 10:10 AM Page 77

tax authorities. A 1979 study in Lesotho found that of 6,244 individu-als registered with the licensing agency, only 350 had filed tax returns.Care must be taken not to disrupt the effective functioning of theselicensing agencies. Sharp increases in licence fees are likely to lead toreduced compliance, with more individuals and firms opting to tradeillegally. Nevertheless, the potential usefulness of licensing proceduresin broadening the tax base is self-evident. One option, discussed aboveunder ‘compliance’, is to refuse licences to individuals who have notpaid their taxes. Another, which is relevant here, is to use the licencefees themselves as a form of direct tax. The additional administrativeresources required may well be limited, as the licensing procedure mayalready involve gathering information relevant to establishing the scaleof the business activity (e.g. number of employees, rental value ofpremises) (Taube and Tadesse, 1996).

3.4.3 Broadening the base of indirect taxation

Recent experience in the region suggests that there is scope for signifi-cantly broadening the base of indirect taxation. One good example isthe set of reforms undertaken in Zambia in 1996. The governmentundertook a comprehensive review of both the tax system and customsduties, with the intention of significantly broadening the base of taxa-tion. By eliminating a considerable number of exemptions in bothtaxes and customs duties and shifting emphasis from specific con-sumption taxes (such as excise duties) to general consumption tax inthe form of the value-added tax (introduced in July 1995), the Zambianauthorities achieved higher revenues, despite significant cuts in cus-toms duties and marginal tax rates.

Governments should build on recent efforts throughout the region tomake the coverage of the general consumption tax (whether in the formof a general sales tax or a value-added tax) as broad as possible. Broad-based general consumption taxes are increasingly the backbone of taxsystems world-wide, as they can be an effective, fair and buoyant sourceof revenue. Exempting wide ranges of goods or services from tax isunlikely to be a cost-effective way to promote distributional objectives.Moreover, changes in the economy over time may make it easier ormore important to bring previously untaxed goods and services into tax.

The effectiveness of the indirect tax system can be further enhancedif governments currently using multiple tax rates under the generalsales tax or VAT work, over time, towards a simplified two-rate struc-ture (or even, where possible, a single uniform rate). The distortionaryimpact and administrative burden of these taxes increases sharply as

78 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 78

the number of rates proliferates due to the greater scope for ‘reclassify-ing’ goods to reduce the tax paid. For similar reasons, efforts should bemade to reduce the number of different excise taxes.

Countries with a general sales tax should give serious considerationto adopting a value-added tax. VAT is the only indirect tax that fullyavoids the problem of double taxation – or ‘cascading’ – that occurswhen taxed goods are used as inputs by some firms. However, value-added tax is also more demanding in terms of the administrativerequirements placed on firms and on the revenue authorities. The bal-ance between these factors will change over time, and governmentswill have to continue to evaluate whether such a reform is desirable.


The revenue productivity of consumption taxes in SADC

One useful way to assess how successful governments have been inbroadening the base of indirect taxation is to examine the ‘revenueproductivity’ of each country’s main general consumption tax (value-added tax, VAT, or general sales tax, GST). The revenue productivityof a tax is the amount of revenue raised by the tax (expressed as apercentage of GDP) for each percentage point of the tax. Thus, if a10 per cent VAT raises 8 per cent of GDP, its revenue productivity is80 per cent.

Since the economic distortion – to employment, savings and invest-ment decisions – caused by a tax is a function of the tax rate (not theamount of revenue raised), a low figure for revenue productivity indi-cates that the tax is an inefficient and distortionary source of revenue.This is likely to be due to a high number of exemptions or poorenforcement and collection.

One study (Tanzi, 1995) of the revenue productivity of generalconsumption taxes (VAT or GST) in the industrialised countries of theOECD found a range of 30 per cent in Italy to 68 per cent in NewZealand, with an overall average of 43 per cent. The average rev-enue productivity of the top five countries in the OECD, which pro-vides a reasonable indicator of ‘international best practice’, was 56per cent.

The table below shows the revenue productivity of general con-sumption taxes in SADC. At the top end, the estimates for Namibiaand Lesotho are biased upward by data limitations and must be

JEN-03.QXD 3/31/00 10:10 AM Page 79

3.5 Fiscal adjustment measures: enhancing control ofexpenditure

A further set of strategies for limiting the increase in tax rates requiredto offset the loss in customs revenue associated with the FTA are those

80 Jonathan Leape

treated with caution. In the case of Namibia, the revenue productiv-ity estimate does not take into account the fact that all services aresubject to tax at 11 per cent (rather than the 8 per cent rate chargedon goods) – although even the adjusted figure would be impres-sively high. In Lesotho, the estimate is inflated by the divergencebetween GDP and GNP (due primarily to workers’ remittances).

Of greatest concern is the poor performance of the general salestax in Botswana (with a revenue productivity of 17 per cent), Malawi(19 per cent), Mauritius (25 per cent) and Tanzania (33 per cent).These findings suggest that the effectiveness of the main consump-tion taxes in these four countries is being severely undermined byexcessive exemptions or weak enforcement, or both.

Revenue productivity of consumption taxes (VAT or GST) in SADC

(a) (b) (b)÷(a)�(c)VAT/GST VAT/GST Revenue tax rates as % of GDP productivity (%)

Angola n/a n/a n/aBotswana 10.0 1.7 17Lesotho 10.0 5.7 57Malawi 20.0 3.9 19Mauritius 8.0 2.0 25Mozambique n/a n/a n/aNamibia 8.0 6.8 85South Africa 14.0 6.2 44Swaziland 12.0 4.7 39Tanzania 10.0 2.7 27Zambia 17.5 5.8 33Zimbabwe 17.5 6.3 36

OECD (all) 43OECD (top 5) 56New Zealand 68

Source: Own calculations using data from Appendix A1; OECD data fromTanzi (1995).

JEN-03.QXD 3/31/00 10:10 AM Page 80

designed to increase effective control of government expenditure.Through structural adjustment programmes and ‘home-grown’ initia-tives, many countries in the region have made strenuous efforts in thisarea in recent years. But considerable scope remains for further progress.

Strategies to increase effective control of expenditure have much incommon with measures to enhance compliance and broadening thetax base (discussed in the preceding section). First, the objectives ofsuch strategies are primarily long-term in nature, and significantprogress is likely to be made not in the space of months but over aperiod of years. Second, such strategies are concerned more with processthan with policy. Enhancing effective control of expenditure is aboutimproving how government implements its chosen policies, irrespec-tive of what those policies may be. Third, concern about processrequires attention to institutional structures and the incentives thosestructures create for the individuals with responsibility for carrying outpolicy. Finally, concern about process also requires attention to thetraining needs of those individuals.

Several countries in the region have used changes in institutionalframeworks in order to assert more effective expenditure control. Oneexample was the decision in Zambia, announced by the FinanceMinister in 1993, to adopt a cash budget. Zambia faced a spiralling fiscaldeficit and increasing macroeconomic instability. There was an urgentneed to reassert control over spending and, relatedly, to re-establish thegovernment’s credibility in controlling the deficit. In theory, the cashbudget approach required a balanced budget on a month-by-monthbasis. In practice, this was translated into a requirement that theauthorisation of spending match the accrual of revenues.

The attraction of the cash budget is that it provides a formal institu-tional framework that sharply decreases discretionary powers in theauthorisation of spending. The government’s public commitment to theframework or ‘rule’ makes it costly for officials or politicians to violatethe rule. In this way, the cash budget operates as a credible public con-straint on spending. The cash budget has also been adopted in Malawi,where the implementation has been strict and largely successful, andTanzania, where the implementation has been difficult and the impactmixed.

The experience of the cash budget in Zambia is examined by Adamand Bevan (1997). Although a severe form of fiscal discipline, the cashbudget approach has been successful in establishing an improvementin state finances, albeit at the cost of a ‘vicious squeeze’ in publicexpenditure. The rate of inflation has fallen but Adam and Bevan argue


JEN-03.QXD 3/31/00 10:10 AM Page 81

that the approach ‘seems to have failed … its primary objective of elim-inating inflation’. They identify a major contributor to this failure asthe frequent shortfalls of aid flows in relation to the government’sexternal debt obligations.

A second example is the adoption by South Africa of a medium-termexpenditure framework (MTEF). The MTEF was announced by theMinister of Finance in December 1997 and was implemented in the1998 Budget presented in March 1998. As with the cash budget, theMTEF operates as a public constraint on spending and was adoptedlargely as a mechanism to enhance the credibility of the government’scommitment to fiscal discipline. Its focus and impact are, however,somewhat different from that of the cash budget.

The primary focus of the MTEF is on medium-term spending priori-ties, rather than the short-run fiscal position. The motivation behindthe adoption of the MTEF in South Africa has several different dimen-sions. One is the implementation in the new constitution of a three-tierstructure of government in which provincial and local governmentshave powers to control vast areas of public spending. These decen-tralised spending powers are not matched by decentralised powers toraise revenue, which might otherwise provide a natural institutionalmechanism for entrenching fiscal discipline. There is thus a need foran institutional framework that can provide for formal coordination ofspending decisions across all tiers of government and, in the process,impose overall limits on spending.

A further dimension of the motivation for the MTEF has been theneed to engineer a substantial re-prioritisation of spending within thecontext of a tightening of fiscal policy, as reflected in reducing fiscaldeficits over time. Although the call for a re-prioritisation of spendingfollowing the democratic transformation in South Africa has had a par-ticularly high profile – especially through the Reconstruction andDevelopment Programme – many other countries in the region are fac-ing re-prioritisation challenges that are not dissimilar. In part, thesechallenges arise from efforts to re-direct spending in line with new pri-orities or, in some cases, a new political dispensation. In virtually everycase, such re-prioritisation challenges are made acute by the need simul-taneously to implement a steady fiscal tightening. In addition, suchchallenges are increasingly accompanied by demands for greater trans-parency. Re-prioritisation exercises, whether formal or informal, arelikely to be a permanent feature of the fiscal environment as countriesseek to accommodate new ideas and a changing environment within acontext of the continuing need to maintain tight fiscal control.

82 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 82

3.6 The need for tax coordination

3.6.1 Harmonisation of indirect taxes

In open economies, differences in indirect taxes between countries cancreate distortions. Where countries levy taxes on goods and servicesproduced within their borders (the ‘origin’ principle), production will beallocated inefficiently among countries. Where countries levy taxes ongoods and services consumed within their borders (the ‘destination’principle), production will be allocated efficiently among countries,but consumption will not be. Thus, there appears to be, in theory, astrong case for harmonising commodity taxes across countries toreduce tax-induced distortions. This is especially true where such coun-tries are engaged in a process of economic integration aimed at elimi-nating other distortions to regional trade.

In practice, however, the efficiency gains from regional tax harmoni-sation are limited. The most important reason is that by harmonisingto an agreed regional standard, countries give up the ability to tailorthe tax system to their own structure of production and preferences.Any reduction in international distortions may therefore be offset byan increase in internal distortions. (See De Bonis, 1997a,b, for a discus-sion of these issues in an international context.)

Thus, for economic as well as political reasons, countries are likely tobe reluctant to agree to uniform taxation in areas where theireconomies diverge. In the EU, for example, the wine-producing coun-tries continue to impose low taxes on wine and relatively higher taxeson beer, while the beer-producing northern countries continue toimpose high taxes on wine and relatively lower taxes on beer. Similardivergences within SADC are likely to create considerable obstacles toharmonisation of indirect taxes.

It is important to note that such divergences, especially where large,can act as proxies for import duties and thus act as an impediment totrade. For this reason, action to reduce large discrepancies in indirecttax rates is desirable to ensure that they do not interfere with freetrade. In the medium term, member countries should identify situa-tions in which tax differences are particularly marked – and the result-ing cross-border distortions potentially large – as possible areas forcoordination of tax policy. In the longer term, countries should con-sider whether it is desirable to formalise such coordination in the formof permissible tax rate ‘bands’ for broad-based consumption taxes suchas general sales tax and value-added tax. However, the benefits of fullyharmonising indirect taxes are unlikely to exceed the costs.


JEN-03.QXD 3/31/00 10:10 AM Page 83

3.6.2 Harmonisation of direct taxes

Direct taxes can, like indirect taxes, cause distortions to internationaltrade. For example, high direct taxes can drive up export prices, caus-ing a country to be disadvantaged in export markets.

The primary concern about direct taxes, however, focuses on theirimpact on cross-border investment within the region. Realising the fulleconomic benefits of freer regional trade will require that progress ismade in reducing the distortions to regional investment (as examinedin Chapter 4). Reducing these distortions may prove critical to thelong-run economic and political sustainability of the FTA. It is widelyrecognised that the current bilateral trade imbalances within the regionare likely, if anything, to increase in the early stages of the FTA, withthe result that the largest economies derive the greatest benefits.Achieving a broader distribution of the benefits of the FTA will requirea step increase in the level of intra-regional investment flows in themedium term. Such flows will, in the short to medium term, work tooffset the adverse balance of payments impact of trade imbalances and,in the medium to longer term, work to reduce the trade imbalancesthemselves.

One important impediment to the efficient allocation of investmentwithin the region are the capital controls that remain in almost all ofthe member countries. At a minimum, the presence of such controlsworks to distort investment decisions. All too often, they represent aninsurmountable barrier to cross-border investment within the region.

But the structure of the tax system can also create obstacles tocross-border investment. Identifying and measuring such tax-inducedimpediments to investment is, however, far from straightforward. Forexample, a withholding tax introduced to enhance the authorities’ability to collect taxes from non-resident investors may have the unin-tended effect of creating a barrier to new investment where such taxescannot be offset against firms’ tax liabilities in their country of resi-dence. Equally, a country’s choice of company tax system can, if notcoordinated regionally, introduce distorting problems of double taxa-tion (or worse). On the other hand, even apparently glaring discrepan-cies in tax rates between countries may not distort cross-borderinvestment decisions, depending on the nature of the tax systems as awhole (including the structure of the tax base). Thus, any attempt toassess the distorting impact on cross-border investment of tax systemsin the region requires a reference point or benchmark.

There are two useful benchmarks for assessing the distortionary effectsof tax systems on cross-border investment. Capital export neutrality (CEN)

84 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 84

holds when firms’ decisions where to invest within the region are notdistorted by tax. When CEN is satisfied, investment will flow to the mostefficient locations in the region. Capital import neutrality (CIN) holdswhen the competitive position of different producers (or sellers) in thesame market is unaffected by their country of origin. When CIN is satis-fied, the lowest-cost producer or seller in any given market will be themost efficient company. These two concepts provide the necessary refer-ence points against which national tax systems can be judged for theirimpact on cross-border investment within the region. (See Devereux andPearson, 1990, for a discussion of these issues in an EU context.)

In general, it is possible to achieve both CEN and CIN if taxsystems – including both tax rates and tax bases – are fully harmonisedwithin a region. As tax bases are shaped by a range of country-specificinstitutional factors such as accounting systems, harmonising tax basesacross countries is a hugely difficult task. Indeed, even in the EU,the difficulty of the task has all but prevented any harmonisation ofdirect tax bases to date. Moreover, harmonising tax rates may create,rather than eliminate, disparities if tax bases are not harmonisedat the same time. This is because cross-country differences in tax ratesmay be driven by a need to compensate for offsetting differences intax bases.

Attempts to reduce distortions to cross-border investment within theregion must therefore focus at least as much on the structure of taxbases in the countries of the region as on tax rates. While there hasnot, to date, been any concerted effort within SADC to address theseissues, initial steps are being taken. Tax harmonisation is one of theareas identified for study by the SADC Finance and Investment SectorCoordinating Unit (FISCU). More concretely, FISCU is establishing acommittee on accounting and auditing in the region. The committeehas the objective of harmonising accounting standards within SADC.The initial conception is that this may best be achieved through a shiftto international standards throughout the region, a reform that wouldserve national as well as regional interests.

Taking the argument one step further, even harmonising tax ratesand tax bases may not reduce distortions if expenditure patterns,including implicit and explicit subsidies, vary across countries. Forexample, complete harmonisation of tax rates and bases across coun-tries will not create a level playing field (‘neutrality’) for cross-borderinvestment if countries continue to differ – as is likely – in the level ofspending on investment-supporting infrastructure such as transportlinks or even education and training.


JEN-03.QXD 3/31/00 10:10 AM Page 85

3.6.3 Tax competition

If SADC countries should, for these reasons, reject tax harmonisation,does the solution lie in ‘tax competition’? The initial appeal of taxcompetition is considerable. Should not ‘market forces’ be allowed toinfluence the levels of taxation in different countries? Will not the riskof reduced trade and investment create a desirable constraint on coun-tries’ abilities to impose excessively high taxes?

The problem with tax competition arises from the international spill-over effects (or external costs) of national tax policies. A country thatreduces tax rates to attract foreign producers (or consumers) fails totake into account the cost of its actions – in terms of lost revenue – tothe original destination or home countries. For this reason, unfetteredtax competition can lead to excessive cuts in taxes, or even ‘predatory’taxation. In the extreme, tax competition to attract foreign investmentcan lead to ‘tax wars’, resulting in costly losses of tax revenue thatleave all countries worse off.

3.6.4 Tax diversity and tax coordination

The case against complete harmonisation is, ultimately, a decisive argu-ment for tax diversity. The structure of production, of preferences andhence of expenditure differs markedly across SADC members – and willcontinue to do so for the foreseeable future. Against this background ofdiversity, any attempt to harmonise taxes regionally is destined notonly to create internal distortions and inefficiencies, but ultimately tofail to achieve its objective of reduced distortions internationally. Thus,the underlying diversity in the regional economies and polities must,for reasons of efficiency, be matched by a degree of tax diversity.

The economic case for tax diversity is reinforced by political consid-erations. The principle of ‘subsidiarity’ – which has been embraced bythe most integrated of all regional groupings, the European Union –calls for policy decisions to be taken by national (or even sub-national)governments unless there is a compelling case for collective regionalaction. The economic arguments for tax harmonisation are far tooweak and ambiguous to justify any serious moves to remove nationalautonomy in tax policy.

While the arguments for tax diversity are strong, the dangers of taxcompetition must also be taken into account. The potential spillovereffects of national tax policies represent compelling grounds for adegree of tax coordination. The purpose of such coordination is tolimit the ability of member countries to improve their positions at theexpense of their regional partners via taxation.

86 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 86

Various regional initiatives currently underway are likely to yieldbenefits in the area of tax policy coordination. Perhaps most importantamong these is the FISCU project to harmonise accounting principlesand practice, as mentioned above. Progress in this area will greatlyenhance the scope for effective tax policy coordination by creating amore uniform basis for direct taxation, especially in the area of com-pany taxation.

International evidence suggests that the greater the degree of integra-tion, the more important is fiscal coordination to avoid unnecessarydistortions to intra-regional trade and investment. Yet, even in the EU,coordination has been limited to agreed bands for VAT and certain lim-its to excise and other specific taxes. MERCOSUR has no coordinationof taxes or subsidies, despite the intense conflicts over the latter. Onlyexport subsidies have been formally banned and there is strong opposi-tion to any attempt to harmonise indirect taxes. Neither is there anycoordination of indirect taxes in the Andean Pact and CARICOM.Indeed, no free trade areas have made any provision for the coordina-tion of tax rates (Page, forthcoming).

International experience thus reinforces the argument for caution inadvancing tax coordination within SADC. That said, however, there is acase for further examination of these issues, with particular emphasis onthe likely sources of tax-induced distortions to cross-border investment.To this end, SADC could consider commissioning a study of the effectivetax rates faced by intra-regional cross-border investments.

‘Effective tax rates’ provide the most useful summary measure of thecombined impact of the range of taxes (both within and across coun-tries) applicable to a particular cross-border investment project. Theunderlying idea is to establish what fraction of each dollar (rand, etc.)invested is ultimately paid in taxes of one sort or another. The method-ology – which was originally developed (in a single-country setting) inKing and Fullerton (1984) and extended to the area of cross-borderactivity by Devereux and Pearson (1990) and others – has since beenapplied in a broad range of studies of developed and developing coun-tries. A useful example is the comprehensive study of effective tax rateson cross-border investment within the OECD (OECD, 1991).

Such a study could identify where and to what extent national taxsystems within the SADC region deviate from the efficient outcomescharacterised by capital export neutrality and capital import neutrality,and identify priorities for action. Devereux and Pearson’s (1990) origi-nal study of the EU, for example, found that much of the benefits ofcomplete tax harmonisation – which was found to be an unworkable


JEN-03.QXD 3/31/00 10:10 AM Page 87

solution even in that context – could be realised by abolishing with-holding taxes on intra-regional investment.

Finally, consideration could be given – ideally in the context of theproposed study of effective tax rates on cross-border investment – tofour potential areas for tax policy coordination. The areas are listed inorder of priority, and the first two merit particular emphasis:

� In the near term, the negotiation of double taxation agreementswith other member countries where such agreements do not exist.While some countries in the region, including South Africa andMauritius, have a range of such agreements, most countries do not.Such agreements are necessary to avoid punitive tax burdens thatcan easily choke off potential intra-regional investment.

� In the medium term, the coordination – or even elimination – ofwithholding taxes on cross-border dividend and profit flows.

� In the medium to longer term, the coordination of tax incentivesfor investment to limit ‘predatory’ taxation and harmful tax compe-tition. And:

� The possible adoption, in the longer term, of a (relatively low) mini-mum company tax rate in the region.

88 Jonathan Leape

JEN-03.QXD 3/31/00 10:10 AM Page 88

4Constraints on Foreign DirectInvestmentRichard Hess

89

4.1 Introduction

The 1997 Global Competitiveness Report produced by the WorldEconomic Forum (WEF) shows that the SADC region comes out verypoorly in terms of international competitiveness. The two largest SADCcountries were included in the WEF world competitiveness index,which is rated from �2.5 for a 100 per cent competitive country to�2.0 for a totally non-competitive country. South Africa was rated at�0.89, whilst Zimbabwe was rated at �1.42. Only Ukraine and Russiawere rated lower out of the 53 countries being surveyed. The 1997Executive Survey carried out by the WEF asked business respondents fortheir subjective judgements about the ten most competitive economies.Out of the 53 countries ranked, South Africa was ranked 38 whilstZimbabwe was bottom of the list at number 53. There is clearly a prob-lem for the SADC region in the perception of international investors.

Investment in Southern Africa over the last decade has been at insuf-ficient levels to launch the region into a phase of high economic growth.The flows of investment have also been highly variable. Investmentshave tended to be limited to a few specific sectors, and only a few ofthe member states have attracted regular inflows during this period.Table 4.1 shows the net foreign direct investment into the region inrecent years, and Table 4.2 reflects the levels of gross domestic invest-ment and fixed capital formation for the region.

Foreign direct investment (FDI) now represents a major source ofcapital in developing countries generally, in stark contrast to the situa-tion ten years ago. In 1986, out of a total world-wide FDI of US$85 bil-lion, less than US$10 billion (12 per cent) was into developingcountries. By 1995, over one-third of total FDI flows of over US$300

JEN-04.QXD 3/31/00 10:11 AM Page 89

billion was into developing countries. Not only has there been amarked increase in total FDI, but developing countries have been tak-ing a significantly larger proportion. However, even after the sharp rise in1995, when the region attracted FDI of US$1,773 million, SADC inflowsaccounted for less than 2 per cent of total FDI flows to developing

90 Richard Hess

Table 4.1 Net foreign direct investment inflows to SADC countries, 1990–6(US$m)

1990 1991 1992 1993 1994 1995 1996

Angola �335 665 288 302 170 250 300Botswana 95 �8 �2 �287 �14 70 75Lesotho 17 7 3 15 19 23 28Malawi – – – – 1 1 1Mauritius 41 17 15 15 20 19 37Mozambique 9 23 25 32 35 45 29Namibia 29 120 118 55 98 119 152South Africa �89 219 �41 �17 334 993 758Swaziland 30 83 83 70 56 26 13Tanzania – – 12 20 50 120 150Zambia 203 34 45 52 56 67 58Zimbabwe �12 3 15 28 35 40 63

Total �12 1,163 561 285 860 1,773 1,664

Source: Global Development Finance, 1998, World Bank; Balance of PaymentsYearbook 1998, International Monetary Fund.

Table 4.2 Gross domestic investment in 1996

Approximate value Per cent of GDPin US$m

Angola 1,792 22.7Botswana 1,190 24.1Lesotho 767 89.2Malawi 281 12.6Mauritius 1,079 25.1Mozambique 693 30.1Namibia 617 20.4South Africa 21,965 17.4Swaziland 381 32.1Tanzania 1,053 18.0Zambia 505 14.9Zimbabwe 2,205 25.9

Source: African Development Indicators 1998, World Bank.

JEN-04.QXD 3/31/00 10:11 AM Page 90

countries. The dramatic rise in FDI flows to SADC in 1995 and 1996(from US$860 million in 1994) was largely a result of the substantialincrease in investment in South Africa (itself related to the response ofcapital flows to political and economic reform). Between 1991 and1993, one SADC country, Angola, accounted for half the FDI into theSADC region. This apparent anomaly is due to the significant invest-ment in the oil sector in Angola.

In the period 1993–5 FDI and other private capital flows to sub-Saharan Africa amounted respectively to only 0.9 per cent and 0.1per cent of GDP respectively, compared to 1.1 per cent and 2.0 per centfor Latin America and 3.1 per cent and 2.5 per cent for East Asia.

This chapter assesses the constraints on investment in SADC.Appendix A2 gives information for each SADC country, covering theinvestment climate, the nature of the productive sector, infrastructure,an overview of the capital markets, and identifying specific constraintsto foreign investment. Investment incentives are detailed in AppendixA3. Each country has a specific set of constraints to foreign investors,unique to that country. However there are a number of constraintswhich are common to most countries, or are at least shared by a signif-icant number of the SADC countries. The main body of this chapterdraws together the most commonly faced constraints in the region. Itshould be noted that most of these constraints are faced equally byoverseas investors as well as by cross-border investors. However, thereis one significant difference between these two types of investors.Cross-border investors (usually South African) are less likely to be con-strained by political and to some extent economic instability in acountry than their foreign counterparts. This is because investors fromwithin the region are more used to the political vicissitudes ofSouthern Africa and have learned better to cope with the situation.

In identifying the constraints, it is clear that some stand out moresignificantly than others as major issues. We have identified five suchcritical issues. There are, however, a large number of other constraints,any one of which could prevent an investment from taking place. Anumber of these are also detailed below.

4.2 Significant constraints

4.2.1 Unstable political and economic environments

Probably the most significant factor, particularly for investors fromoutside the region, concerns the economic and political instability ofsome countries. Uncertainty about the future economic environment

Constraints on Foreign Direct Investment 91

JEN-04.QXD 3/31/00 10:11 AM Page 91

will cause investors to postpone investment decisions, as the irreversiblenature of direct investment makes an error extremely costly. (This issueis dealt with in detail in Chapter 2.) Even stable SADC countries sufferfrom some contagion effect, so that instability in one country affects all,albeit to a lesser extent. Investors from within the region can accept agreater degree of instability, both because they are more accustomed toit, and because they know that their future rests with the region.However, for extra-regional investors, who are free to invest anywhere inthe world, these problems are much more serious. This factor was identi-fied by the WEF in the recent Africa Competitiveness Report as thesingle most damaging problem in attracting investment to Africa. InZimbabwe, for example, general strikes, food riots, continuing high bud-get deficit, uncertainty over land tenure and reversal of some liberalisa-tion initiatives have caused a number of potential investors to canceltheir investment plans. A South African bank, for example, cancelledplans in 1998 to enter the Zimbabwean market, citing the lack of stabil-ity. Investment missions have also been postponed or cancelled. Datafrom the Zimbabwe Investment Centre show that the value of projectsapproved for investment in Zimbabwe has fallen significantly in 1998.Table 4.3 shows the average monthly investment in Zimbabwe.

Civil war in several SADC countries has continuing effects: there are alarge number of weapons in private hands, exacerbating violent crime.The high level of unemployment has also led to an increase in violentcrime and demonstrations. South Africa has a particularly high level ofviolence, notably in the economically strategic Gauteng area, which dis-courages investors. Other notable factors discouraging investment inSouth Africa are union militancy and rigidities in the labour market.

The single most important feature required to attract significantregional and foreign investment is a stable macroeconomic and political

92 Richard Hess

Table 4.3 Approved average monthlyinvestment in Zimbabwe, 1994–8 (US$m)

Approved averagemonthly investment

1994 58.91995 34.11996 79.81997 56.4Jan.–Apr. 1998 19.2

Source: Zimbabwe Investment Centre.

JEN-04.QXD 3/31/00 10:11 AM Page 92

environment. This includes stable rates of exchange, inflation andinterest. Governments need to be committed to protecting the interestsof those parties that invest in their countries. Policies planned for theeconomy need to be clearly stated, and deviations from a strategy shouldbe minimal. Interviews with investors reveal that it is better to haveslightly less than optimum policies than more optimal policies whichsuffer reversals. Investors need to have as much certainty as possible overthe future of the economy to enable an investment decision to be made.

4.2.2 Bureaucracy and inefficiency

Bureaucratic procedures which inhibit investment are still a majorproblem in most SADC countries. The more cumbersome the bureau-cratic procedures, the greater the chance for inefficiency and corrup-tion. Whilst improvements have been made in a number of countries,there is still a long way to go. These problems cover a number of areas,including the following:

1. Investment approval: many countries have established investmentcentres to facilitate investment licensing and approval procedures,but the list of aspects requiring approval is unreasonably long:licences and permits are often required for land, utilities, work andresidence, trading, foreign currency, investment (to qualify forincentives) etc. Although the investment centre often does its bestto help, it usually does not have the authority to issue permits, butonly to facilitate. It is the other government departments which areresponsible for issuing the permits where the delays occur.

2. Customs departments: investors want to know that they will haveco-operation from the authorities when importing their capitalequipment as well as their inputs. Customs departments are notori-ous for delaying imports due to bureaucracy and corruption.Sometimes the legislation does not facilitate procedures adequately.For example, in Zimbabwe, after the legislation had been enactedestablishing export processing zones, a number of EPZ permits wereissued to investors. This should have allowed them to import capitalequipment duty-free. However the customs department insisted onlevying import duties on the equipment in spite of the EPZ licencesbecause customs and excise legislation had not been amended toallow the duty-free importation. Transport of goods has also beenaffected by the increased diligence of customs officials in searchinggoods that are crossing borders, as governments look to maximisetheir revenue. The improved diligence has caused long delays for


JEN-04.QXD 3/31/00 10:11 AM Page 93

legitimate goods waiting to be cleared, as well as causing people toleave their goods at customs posts as they realise they will not beable to afford the tariffs that will be levied on them.

3. Inefficiency in government departments can also frustrate investors,who tend to have a much greater sense of urgency than civilservants.

Investment centres need to be given greater authority to issue per-mits and licences. Statutes of limitations should be given on otherdepartments to respond within a given time frame to applications sub-mitted for permits through the investment centre. After a short periodthe centre should be free to issue the permit, unless the departmentcomes back with formal objections. The same statute of limitationshould be given on the investment centre itself where it issues aninvestment certificate. This should be deemed automatically issuedunless the centre comes back with objections within the given timeperiod. This would greatly reduce bureaucratic delays, improve trans-parency and enable investments to happen in a shorter time frame.

All civil servants involved in aspects of investment facilitationshould be given training to enable them to work more efficiently.

Certain existing government functions could be privatised or mademore independent to improve efficiency. In the first year of operationsof a privatised customs department in Mozambique, revenue wasincreased by 15 per cent and efficiency was improved considerably.Where independent revenue authorities have been established, such asin Zambia and Tanzania, efficiency has increased as well as collections.Other countries should consider such schemes.

4.2.3 Lack of transparency

A lack of transparency in the decision-making processes regardinginvestment applications often generates corruption. This not onlyincreases costs of compliance to potential investors, but detracts fromthe best decisions. A lack of transparency in large transactions, like pri-vatisation agreements, has contagion effects on the rest of the economy.

In Zimbabwe for example, the award of a contract in the privatisationof a significant proportion of a power generation operation was very pub-licly influenced by the government. Two years after the award of the ten-der to a Malaysian firm, no investment had been made and the tenderhad not been ratified by parliament. Under mounting pressure the dealwas subsequently cancelled. This caused many ripples in the industryand in the investment climate in general. A similar problem was created

94 Richard Hess

JEN-04.QXD 3/31/00 10:11 AM Page 94

over the issuing of licences for operating a cellular telephone network.Government’s influence in the decision-making process and lack oftransparency gave very strong negative signals to potential investors.

Transparency can be improved by reducing bureaucracy, as indicatedabove. Greater freedom of the media (television, radio and the press)would allow public enquiry into irregularities. This is important inthose countries where the state dominates the media.

4.2.4 Inadequate infrastructure

This issue is dealt with more fully in Chapter 5. The implications forcross-border investment are summarised below.

4.2.4.1 Telecommunications

Although there have been improvements in telecommunications in anumber of countries in recent years, with the installation of cellularphone technology, fibre optic cable, digital exchanges and access toe-mail through the world wide web, the region generally still lagsbehind many other parts of the world, and communication generallyremains a hindrance. It can take a long time to connect with otherparts of the same country, let alone other parts of the world. In addi-tion, regional and international telephone calls are expensive com-pared to other parts of the world.

4.2.4.2 Transport

Road and rail networks are often in a state of disrepair, making thetransport of goods unreliable and often expensive because of delaysand high maintenance costs. For land-locked countries, it is often moreexpensive to get export goods to the seaport than to get them fromthe port to final destination, be it in Europe, America or Asia. The sameapplies to imports – the largest cost component is the inland cost.Sometimes these inland costs are high because of monopolistic prac-tices, but often it is due to the poor state of the road system, makingtrucking operations very expensive. Insufficient cargo and infrequencyof services are other factors contributing to high costs. Poor transportlinkages are also a deterrent to investors looking to serve the SADC mar-ket. It is not always easy moving goods within the region, from, say,Tanzania to Botswana, and underdeveloped countries like Mozambiquehave huge areas of land that are difficult to access because of poorroads. There is also a need to improve the integration of economieswithin individual countries. For example, Mozambique’s ZambesiaProvince is to a large extent cut off from the rest of Mozambique. This


JEN-04.QXD 3/31/00 10:11 AM Page 95

necessitates goods and produce from the Province to be transportedthrough Malawi to reach other provinces in Mozambique.

Flights between countries in the SADC region are becoming morecommon, although it is sometimes necessary to go through a majorhub such as Johannesburg to reach the final destination on the dayrequired. Intra-regional air transport is often still a constraint for busi-ness travellers.

4.2.4.3 Electricity and water

Whilst supplies of electricity and water are improving in most urbancentres within the region, there is still scope for considerable improve-ment in these areas. Countries where this applies in particular includeTanzania, Malawi, Mozambique and Mauritius. The inadequate pro-vision of such services often requires investors to install their ownfacilities, such as back-up generators. This is costly from a capital per-spective as well as operationally. Again the costs of business within theregion are increased.

Large investment in infrastructure is required in most SADC coun-tries. Adequate public capital is usually lacking. Privatisation of utilitiesand infrastructure should therefore be initiated or undertaken morequickly. This could cover all sectors identified above, including air-ways, airports, sea ports, railways, roads, telecommunications, water,electricity, etc. For example, South Africa has recently allowed privatetoll roads on main highways. Where full privatisation is not possible,other partnership possibilities between the state and the private sectorshould be developed, possibly on the Build, Operate, Transfer (BOT)concept. A new railway line is due to be built in Zimbabwe shortly insuch a partnership approach.

4.2.5 High taxation

By world standards, some SADC countries still have high levels of cor-porate and individual direct taxation (see Chapter 3), which acts as adeterrent to investors. Although incentive schemes have often beendesigned to reduce the tax burden, these are often difficult to adminis-ter, bureaucratic in operation and lacking in transparency. Whilst sev-eral SADC countries – for example, Zambia – have made good progressin reducing direct taxation, others need to follow the world trendtowards lower levels of direct taxation.

Along with a shift towards more indirect taxation there needs to bean increase in the efficiency of tax collection, which enables loweroverall rates to be applied (see Chapter 3 for details). The high costs of

96 Richard Hess

JEN-04.QXD 3/31/00 10:11 AM Page 96

investing regionally or internationally are reduced through the imple-mentation of double taxation agreements. Governments should seek toincrease the number of double taxation agreements that they have,thus increasing the incentives for investors into their countries.

4.3 Other constraints

4.3.1 Public ownership and weak private sector

In some countries emerging from strong public ownership of enter-prise, the private sector is underdeveloped and not well organised.Even in those countries with a longer tradition of private sector activ-ity, the business associations are still very often weak institutions,which cannot adequately support private sector developments. Thisrestricts the potential for investment from within the region and dis-courages investment from outside.

In several SADC countries, public ownership of enterprise is stillwide-ranging, even in those which have embarked on a privatisationprogramme. At the same time, whilst privatisation creates opportuni-ties for investors, the sluggishness with which privatisation is takingplace in some countries can be a disincentive, because of uncertainty.

Efforts should be made to strengthen the private sector representa-tive organisations within the SADC region and to educate the privatesector on the need for collective action.

The rate of implementation of privatisation programmes in the vari-ous SADC countries generally needs to be improved. The slowness withwhich it is happening often discourages potential purchasers, particu-larly foreign investors. Furthermore the privatisation process needs tobe handled in a very transparent manner (see above for examples).

4.3.2 Movement of persons

Visas are still necessary to enter many of the countries in the region. Insome cases the situation is deteriorating, such as with the recent impo-sition of visa requirements for British visitors in Tanzania and Zambiaduring the period 1997–8. Although it is often stated that the need forvisas is for national security and health reasons, it would appear that inpractice they are more often used as a source of revenue or as a retalia-tory measure.

Work and residence permits are difficult to access, again with theprocesses often not being transparent. If an investor cannot employenough expatriates to run an operation, adequately or if the process istoo lengthy, he or she will not invest.


JEN-04.QXD 3/31/00 10:11 AM Page 97

Governments should re-evaluate the visa requirements from poten-tial investment sources. A streamlining of processing of work and resi-dence permits needs to be undertaken. A statute of limitation method,as mentioned above in connection with investment centre procedures,should be instigated.

4.3.3 Investment transactions, money and capital markets

In most countries potential investors are restricted from cross-borderinvestment due to exchange control restrictions on outward move-ments on the capital account. The impossibility of trading in regionalcurrencies (with the exception of the SACU countries) at market-determined rates for investment transactions is a serious constraint onsuch transactions. Whilst some countries have liberalised extensively,such as Botswana, Mauritius and Zambia, most other SADC countriesstill maintain tight capital controls.

Capital markets in the region are underdeveloped. The mechanismsdo not generally exist for adequately mobilising funds, except in SouthAfrica, Mauritius and Zimbabwe. Newer and smaller stock exchangesnow exist in Malawi, Botswana, Swaziland, Namibia, Tanzania andZambia, with Mozambique looking to establish one in 1999. They are,however, still small and underdeveloped. There is very little cross-list-ing, except for Namibia and Johannesburg. South African corporates,on application, are permitted to invest up to R250 million per projectfor approved new investments in SADC. Companies are permitted duallisting on the JSE and other SADC stock exchanges, subject to theconsent of the South African Minister of Finance within the R250million limit.

Money markets are also underdeveloped in most countries, making itharder to raise finance domestically.

SADC countries which have not fully liberalised their exchange con-trol procedures should consider adopting a policy similar to the oneadopted by South Africa in 1997 whereby cross-border investmentsinto another SADC country are permitted without Reserve Bankapproval up to a given (realistically high) figure. Authorised dealerswould be permitted to make the foreign currency available, accordingto established documentary requirements. Investments above that fig-ure could then be referred to the Central Bank for authorisation in thenormal manner.

Stock exchanges are an important way of attracting foreign invest-ment. Companies should be allowed cross-listings on more than onestock exchange in the region, as is frequently the case with Namibian

98 Richard Hess

JEN-04.QXD 3/31/00 10:11 AM Page 98

listings and occasionally with others in the region, as well as listing onother exchanges outside the region. The existing initiative to standard-ise listing requirements among the stock exchanges within the regionshould be developed and extended. Other forms of cooperation, suchas that being developed by the regional association of stock exchanges,should be enhanced.

Development of money markets should be seen as a priority in thosecountries without adequate markets.

4.3.4 Product standards

There is a variety of product standards in the SADC region, with eachcountry often having its own standards, based on its own product test-ing and certification. National standards bureaux exist in most SADCcountries, and, until recently, they have worked very much on theirown without reference to neighbouring institutions. This often restrictsthe ability of a producer in one country to export to another country inthe region, where the product standards are different. The exporter hasto modify the production in such cases, which can be a costly andsometimes impractical requirement. This inhibits intra-regional trade.Currently a number of the Associations in the region lack adequate facil-ities for testing. The South African Bureau of Standards (SABS) is a signif-icant exception to this, with SADC countries sometimes sending theirproducts to SABS for testing. One of the problems encountered becauseof this is the degradation of the products during the transportation.

The development of common standards on safety and quality inthe SADC region would help level the playing field for investors in thedifferent countries and promote intra-regional trade as well as theacceptance of goods exported from SADC. The aim of the SADCStandardisation, Quality Assurance and Metrology programme is to:

� remove technical barriers to trade such as divergent regulations,� improve the quality of products manufactured in the region,� promote technology exchange between member states,� avoid duplication of work and strengthening member states’ com-

mon interest in standards quality assurance methods.

The programme has been coordinated through the member statesNational Standard Bureaux (NSBs). The priority areas for the NSBs havebeen:

� strengthening of existing standards institutions and establishingnew ones,


JEN-04.QXD 3/31/00 10:11 AM Page 99

� quality testing and development,� information exchange and training,� harmonisation of standards and certification schemes, although no

harmonisation programme has been put into place.

More attention needs to be given to this programme to implement thedecisions made at the regional level.

4.3.5 Small domestic markets

Domestic markets in SADC are generally small, which is a deterrent toinvestment. Most countries have small populations with a relativelysmall purchasing power, and a large percentage of the population aresubsistence farmers. In addition, the economies are often reliant onone or two sectors, which leaves people highly susceptible to dramaticswings in their income. The factor that most often precipitates thisswing in income is drought, as many of the economies are agro-based.Other factors include the price of minerals such as gold in South Africa,copper in Zambia and diamonds in Botswana.

Whilst the idea behind the SADC Protocol on Trade is to create aregional free trade area which would help overcome the problem ofsmall domestic markets, little progress has yet been made on imple-mentation of this protocol. The market constraints therefore still exist.This problem is most acute in terms of access to the South African mar-ket by the non-SACU countries. Preferential trade relations alreadyexist between many of the SADC countries, either under bilateralagreements or through COMESA, but not so with South Africa (withcertain exceptions).

There needs to be a speedy implementation of the SADC Protocol onTrade in order to create the larger regional market, which would inturn be more conducive to investment. For this to happen, those coun-tries which have not ratified the protocol should do so in the immedi-ate future.

4.3.6 Shortages of skilled labour

Despite an abundance of cheap labour in most of the countries there isa severe shortage of skilled labour and experienced management.

More resources should be put into skills-based training schemes toraise the level of skilled labour in each country. In order to retain man-agerial skills, the SADC countries should reduce the levels of direct per-sonal taxation. There is anecdotal evidence to show that the high taxlevels contribute to emigration, as people with high mobility seekemployment where they can have a higher standard of living.

100 Richard Hess

JEN-04.QXD 3/31/00 10:11 AM Page 100

4.3.7 Low productivity

Although it is often claimed that labour costs are low in the SADCregion, productivity levels are also generally seen as low compared toother parts of the world. When adjusted for productivity levels, labouris relatively expensive. Table 4.4 illustrates this point.

Some SADC countries, such as Botswana and South Africa, have estab-lished productivity centres as focal points for enhancing national produc-tivity levels. Other countries in the region should investigate establishingsimilar centres or seeing how best they can utilise the services of those inneighbouring countries to improve their levels of productivity.

4.3.8 Archaic legislation

In some countries the legislation covering investment, property rightsand company law is particularly archaic and not suited for modernbusiness. Legislative reform has been undertaken in some but not allSADC countries. Legislation governing companies and other businessoperations needs to be reviewed with the objective of streamlining andmodernising the regulative environment.

4.3.9 Land ownership

In Angola, Mozambique and Tanzania land is owned by the govern-ment, or there are severe restrictions on land ownership. Some coun-tries, such as Mauritius, prevent non-nationals from owning land.These restrictions on land ownership can discourage potential investors.

Land ownership and tenure legislation needs to be revised to reflectcurrent conditions. This often requires extensive investment in aspectssuch as surveying and production of title deeds. Where legislationrestricts ownership by non-nationals, consideration should be given totreating nationals from other SADC countries on national terms.


Table 4.4 Labour productivity in the manufacturing sector of selectedcountries, 1990

Value added (US$m) Employees Labour productivity

Bangladesh 1,887 991,690 1,903.1Chile 8,783 298,000 29,318.5Singapore 11,922 350,430 34,021.1South Africa 23,172 1,462,000 15,849.3Zimbabwe 909 214,400 4,239.7

Source: World Bank (1994).

JEN-04.QXD 3/31/00 10:11 AM Page 101

5Microeconomic PoliciesGavin Maasdorp

102

The major goals of microeconomic policy are efficiency, equity andgrowth. Economic growth is often treated as a macroeconomic issue,but it is closely related to the micro-behaviour of the economy and thefunctioning of markets.

5.1 Sensitive industries and employment effects

The removal of tariffs when a free trade area (FTA) is established has adifferential effect on sectors, sub-sectors and firms in each membercountry. Those sectors, sub-sectors and firms that are strong, efficientand competitive are able to exploit economies of scale in the enlargedmarket of the FTA and expand their output, while those that haverelied heavily for their existence on protection may be less able to com-pete in the FTA market.

The SADC Trade Protocol Study (Imani, 1997a) covering the then 12member countries identified a number of sensitive products in sectorsalready experiencing high effective protection. This was done on thebasis of: (i) the contribution of trade taxes on the particular product tocentral government revenue; or (ii) the social implications of the con-traction of labour-intensive industries or industries which were largeemployers; or (iii) the likelihood of the industry surviving the removalof tariffs. The main sensitive sectors were identified as follows, the rele-vant countries being listed in parenthesis:

� Clothing and textiles (Lesotho, Malawi, Mauritius, Mozambique,South Africa, Tanzania, Zimbabwe)

� Motor vehicles (South Africa, Zimbabwe)� Machinery (Malawi, Zambia)

JEN-05.QXD 3/31/00 10:12 AM Page 102

� Electrical machinery (Malawi, Mauritius, Tanzania, Zambia)� Paper (Mauritius, Tanzania, Zambia)� Beverages (Mauritius, South Africa, Tanzania)� Dairy products (South Africa, Zambia, Zimbabwe)� Meat products (Namibia)� Cereals and milling (Namibia, Zambia, Zimbabwe)� Sugar (South Africa, Swaziland, Tanzania)� Tobacco products (Malawi, Mauritius, South Africa)� Articles of iron and steel (Malawi, Mauritius, Mozambique, Zimbabwe)� Furniture and medical (Malawi, Mozambique, South Africa, Zambia)� Footwear (Lesotho, South Africa, Zambia, Zimbabwe)

No sensitive products were identified in Angola because of the virtualdevastation of the productive system. Employment effects were notquantified for any countries, and sensitivity in fact amounted to acombination of the second and third categories, namely, the capacityof the industry to survive regional competition once the free trade areacomes into being, with resultant job losses.

The Imani (1997a) study, since it dealt specifically with the tariffreduction schedule, did not identify industries or sectors with thepotential to expand under conditions of SADC free trade. Evans (1997)covered a wider canvas. He finds that customs revenue losses would beconcentrated on four countries (Malawi, Mozambique, Zambia andZimbabwe), but that trade creation and stimulation of demand wouldlead to increased local production, and that this would contribute toemployment growth. Table 5.1 presents Evans’s estimates of the impactof the SADC FTA on employment by sector in the SADC member states(treating SACU as a single ‘country’, because only aggregate trade datafor the customs union are published). These estimates are derived froma simulation of the effects of the FTA on domestic demand and supplyof importables; imports and exports from SADC and the rest of theworld; the balance of payments; employment; and customs revenue.There are several caveats regarding the quality of data and the assump-tions underlying the model – these are explained in the study and wesuggest that these estimates be treated with some degree of caution.

Evans runs two simulations of the FTA. One assumes zero growth (inboth SADC and the rest of the world) and zero improvement in theterms of access to extra-regional markets. The other assumes 3 per centgrowth with a 3 per cent increase in access to world markets. The fig-ures presented are based on the zero growth scenario and therefore canbe thought of as representing a ‘worst-case’ outcome. Evans notes that

Microeconomic Policies 103

JEN-05.QXD 3/31/00 10:12 AM Page 103

104

Table 5.1 Estimates of effect on employment of the SADC FTA, in per cent

Agriculture Mining Food, tobacco Textiles Clothing Other Totaland beverages manufacturing

Angola �0.09 0.00 0.16 �0.29 �0.08 0.01 �0.03Malawi 0.01 0.00 0.77 �0.56 �0.49 0.51 0.10Mauritius �0.40 0.03 0.55 2.69 0.03 0.48 0.12Mozambique 0.18 0.00 0.14 �0.07 �0.11 0.44 �0.03SACU 0.01 0.00 0.31 0.65 0.29 �1.08 0.10Tanzania 0.01 0.00 0.18 �0.09 0.00 0.14 0.01Zambia 0.09 0.01 0.14 �0.23 �0.20 0.21 0.00Zimbabwe 0.25 0.03 0.75 �0.79 �0.08 1.28 0.33

Source: Evans (1997).

JEN-05.QXD 3/31/00 10:12 AM Page 104

in the positive growth scenario, employment effects are swamped bythe impact of one year’s growth.

In total, only two of the SADC countries are expected to experience afall in employment as a result of the FTA: Angola and Mozambique.However, these falls are small – less than 0.1 per cent – and far fromevenly spread across the sectors. Zimbabwe is expected to enjoy the mostsignificant job creation, with employment increasing by 0.33 per cent.

Job losses are generally most likely to occur in the textiles and cloth-ing industries. In textiles, six of the eight ‘countries’ are expected toexperience job losses, while Mauritius and SACU benefit from expan-sion. Indeed, Mauritius is estimated to benefit from a 2.7 per centincrease in employment in this sector. Similarly, for clothing, five ofthe eight are expected to suffer a fall in employment – here SACUappears likely to benefit most, although the increase in employment of0.3 per cent is relatively small.

Job creation across all of SADC is most significant in the food,tobacco and beverages sector, with increases in employment rangingfrom 0.14 per cent (in Mozambique and Zambia) to 0.77 per cent inMalawi. Job creation is also generally expected in the sector labelled‘other manufacturing’, with the notable exception of SACU, which isestimated to experience a 1.1 per cent decline in employment. Zimbabweis the main beneficiary, with a 1.3 per cent increase. In general, smallincreases in employment are expected in the agricultural sector (withthe exception of Angola and, more notably, Mauritius). Job creation inthe mining sector is estimated to be negligible for most countries – thisis unsurprising given that nearly all of SADC mining trade is with therest of the world.

A useful perspective on these employment effects is provided by acomparison with the effects of trade liberalisation during the structuraladjustment period. The impact of structural adjustment on employ-ment, shown in Table 5.2, has been generally stronger than that esti-mated for the FTA (although by sector, this is not necessarily the case).This is not unexpected, given that these reforms have liberalised tradewith the rest of the world, rather than with a subset of regional part-ners. More importantly, they suggest a large part of the adjustment(both negative and positive) that might have been expected to takeplace as a result of regional free trade is likely to have taken placealready, due to the progress made on trade liberalisation as part ofstructural adjustment.

In summary, the FTA is expected to have small but positive effects foremployment, although it is a cause for concern that the two exceptions


JEN-05.QXD 3/31/00 10:12 AM Page 105

106

Table 5.2 Estimates of effect on employment of the SAP period, in per cent

Agriculture Mining Food, tobacco Textiles Clothing Other Totaland beverages manufacturing

Angola 0.00 0.00 0.00 0.00 0.00 0.00 0.00Malawi �0.12 0.00 0.38 �0.05 �0.01 1.35 �0.08Mauritius �1.14 0.00 0.16 0.21 �0.01 2.88 �0.19Mozambique �2.76 0.00 0.05 0.00 0.00 0.87 �0.03SACU �0.12 0.01 �0.10 1.07 1.15 0.59 0.21Tanzania �0.04 0.02 0.12 0.00 0.00 0.43 �0.23Zambia �1.30 0.08 0.11 0.00 0.00 0.59 0.07Zimbabwe �0.63 0.33 0.61 �1.49 �0.05 4.64 0.56

Source: Evans (1997).

JEN-05.QXD 3/31/00 10:12 AM Page 106

to this generalisation – Angola and Mozambique – are amongst thepoorest countries in the region in terms of GNP per capita. Even forthose countries that expect to experience the largest employmentgains, there will be some adjustment difficulties in certain sectors(most commonly textiles and clothing). This finding, in particular,emphasises the need for strategies to help displaced workers move intogrowing sectors.

A study for the government of Malawi on the effects of SADC freetrade on the national economy (Imani, 1997b), however, was not assanguine as Evans. Although it did not quantify the employmenteffects, it produced a lengthy list of sensitive industries. ‘Very sensitive’industries which would not survive competition in the FTA includedtobacco products; some wood, maize and engineering products; textilesand apparel; and rubber and rubber products. Their closure wouldresult in major adverse effects on employment. ‘Quite sensitive’ and‘sensitive’ industries which would lose market share and competitive-ness, with consequent adverse effects on employment, included woodand wood products; extruded vegetable oils; soaps, detergents and likeproducts; maize and maize products; engineering products; plasticproducts; leather products; pharmaceuticals; processed tea products;ethanol; food processing products; some beverages and alcoholic spir-its; and packaging materials. This list is considerably longer than theone shown by Imani (1997a) and indicates that in-depth country stud-ies might reveal a greater incidence of product sensitivity than moregeneral studies covering only the most important traded products inSADC as a whole. The results of these studies do not enable us toattach any numbers to the possible adverse employment effects, butcognisance must be taken of the possibility that they could be signifi-cant in some countries, sectors, sub-sectors and firms.

In any event, it is clear that the contraction of sensitive sectors is likelyto have some significant adverse social effects in terms of job losses andhence increased poverty. Microeconomic policies, therefore, need to bedevised in order to mitigate any transitional employment effects.

In an FTA each member country should be better off, but at a mini-mum no worse off, than it would have been had it not joined. This isto ensure that the FTA is seen to be distributing net gains to each coun-try, or at least not impoverishing any member country. If all membersare to benefit, then free trade must be accompanied by other policymeasures which will stimulate investment and growth of output andemployment in all countries. Since unemployment and underemploy-ment are serious socio-political problems throughout the region (except


JEN-05.QXD 3/31/00 10:12 AM Page 107

in Mauritius), measures to mitigate the effects of job losses are impor-tant. The firms that are sensitive and could lose jobs may require assis-tance in meeting competition and surviving the phasing in of freetrade, while the displaced workers may need to be helped to find othersources of employment and income.

Countries should constantly work on how to become internationallycompetitive. The rapid changes in, and development of, the globalenvironment make it more and more difficult to enter the market.Those industries or countries hesitating on the sidelines will constantlybe playing ‘catch-up’ as resources, machinery and technology becometoo costly to elevate them to the same level as that of the leaders.

Support for industries with the potential to become competitive can-not be delayed. Restructuring of this type of industry includes: anacceptable environment in which to operate; human resource develop-ment; and financial support for capital investment. Skills developmentwill be accelerated in some of the SADC countries through traininglevies imposed on all companies. Industrial training boards are beingupgraded with the latest training methods and equipment in order to‘multi-skill’ the workforce.

Although the world no longer tolerates the protectionist measures orincentive packages introduced pre-WTO, it is permissible to allowdomestic companies to import their inputs duty-free, so as to enablethem to compete with hostile imports.

Supply-side constraints are significant in retarding responses fromproducers to greater competition in regional markets. Appropriate mea-sures for alleviating these constraints relate to the provision of physicalinfrastructure, education and training, and finance; the transfer oftechnology and information; and market development activities.Sectors, sub-sectors and firms which a member country might havedeveloped under protectionist policies, but in which it has no compar-ative advantage under free trade, will be likely to contract and shedjobs, and measures would be required to retrain displaced workers andto find alternative jobs for them through, for example, the develop-ment of micro-, small and medium enterprises.

In most SADC countries manufacturing industry is poorly developedand production capacity is limited. Manufacturers face a variety ofproblems (Kritzinger van Niekerk, 1997):

� the absence of backward and forward linkages in the domestic mar-ket because of a lack of industrial diversification,

� a lack of market information,

108 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 108

� a relative absence of modern technology and a limited capacity toabsorb such technology anyway,

� poor and unreliable key infrastructural services such as transport,telecommunications and electricity,

� Limited managerial and technical skills.

Thus, manufacturing often tends to be high-cost despite relatively lowwage rates. Supply-side measures in the first instance have to be intro-duced by the government, but there is scope for regional cooperationin the provision of such measures, for example, in marketing, the pro-vision of information, R&D and the promotion of joint venture invest-ments. Although the issue of managerial and technical skills is relatedto the education system in the particular country, there are possibilitiesfor regional cooperation in human resource development especially atthe level of post-school training.

Job losses could also occur in the public sector: where an FTA leads toreduced customs revenue, governments might have to reduce the publicsector unless they are able to find sufficient alternative sources of rev-enue. In most SADC countries the public service has been a source ofnew employment. The failure of the private sector to create jobs rapidly,for a wide variety of reasons, including an unfavourable macroeconomicpolicy climate, has exacerbated the political pressures on governments touse the public service as a mechanism for creating jobs and dispensingpatronage. With the introduction of structural adjustment programmes(whether at the behest of the Bretton Woods institutions or home-grown)has come the admission that the public service is bloated and needs to bereduced (the so-called ‘downsizing’ or ‘rightsizing’). In many countriespersonnel remuneration is the major item in the recurrent budget and isregarded by the IMF as accounting for an excessively high proportion oftotal government recurrent expenditure. Thus, in terms of structuralreform, there is considerable pressure on governments to reduce numbersand total salaries in the civil service. This is politically difficult for gov-ernments and raises the question of how to absorb those who are maderedundant. The SADC FTA may exacerbate these pressures, since any lossof customs revenue on intra-SADC trade will further constrain govern-ment spending. A closer examination, however, reveals that the impactof SADC free trade on public service employment will not be severe: itwas shown in Chapter 3 that the revenue effects of the FTA will probablybe too small to result in the significant downsizing of the public sector.

The remainder of this chapter deals with measures directly aimed atemployment and labour, as well as with measures that, by enhancing


JEN-05.QXD 3/31/00 10:12 AM Page 109

the ability of a country’s industries to compete effectively in theregion, indirectly mitigate employment effects.

5.2 Mitigating the effects of job losses

5.2.1 Micro-, small and medium-sized enterprises

Most governments in the region have programmes for the developmentof micro-, small and medium-sized enterprises (MSMEs). Inclusion insuch programmes would be one possible way of retraining civil servantsas well as private sector employees who are made redundant. Variousprogrammes are available in different countries of the region to assistindividuals wishing to establish MSMEs in agro-business, manufactur-ing, construction, distribution, tourism, retail and transport. Trainingin business management, the provision of credit and assistance withmarketing are some of the components of such programmes. Theinvolvement of financial institutions should be sought in the fundingof such programmes. In Namibia, for example, commercial banks havediscovered that their neglect of the small business sector in the past haslost them a profitable business opportunity, and that there is good busi-ness to be done through extending credit and providing training tosmall operators. However, banks must be left to make loans on strictlycommercial criteria if widespread default is not to occur.

All SADC countries regard the growth of the MSME sector as impor-tant, and all have programmes which focus on the provision of financeand technical resources. However, there is no clear picture of thenature and character of MSMEs regionally (SADC, 1997: 19). It is notknown, for example, what is the relative contribution of micro- andsmall-scale enterprises in each national sector. Moreover, there doesnot seem to be a clear picture of the prioritised needs of enterprises:the main emphasis is on access to credit, whereas the success of smallenterprises usually depends on a range of inputs tailored to the charac-teristics of the operator and the industrial sector. MSMEs (particularlythe smallest enterprises) have the advantage that they frequently con-sist of individuals or family members and hence are not bound by reg-ulations or industrial relations machinery. However, they face anumber of disadvantages: because of the lack of economies of scalethey are unable to purchase in bulk and hence pay more for inputs,which in turn affects the price of their products; they have limitedmarket exposure and this affects the quality and design of their prod-ucts; they lack expertise and skills in management, book-keeping andmodern business methods; they lack market information; transport,

110 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 110

distribution and marketing of their products are frequently difficultand costly; and volume constraints mean that they are usually unableto export and instead depend on local markets.

In Southern Africa many governments have programmes to provideessential infrastructural inputs such as electricity to MSMEs. Non-governmental organisations (NGOs) also have programmes for develop-ing the MSME sector, but this is a field which has been littered withfailures for the last decade or two. There is a high rate of turnoveramong NGOs in this area, and many of the programmes which aredeveloped may not survive once the particular NGO project period haselapsed. Some agencies have been more efficient than others, but theplethora of public and private sector financing schemes being operatedin most countries calls for some consolidation at a national level. Therecould be some benefits from coordinating the various efforts in order toensure that all sections of the market are adequately served and that theprogrammes are sustainable.

According to SADC (1997: 20), worldwide experience is that the prob-ability of starting a successful MSME is small. Clearly, therefore, strate-gies to mitigate the adverse employment effects of the FTA should notbe limited to the MSME sector.

5.2.2 Assisting the private sector

The private sector may be assisted by appropriate policies to faceincreased competition within an FTA. In addition, the obvious placefor employment creation for displaced workers is the conventional pri-vate sector. An economic policy environment which encourages busi-ness activity is essential. In broad terms, this should include theprivatisation of public enterprises, deregulation complemented by aclear competition policy and an industrial policy which is clearlyenunciated. These are all important if there are to be open markets,and if trade (domestic and foreign) is to be an engine of growth.According to SADC (1997), the most coherent industrial policies in theregion are found in South Africa, Mauritius, Namibia and Botswana,and the least coherent in Malawi and Tanzania.

A clear policy to attract foreign direct investment is also essential.This is dealt with in Chapter 4, but it is noted here that, if the SADCregion is to compete for scarce foreign investment, the process of estab-lishing a new business in the region must be simplified and speededup. This includes the establishment of a one-stop shop to assist poten-tial investors, process applications, issue licences, grant temporary resi-dence permits for skilled personnel and assist with important itemssuch as housing and schooling.


JEN-05.QXD 3/31/00 10:12 AM Page 111

The role of organised commerce and industry is vital in achievingsuccessful economic growth. Chambers of commerce and industry arecommon throughout the region, but their level of sophistication andcompetence varies greatly, and this is one of the crucial fields callingfor donor financial and technical assistance. Business associations needto be strengthened in some SADC countries. Cooperation facilitated bySADC structures would help this process: it is important to arrangeencounters between business groups (like chambers of commerce andindustry) to encourage the exchange of information, develop institu-tional capacity and provide a forum for dialogue between the privatesector and both national and regional policy-makers. Organised busi-ness needs to be able to play a full role in dialogue with government,rather than simply acting as a lobby group.

A series of regional industrial location studies (RILS) (listed in theReferences) has been prepared on a country-by-country basis for theSADC region. These studies have been useful in identifying those prod-ucts and sectors in which each country enjoys a comparative advantage.Opportunities for investment were identified in physical infrastructure(Angola and Mozambique); oil and diamonds (Angola); agriculture andagro-industry (Angola, Malawi, Mozambique, Tanzania and Zambia);fishing (Mozambique); forestry (Mozambique); textiles and clothing(Malawi, Tanzania and Zambia); building materials (Tanzania);footwear (Malawi); leather products (Tanzania); fertiliser (Malawi andTanzania); and wood and wood products (Malawi). A range of mineral-based industries offer opportunities in Zambia while mineral depositsin Malawi remain unexploited. In Mozambique there are opportunitiesfor re-establishing a range of manufacturing industries. It must benoted, however, that whereas the RILS for Malawi identified compara-tive advantages in textiles and clothing, footwear and leather products,and wood and wood products, the Imani (1997b) trade study forthat country found these to be sensitive products which would eithernot survive competition in an FTA or lose market share and competi-tiveness. The difference in results might perhaps be explained by thefact that the latter study was based on in-depth interviews with firmswhile the former was limited to analysis of official documents andstatistics.

It appears, therefore, that there is scope for further work in identify-ing opportunities for industrial investment in the various SADC coun-tries. The Development Bank of Southern Africa funded the RILS series,and both it and the African Development Bank could well considerfollow-up studies. Information of the type contained in the RILS report

112 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 112

needs to be made available to potential investors, both in and outsidethe region. Again, the DBSA and ADB could play a role here, togetherwith SADC, whose structures could be used to build regional databasesin key sectors, and to collate and update information of use toinvestors, importers and exporters.

The largest losses in employment are expected to be in the so-calledsensitive industries, identified in section 5.1 above. The detailed tariffreduction schedule which is ultimately agreed upon should allow sen-sitive industries in each country to take steps over a period of time tobecome competitive in the FTA. This might, of course, involve someshedding of jobs, especially at the level of factory workers. The ten-dency throughout the region has been to leave those displaced bycompetition to their own devices. The firms endangered by the SADCFTA should be relatively easily identifiable, however, and governmentlabour offices could work in close collaboration with the companies toformulate retraining programmes if necessary or facilitate the redeploy-ment of displaced workers in industries which expand as a result of freetrade. Special schemes to retrain such workers to provide them withskills to enter industrial employment elsewhere in the economy wouldbe helpful. To finance this, a social fund along the lines of that oper-ated in the EU could be established, with contributions from govern-ments and firms to retrain displaced workers (see Chapter 7). Thefunding of retraining may be limited to a specific period, say, the first15 years after the ratification of the trade protocol, when protection ofsensitive products would be withdrawn. This fund, of course, couldalso apply to displaced civil servants. The asymmetric phasing in of tar-iff reductions between South Africa and the rest of SADC would alsohelp ease the potential displacement of workers from industries insmaller countries if these are unable to compete with South Africanmanufacturers. Ultimately, however, those firms which cannot becomecompetitive will have to be allowed to die.

Industries in the poorer countries of SADC will also be assisted bythe adoption and implementation of a uniform competition policythroughout the region. Competition policy should be unambiguous andcoherent, and should be aimed at preventing abuses arising from theFTA in which national markets will be opened to producers throughoutSADC. A recent example of a case which would have been avoided hadstrong competition policy been in force in the countries concerned isthe beer dispute between Namibia and South Africa. Technical assis-tance for the development of an appropriate legal structure and also forstaff training would be important in implementing competition policy.


JEN-05.QXD 3/31/00 10:12 AM Page 113

5.2.3 General labour market conditions

In all SADC countries except Mauritius, employment growth in thewage sector of the economy has not kept pace with the annual netaccretion to the labour force. Those who have not been able to obtainformal wage jobs have been absorbed into the traditional (subsistence)agricultural sector or the informal sector, or have become openlyunemployed, the rates for which are commonly put at 20–30 per cent.The concept and measurement of unemployment is itself a controver-sial issue in the literature, but suffice it to say that in the mainlandSADC countries all governments have accorded a priority to job cre-ation and the reduction of open unemployment.

A competitive market economy implies that all factor markets,including the labour market, ought to be competitive. Any nationallegislation which restricts the operation of supply and demand in thelabour market introduces rigidities; for example, if minimum wage ratesare set at levels exceeding the average product of labour, or conditions

114 Gavin Maasdorp

Competition policy

Competition policy should not penalise firms which have establishedmarket dominance as a result of good management and economicefficiency. It should prevent various forms of restrictive behaviourand economic abuse arising out of market dominance.

It should not aim to eliminate bigness per se; there might well beinstances where concentration is essential for the global competi-tiveness of a Southern African industry. It should aim to eliminateeconomic abuses which may stem from bigness.

It should:

� provide an institutional structure which combines the judicialright to appeal with an investigative and administrative body,

� ensure independent decision-making on the basis of the policyprinciples,

� provide for removing discretionary authority which may be sub-ject to political pressure,

� establish a Competition Tribunal to grant interdicts to protect vic-tims of restricted competition pending the outcome of a trial,

� provide for an independent Competition Board with powers toinvestigate and prosecute, powers of surveillance of monopolypricing practises, and powers to intervene in mergers.

JEN-05.QXD 3/31/00 10:12 AM Page 114

of employment are excessively out of line with other countries at simi-lar levels of economic development, this tends to raise the cost of labour,reducing both job creation and exports. A country with a labour marketcharacterised by a supply of workers exceeding demand, as is the casein mainland SADC countries, should theoretically enjoy a comparativeadvantage in the production of commodities requiring large inputs oflabour, but with labour market rigidities, the market fails to clear withresultant unemployment.

South Africa’s relatively high labour costs give neighbouring coun-tries an opportunity to attract labour-intensive industries. SADC (1997)quotes a manufacturing survey in Botswana which found thatBotswana had an advantage over South Africa in relation to real costsof labour and the lower frequency of labour unrest. These were suffi-ciently important to investors to more than offset the lower output perhead. This advantage may be undermined by the mooted ‘social clause’in the FTA, which aims to regionalise wages and labour standards athigher (South African) levels. While it is important that the rights ofworkers be protected, national wages need to be in line with nationaleconomic conditions and not with South Africa’s standard of living.

Differential wage rates in SADC is one way of developing greatertwo-way trade between South Africa and the rest of SADC, reducingSouth Africa’s large trade surplus with the region and making thedevelopment goals of SADC easier to achieve.1 Moreover, if wages wereto be regionalised at the existing South African levels, Southern Africaas a whole would be internationally uncompetitive as a location forinvestment in labour-intensive industries.

5.3 Human resource development

Almost all SADC countries are experiencing difficulties in the develop-ment of their human resources. Some countries are struggling to main-tain overall standards of education and training and to find theresources to finance education and training at all levels in the face ofgrowing numbers of pupils of school-going age and young people oftertiary education age. For some SADC members, the education sectoris declining at the very time when the growth of world trade and thedevelopment of the information superhighway are making the qualityof human resources even more important for countries engaging inexport development than hitherto.

To benefit from the SADC FTA, the development of human resourceswill be important in helping each country to enhance competitiveness


JEN-05.QXD 3/31/00 10:12 AM Page 115

by raising its levels of productivity. Some countries in the region sufferfrom a shortage of highly trained professionals, managers, officials andtechnicians, and the skills which are available are often not utilised opti-mally because of political, social and economic constraints. Better man-agement and administrative skills can come with improved educationand training, which also promotes scientific and technological capacity.

Studies in developing countries have shown that, within the educa-tional sector, expenditure on primary schooling should be the priority,as it generally yields the highest social rates of return. In fact, full pri-mary schooling is not necessary to enhance economic growth andequity. Wood (1994) has found a positive relationship between expendi-ture on basic education (literacy and numeracy) and the growth ofnon-traditional manufactured exports. In an analysis of the growth ofNorth–South trade (i.e. trade between developed and developing coun-tries), Wood argues that trade liberalisation can yield improvements inboth economic growth and equity in the distribution of income, partic-ularly where it encourages manufactured exports and raises the demandfor low-skilled labour. The provision of basic education is crucial indeveloping exports of manufactured goods, and Wood argues that edu-cation and training are necessary for lowering the proportion of low-skilled workers in the population, which both raises wages at the lowerend of the skills range and facilitates sustained economic growth.Improving human resources is therefore important for long-term growthand equity: by improving the skills of the workforce, countries are ableto improve average labour productivity; improve the relative wages oflow-skilled workers (as they become more scarce); and change the com-position of manufactured exports towards more skill-intensive products(as long as skill levels are improving relative to other countries).

Wood raises several caveats to these findings. Most important, hepoints out that, where countries have a low ratio of human to naturalresources, they will not normally export manufactures. This is particu-larly relevant for many of the SADC members. For these countries,improving the ratio of human to natural resources to such an extentthat it creates a comparative advantage over other countries in the pro-duction of manufactured exports may be difficult (Wood, 1994: 339).Also, where the proportion of illiterates in the population is large, tradeliberalisation may well have an ambiguous effect on inequality, since ittends to improve the wages of low-skilled labour relative to a largenumber of illiterate workers. This suggests that, where literacy levels area cause for concern, a first step should be to improve the coverage ofbasic education, before improving the skill levels of the educated.

116 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 116

Much of the human resource development which is necessary inSADC will be undertaken at a national level, particularly if the focus isto be on basic education: each country has its own education andtraining system as well as programmes with elements unique to it.However, there are certain avenues in which there is scope for regionalcooperation.

At the level of schooling, SADC governments with insufficientresources to train teachers and expand facilities should consider the useof audio-visual technology instead of teacher-intensive education. Suchtechnology has been developed in South Africa using highly trainedteachers, and the lessons could be purchased by other SADC countries,thus providing pupils with quality teaching and reducing the need forexpenditures on specialist teachers and, in some cases, expensive labo-ratory and other equipment. The broadcasting of lessons on nationaltelevision will also enhance human resource development. At the ter-tiary level, scope for regional cooperation occurs mainly in those facili-ties which are very expensive to establish and are consequently notaffordable by some countries, especially those with small populationswhere economies of scale cannot be realised.2

Outside of educational institutions, on-the-job training at a regionallevel is provided by the head offices of South African companies (ormultinational corporations with their regional head offices in SouthAfrica) for their subsidiaries in neighbouring countries. Public enter-prises such as Spoornet also provide training for neighbouring coun-tries. It would be helpful if SADC-wide standards could be set foron-the-job training and apprenticeship, and if regional bodies could beestablished for accreditation of professional standards.

5.4 Transport and communications

Since its inception SADC has given priority to investment in transportand communications, recognising that the efficient movement of peo-ple, goods and services is the key to successful regional cooperationand integration. Despite its efforts, however, transport and communi-cations problems are still found and represent a major barrier affect-ing in particular the competitive position of the smaller landlockedcountries.

It is absolutely vital for the success of a SADC FTA that these prob-lems be overcome since intra-regional trade quite obviously dependson transport and telecommunications: goods have to be moved acrossborders, and business deals have to be struck via telecommunications


JEN-05.QXD 3/31/00 10:12 AM Page 117

and intra-regional travel. Unless the flows are efficient and fast, tradewithin SADC will be seriously impeded.

5.4.1 Surface transport

A particular onus rests on maritime countries which, by definition,have to serve their landlocked neighbours dependent for their overseastrade on port, road and rail networks to the sea. The landlocked coun-tries, in turn, frequently offer important transit routes for through traf-fic between other landlocked countries and a maritime country,Botswana being a case in point.

What is required is a clear policy at a SADC level with all govern-ments committing themselves towards establishing efficient inter-modal competition. It is important that the efficiency of cross-bordertransport be maximised while simultaneously minimising the invest-ment in physical infrastructure given competing demands on theexchequer in all countries of the region and the need to keep foreigndebt within bounds (unless physical infrastructure is privatised).Efficiency implies keeping total delivered costs as low as possible. Themain component of total delivered costs is the freight rate itself, theothers being trans-shipment charges, storage and distribution charges,losses through damage and pilferage, and elapsed time from themoment of delivery to the transporting agency to the moment ofdelivery to the consignee.

The three modes which should compete for cross-border traffic inthe region are road, rail and sea (omitting for the present air transportwhich is limited to very specific cargoes). The policy priority should beto allow the three modes to develop to their maximum efficiency con-sonant with considerations of public safety and the environment. Roadhaulage and ocean shipping are in the private domain, railways andports are not, and a priority should be to privatise these operations.The potential exists for competition between private road hauliers anda private regional railway.

The declining standards of most national railways has led to under-utilisation of this mode and the loss of traffic to road. Rail infrastruc-ture needs rehabilitation and/or upgrading in most countries, and it isclear that the continuation of a situation characterised by national rail-ways of differing efficiency and capacity will militate against the abilityof rail transport to compete in terms of service with road hauliers.

For rail, one solution to improving cooperation is to establish a‘Southern African Rail Corporation’ (SARC, for purposes of convenience).All governments in countries which have railway systems could each

118 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 118

have, say, a 3 per cent shareholding in the corporation, making a totalof about one-third of the equity with the balance of two-thirds beingheld by private interests. The SARC could be responsible for all cross-border traffic, while privatised national railways could be responsible fordomestic traffic. There are various options regarding ownership andoperation of the track since parts of the track would be used by both theregional and individual national railways. However, it is clear that aregional railway would be the best way of providing a seamless servicewith through rates and a minimisation of trip time, obviating the pre-sent system of changing crews and locomotives at the border. The ques-tion is whether the SARC would be a monopoly or not, and the answerappears to be negative. It would have to compete with road transportfor business, and there would be competition between the SARC andindividual national railways; for example, for South African trafficbetween Johannesburg and the ports, the SARC would operate on theJohannesburg–Maputo route (cross-border), but it would face competi-tion from the Johannesburg–Durban route operated by Spoornet.

Although the idea of SARC has been mentioned from time to time,particularly by Spoornet officials, there is no public document and it hasfound little support in the face of the ‘national flag carrier’ syndrome:countries regard their national railways as sacrosanct and are unwillingto yield sovereignty to a regional railway. However, a Southern AfricanRailways Association (SARA) was formed in 1996 to deal with govern-ments. SARA in the medium term may offer some of the benefits whichhave accrued in the USA from the formation of the Association ofAmerican Railroads (AAR). The AAR is now a key element in the effi-ciency of the US rail system, offering services to all railways includingstandardisation of procedures, documentation, interlining arrangements,leasing of track and rolling stock, and the definition of technical stan-dards. The main function of the SARA is to lobby governments onchanges in transport policy, particularly with regard to providing equaloperating conditions for road and rail. Some progress, however, is beingmade towards the provision of a seamless service which is a basic com-ponent of a regional plan adopted by the Southern African RailwaysChief Executives’ Conference. Customers now have to deal with onlyone railway for all issues pertaining to the particular consignment.Through rates are quoted on the basis of ‘what the market can bear’.Railways are negotiating on a bilateral or corridor basis about improvingcross-border operations such as crew changes, the introduction of jointwagon inspections and even single inspection points, and the use of themost cost-effective interchange points. These measures have already led


JEN-05.QXD 3/31/00 10:12 AM Page 119

to a decline in overall transit times and wagon turnaround times. Thistrend will be enhanced by the standardisation of infrastructure, equip-ment and maintenance practices which have been accepted.

The tendency has been for traffic to move away from rail to road.This is a worldwide trend and, indeed, many categories of goods arebetter suited to road transport. Southern African railway administra-tions acknowledge this fact. However, the increase not only in the vol-ume of road traffic but also in gross vehicle mass (GVM) and axle loadsover the last 20–25 years is quite out of line with the standards towhich the regional road network was built, thus leading to severe dam-age to pavements. The GVM allowed in the region is significantlyhigher than that in Western Europe and North America, and this is dif-ficult to justify for a region consisting of poor countries since it meanseither (a) continued rapid deterioration of the road surface, especially ifit is accompanied by overloading (which is inadequately policed in allcountries), or (b) complete reconstruction of the regional trunk roadsystem to standards sufficiently high to cater for the GVM and the vol-ume of traffic. The cost of building an adequate regional trunk systemwould be considerable and should be weighed against the benefits tobe gained from an efficient intra-regional railway.

The main policy problem in road–rail competition is the failure tointroduce equal operating conditions (involving a withdrawal of subsi-dies and the levying of user charges sufficient to recover at least the fullcost of using the particular facility) for the various modes. Road hauliersat present are not charged the full user costs because of inadequate roadpricing policies, and it is of critical importance that these charges belevelled in such a way that full costs are recovered. Correspondingly, allsubsidies to any of the modes need to be abolished.

Permissible axle loads and GVM need to be reduced and the controlof heavy vehicle overloading requires considerable tightening up. Inmany SADC countries, including South Africa, such control is almostnegligible. Zimbabwe is the one exception. Most countries lack suffi-cient weighbridges and trained staff to implement a system of control.This exacerbates the policy distortions which favour road transport atthe expense of the railways. It is clear that the road–rail issue can beresolved only by a strong regional approach: the problem is wellknown among engineers but policy-making is subject to the pressure ofvested interests. The hand of the Southern African Transport and Com-munications Commission needs to be strengthened by support frommultilateral institutions such as the World Bank and ADB.

120 Gavin Maasdorp

JEN-05.QXD 3/31/00 10:12 AM Page 120

External diseconomies which arise in road freight transport, butwhich are often neglected, include accident costs (both direct, in thesense of accidents involving heavy vehicles themselves, or indirect, inthe sense of slow-moving, heavy vehicle traffic causing drivers of othervehicles to become impatient and take unnecessary risks resulting inaccidents, but not actually involving the heavy vehicle itself) and airpollution from exhaust fumes. These factors should also be taken intoaccount in transport policy.

The use of inter-modalism, that is ‘piggybacking’ between road andrail, is an alternative to the either/or situation. This is common inEurope and North America. It should be encouraged as a priority since itwould make railways more profitable, allow roads to last for theirdesigned lifetime, allow virtual door-to-door delivery and reduce exter-nal diseconomies. However, its introduction presupposes the reorganisa-tion of the region’s railways, as discussed above. Suitable infrastructurewould have to be provided for the inter-changes from one mode toanother.

A problem facing the road transport industry is the considerabledelay experienced in crossing certain borders. For example, at BeitBridge on the South Africa–Zimbabwe border, vehicles face delays ofseveral days waiting in queues to be processed through immigrationand customs. These border post problems need to be addressedthrough harmonised documentation as well as through staff trainingin order to improve efficiency.

Ad hoc, unpredictable and largely unauthorised road blocks exist insome transit countries and add to the total cost of transport to and fromthe coast. This affects Malawi in particular, with frequent stoppages inthe Tete province of Mozambique, which acts as a transit route forMalawian traffic to and from the southern SADC countries and ports.Landlocked countries require a guarantee of unimpeded transit to theseaport. Thus these unauthorised road blocks should be removed wher-ever they occur; a mechanism needs to be developed for the purpose.

5.4.2 Sea transport

The role of coastwise ocean transport has generally been neglected inSouthern African transport studies. The ocean way itself requires noinvestment; all infrastructural investment is at the harbours, which haveto be developed anyway for inter-continental trade. The levelling of thepolicy playing field should be applied not only to road versus rail trans-port, but also to inland surface transport versus coastwise sea transport.


JEN-05.QXD 3/31/00 10:12 AM Page 121

122 Gavin Maasdorp

5.4.3 Air transport

Air transport has become increasingly important for the conveyance ofhigh-value, low-volume cargo, but its major role remains the passengersphere. Air transport is the mode by which most business travel in theregion takes place, and consequently the efficiency of intra-SADC airservices is an important component of any moves to promote freetrade. The ADB report (1993), written against a background of rapidchanges (mergers and deregulation) in the international airline indus-try, concluded that the continued existence of national carriers in eachSADC country was uneconomic and that there was an urgent need torationalise operations on a regional basis, pointing to the SADC pro-posal to establish a single regional airline.

There has been a number of changes in the regional industry in thelast five years. With Swiss Air as a strategic partner, SAA is now firmlyinside one of the global alliances which have emerged in the interna-tional industry. South African deregulation has seen the entry bymeans of joint ventures of European airlines (BA and Sabena) into

Subsidies and distortions in transport

Railways:

� operate on commercial lines in most SADC contries,� are responsible for raising finance for capital projects,� depend on operating revenue to cover costs (including interest,

depreciation and amortisation of loans),� commonly receive duty drawbacks on imports of capital equip-

ment.

Road hauliers:

� government provides infrastructure,� road user charges include licences, fuel taxes and toll fees,� cost subsidisation of heavy vehicles by light vehicles (underrecov-

ery from heavy vehicles equals the overrecovery from light vehi-cles in South Africa),

� social costs (air and noise pollution/accidents) are not included inroad user charges,

� additional capital costs involved in strengthening road pave-ments for use by heavy vehicles are not charged to heavy vehi-cles, implying further cross-subsidisation by light vehicles.

JEN-05.QXD 3/31/00 10:12 AM Page 122

domestic and regional routes. In Zimbabwe a competitive private air-line has emerged for the state-owned national carrier. In Zambia thegovernment refused to bail out the loss-making national airline, lead-ing to its disappearance and replacement by two private operations.New competitors have also emerged in Namibia. Alliance Airline (theSAA–Air Tanzania–Uganda Airlines joint venture) continues to expand.In Swaziland, the loss-making national airline has found a joint ven-ture partner in a subsidiary of SAA.

While deregulation and the growing competition which has fol-lowed have been positive developments, the ADB report’s cautionregarding small, uneconomic national carriers remains valid. The onlyway in which these airlines will cease being a drain on the fiscus is forthem to be absorbed into regional joint ventures (such as AllianceAirline), which could then lead to the use of more efficient aircraft andthe development of more appropriate flight schedules to improveregional links and facilitate travel. Governments should take the neces-sary political decisions, and also grant fifth freedom rights3 in order tofacilitate inter-SADC travel.

The other area of concern in air transport relates to safety. TheInternational Civil Aviation Organisation has highlighted the growingdanger facing aircraft in Africa as a result of the failure to maintain ade-quate equipment and controls to ensure air safety. Some SADC coun-tries have been listed as dangerous in this regard, and this could have anegative effect on the image of a SADC free trade area. Appropriateinvestments and other steps to rectify the position are required.

5.4.4 Telecommunications

The field of telecommunications has seen continued technologicalchange since the publication of the ADB report (1993). In particular, thelast five years have been marked by the widespread use of cellular tele-phones in South Africa and the growing use of electronic mail. Theintroduction especially of cellular telephones in other SADC countriesgenerally has been slow, and in some countries the process has been lessthan transparent with heavy-handed political interference which hasdelayed the granting of licences, thereby disadvantaging business. Thisfailure to introduce cellular networks exacerbates the problems busi-nesses face because of the unreliability of existing terrestrial networks.In 1999 it was still very difficult to communicate telephonically or byfax with some countries in SADC. As long as this situation obtains, itwill be a factor inhibiting the development of business links in SADC.


JEN-05.QXD 3/31/00 10:12 AM Page 123

124 Gavin Maasdorp

Thus, the modernisation of the telecommunications network is cen-tral to the growth of intra-SADC trade. It is a question not merely ofinvestment in physical infrastructure, but of the implementation of poli-cies which will lead to greater efficiency and enhance the region’s com-petitiveness. Deregulation and privatisation are essential components oftelecommunications reform, but the process is too often blocked ordelayed for political reasons. A priority should be to achieve widespreaduse of cellular telephones and e-mail throughout the SADC region by aspecific date, certainly well before the conclusion of the Trade Protocol’simplementation period – by, say, 2005, given that the implementation ofthe Trade Protocol cannot now be completed before 2008 at the earliest.

5.5 Development corridors

A concept which has gained currency in SADC in the last few years isthat of development Corridors. In South Africa the idea of SpatialDevelopment Initiatives (SDIs) is also being promoted by the govern-ment. A number of cross-border development corridors have beenidentified in Southern Africa, and the most advanced – the MaputoCorridor – is described in the following box. A separate box alsodescribes an SDI associated with the Maputo Corridor.

The intention is that development corridors and SDIs will involvegovernments, the business sector (both local and foreign) and multilat-eral agencies. The Maputo Corridor is the flagship of development cor-ridors: it started with a flourish in 1996 but indecisiveness inMozambique regarding the concessioning of the railway and port,together with poor South African planning of a ‘one-stop’ border post,have led to some of the impetus being lost in 1998–9. Nevertheless,there is an impressive portfolio of projects. Whether development cor-ridors in less developed parts of the SADC region will have the sameappeal to the private sector will depend on the productive potential ofthe areas they serve, the security situation and the efficiency of thegovernments concerned. Most development corridors and SDIs havenot yet gone beyond the blueprint stage, and their realisation willdemand huge investments in physical infrastructure and sectoral devel-opment. If the Maputo Corridor is able to maintain its impetus, itcould serve as an example of successful multinational developmentgenerating investment and employment in all countries involved. Theimpact of development corridors would be enhanced if they were ableto incorporate seamless rail and road services, eliminating the prob-lems experienced by railways and road hauliers at border crossings.

JEN-05.QXD 3/31/00 10:12 AM Page 124


The Maputo Development Corridor

A number of development corridors have been identified in theSADC region, for example, Beira to Zimbabwe, Nacala to Malawiand Lobito to Zambia. The most advanced of these is the MaputoCorridor. An investors’ conference held in Maputo in May 1996 trig-gered substantial development, leading to a construction boom.

The Maputo Corridor is being portrayed as a prototype for cross-border economic development in the region, linking as it does coun-tries at very different levels of development. It links theWitwatersrand–Pretoria industrial region of South Africa to the portof Maputo in Mozambique. It passes through areas of mining,industry, agriculture, forestry and tourism, and it is not only a trans-port but also an investment corridor.

The organisation of the corridor represents a good example ofcooperation between government and business. The Maputo Corri-dor Company has been established with headquarters in Nelspruit.Its shareholders are the governments of South Africa andMozambique together with the private sector, with provision havingbeen made for the governments of Swaziland, Botswana andZimbabwe to become shareholders. The non-profit company has alimited life, and its role is to be the catalyst for investment projects.It chairs an inter-ministerial committee. National governments aswell as the provincial government of Mpumulanga are involved inpromoting investment in the corridor.

Roads: The N4 from Witbank to Maputo is to be Africa’s first inter-national toll road. It is to be upgraded on a 30-year build–operate–transfer basis by Trans-African Concessions, which will have to raisethe capital to finance the physical improvements. All costs are to becovered from toll revenues.

Railways and ports: The Mozambican Government appears to befavouring management contracts rather than concessioning in thefirst stage. Substantial reform is needed to rejuvenate the railway(the line has the capacity to carry over six times its present volume)and the port of Maputo. In 1973 the port handled 12 million tons ofcargo as against its present figure of 3 million. Dedicated terminalshandling sugar, coal and container traffic have been leased out toprivate operators.

JEN-05.QXD 3/31/00 10:12 AM Page 125

126 Gavin Maasdorp

Agriculture and agro–industry: Forestry, sugar and citrus expan-sion is planned in the corridor area, and water for irrigation will bemore plentiful when two large dams on the Komati River have beencompleted.

Industrial investment: Major investments in industries under wayor proposed include a new aluminium smelter and an iron reductionand steel plant in Maputo.

Power: The aluminium smelter will be supplied by electricity from a435MW line from Eskom’s Camden power station in Mpumulangaprovince, running through Swaziland to Maputo. This line will alsosupply Swaziland.

Tourism: The corridor contains a variety of tourist attractions rang-ing from sea to wildlife. Significant investments are being made bythe private sector in hotels, game lodges and reserves, and casinos,and by the Mpumulanga Parks Board in nature conservation andeco-tourism.

Financing: Institutions involved in financing technical studies andinvestment projects in the corridor are the World Bank, Common-wealth Development Corporation, Development Bank of SouthernAfrica, and South African and foreign commercial banks.

The Lubombo Spatial Development Initiative

This is an ancillary project to the Maputo Corridor. The SDI is focusedon the geographic area of which the Lubombo Mountains are themajor physical feature, i.e., the lowveld regions of Mpumulangaprovince and Swaziland, north-eastern KwaZulu-Natal and theMaputo province of Mozambique. The major foci are transportroutes, eco-tourism and agriculture. Projects include:

Roads: A new highway from Hluhluwe in KwaZulu-Natal along thecoast to Maputo, and the upgrading of the road from KwaZulu-Natal through the southern Swaziland lowveld to Siteki and acrossthe Lubombo Mountains to Maputo.

Rail: A passenger service from Durban to Maputo via Swaziland hasbeen opened.

JEN-05.QXD 3/31/00 10:12 AM Page 126

Notes

1 Higher wages in South Africa also have implications for the movement oflabour across regional borders. They are one of the factors attracting labour(both skilled and unskilled) from neighbouring countries, but such flowshave problems at either end. For South Africa they place additional pressureon scarce housing and social infrastructure, and exacerbate the problems ofjob creation, while for the sending country they lead to an exodus of skilled,high-level personnel. When national economies are growing and creatingjobs, such flows can be reduced, although the larger returns to employmentin South Africa will doubtless remain a magnet.

2 One problem which continues to be encountered is that of the comparabilityof educational standards and qualifications of applicants from the SADC coun-tries to regional universities. South African universities have allowed applicantsto do alternative selection tests, and this has proved satisfactory. However, itwould be preferable if country policies on number of years of schooling up tomatriculation level could be standardised throughout the region.

3 Fifth freedom tariff rights mean the privilege to take on passengers, cargoand mail in the territory of a state in which the aircraft is not registeredwhich are destined for the territory of any other state, or to put down pas-sengers, cargo and mail in the territory of the first-mentioned state whichoriginated in the territory of any other state.


Agriculture: Increased output of tropical fruit and food crops.

Eco-tourism: Consolidation of game parks in KwaZulu-Natal,Swaziland and Mozambique, development of tourism around thePongolapoort Dam on the Swaziland–South Africa border, andinvestments in hotel and other tourism development in the moun-tains and along the coast.

The Lubombo SDI is being marketed by cabinet ministers from thethree countries concerned at conferences both in the region andabroad.

JEN-05.QXD 3/31/00 10:12 AM Page 127

6Export Promotion ArrangementsNora Hill

128

6.1 Introduction

As the global market becomes increasingly integrated and competitive,there is a concern that Africa will be further marginalised in interna-tional trade. It has been argued that, while sub-Saharan Africa’s currentmarginalisation was partly due to the slow pace of growth in globaldemand for the region’s exports, inappropriate domestic policies (suchas import barriers and an inability to diversify the export base) ratherthan external protection by developed countries were largely responsi-ble for African countries’ inability to compete internationally (Ng andYeats, 1997).

Earlier chapters have shown that it is imperative that SADC countriesadopt macro- and microeconomic policies that support regional tradeliberalisation and new investment. Industrial restructuring towardsexport-oriented production is necessary if both new jobseekers andlabour that is displaced by foreign competition are to find formal sec-tor employment. This chapter examines export-promotion measureswhich complement macro- and microeconomic strategies to facilitatethe development of a productive and competitive industrial sector sup-porting increased employment, economic growth and the alleviationof poverty.

Trade and investment are very closely linked:

The fact that trade and investment were ever regarded as separate oralternatives was more an historical and political aberration than apractical reality. They are closely entwined and all the more so in thecontext of globalisation. Businesses trade to invest and invest to trade.

(Renato Ruggeiro, Director, WTO)

JEN-06.QXD 3/31/00 10:12 AM Page 128

Any incentives, therefore, be they intended specifically to promoteinvestment or to foster trade, should be considered in parallel, andboth are included in this chapter. Details about constraints on invest-ment are in Chapter 4.

An aggressive export promotion package should be part of a coun-try’s trade policy, which is, in turn, part of the restructuring of industrywithin an economy. The ‘curse of resources’ has caused most Africancountries to rely on the export of raw materials resulting in the lethar-gic development of manufacturing industries in these countries. Theexport of value-added manufactured products must grow in order todevelop economies and promote employment.

In order to reduce the threat of marginalisation, it is critical thatSADC countries pursue strategies that will ensure that they benefit opti-mally from the range of multilateral arrangements in which they partic-ipate: the World Trade Organisation (WTO), the Organisation of AfricanUnity (OAU), African Economic Community (AEC), SADC, the Cross-Border Initiative (CBI) and COMESA. The resolution of the relationshipbetween the numerous bilateral and regional trade agreements and theWTO Agreement will be a major issue in the multilateral liberalisationof trade in SADC. Some of the agreements which do, in fact, liberalisetrade between members are nevertheless contrary to the eventual aimof the WTO, which is the gradual convergence of regionalism andmultilateralism leading to one set of global rules for free trade. WTOcompatibility is an important criterion for any new initiatives, as anymeasure that is not compatible with WTO rules is inevitably temporary.

Many of the SADC countries are signatories to the Lomé Con-vention, which currently provides non-reciprocal preferential access tothe European Union for 70 African, Caribbean and Pacific (ACP)nations. The Convention is in the process of being renegotiated and itseems likely that new arrangements will take place on a regional basisfollowing the poor performance of ACP countries in increasing tradewith little industrial or manufacturing growth. With South Africahaving negotiated the EU–South Africa Free Trade Agreement, it is rec-ommended that any new trade agreements (e.g. SADC FTA, post-Loméarrangements, and bilateral trade agreements between SADC countries)are harmonised to include the same set of rules. In addition SADCmembers enjoy access via the Generalised Systems of Preference (GSPs)into various developed countries. These, together with other tradeagreements, give the majority of their products the benefit of eitherduty-free or reduced-duty status into their traditional export markets.In spite of these benefits, countries in Africa are having difficulty in

Export Promotion Arrangements 129

JEN-06.QXD 3/31/00 10:12 AM Page 129

finding markets for their manufactured products. In order to enlargetheir markets with a view to developing the manufacturing sector, anumber of SADC countries initiated additional schemes to encourageexports. Export incentive measures were introduced to a greater orlesser degree, depending on the extent of value-added in productionand on the relative importance of the industry to the country (strategi-cally or economically).

At the same time, because developing and developed countries donot benefit equally from multilateralism, some countries are threatenedby the WTO framework. Protectionist policies are therefore sometimesretained (or imposed) in order to support and preserve ‘sensitive sector’industries. Sensitive industries are frequently labour-intensive, and,under the regime of import replacement, survive with support in theform of incentives and protective tariffs. This support enabled many ofthese industries to ‘compete’ internationally, as they experienced poorproductivity, expensive raw materials, old technology and obsoletemachinery. In SADC countries, many of these industries, particularlythe clothing and automotive sectors, are major employers. They arecurrently undergoing radical restructuring and development, but eventhose that may adapt and become competitive in the longer term needprotection for an interim period. The measures used, however, tend tofall foul of WTO rules, and their retention must be seen as temporary.

The WTO dictates the extent of export support mechanisms its mem-bers may apply. Supply-side measures and export marketing grants areperceived as acceptable methods of encouraging manufacturers to sellbeyond their borders. Member countries have been given a period ofgrace in which to phase out unacceptable export incentives and sup-port measures, and reduce duty protection to the Uruguay level of tar-iff bindings. Not all SADC countries are members of the WTO, and aretherefore not bound by its rules. However, as more and more countriesjoin the WTO, it will become increasingly difficult and undesirable toremain outside the Organisation. It makes sense for non-members toobserve WTO compatibility in the introduction of new trade measures,or they may be seen by the private sector as inevitably temporary.

6.2 WTO agreement on subsidies and countervailing duties

6.2.1 Prohibited subsidies

Under Article III of the WTO agreement, a red box of prohibited subsi-dies has been created (excluding those governing agriculture).Outlawed are subsidies directly linked to export performance and those

130 Nora Hill

JEN-06.QXD 3/31/00 10:12 AM Page 130

given for the use of domestic in preference to imported raw materials.Those subsidies outlawed under Article III will not, however, apply tothe least-developed members of the WTO (of which some are SADCcountries), and will apply only after a phase-in period of eight years(from signature) for other developing countries. If a developing coun-try wishes to continue with a subsidy after the eight-year period, itmust gain the approval of the committee on subsidies. If approval isnot forthcoming, the country must remove the subsidy. Once a prod-uct or sector has achieved the status of ‘export competitiveness’, noextended subsidies will be allowed or considered after the eight-yearperiod. A country is deemed by the committee to have acquired exportcompetitiveness in a product if it has gained 3.25 per cent of worldtrade in that product for two consecutive calendar years.

Complaints concerning subsidies by countries exposed to artificiallycheap exports from WTO members follow a hierarchy laid down in theDispute Settlement Procedures. The procedures have fairly strict time-tables. If there is no clear outcome, the plaintiff may take countervail-ing actions to compensate for the subsidy used by the offending WTOmember.1 Incentives which contravene the WTO ruling are:

� subsidies, tax concessions and extra tax deductions based on exportperformance, i.e. paid to companies either whose exports exceed acertain percentage of their total production or which achieve a spec-ified percentage of domestic value added in volumes of exports;

� currency-retention schemes involving a bonus on exports;� preferential transport and freight costs for exports;� the provision of subsidised domestic inputs, which reduce the final

selling price so that the product can compete internationally;� indirect tax exemptions (other than VAT) for exported products;� exemption from cumulative indirect taxes on inputs for exported

products;� remission of import charges for imported inputs used in exported

goods (if this reduces the price of exports below the domestic pricepaid for the same goods);

� export guarantee programmes offering levels of coverage in excessof the long-term operating costs of the programmes;

� preferential export credit programmes which substantially reducethe final price of exports.

Subsidies must not have the effect of injuring a foreign industry, nulli-fying or impairing the benefits enjoyed under the GATT by a foreign


JEN-06.QXD 3/31/00 10:12 AM Page 131

country, or causing serious prejudice to the interests of another mem-ber state. No subsidy can be paid to cover the operating losses of anindustry, unless as a one-time aid to adjustment; nor can it amount tomore than 5 per cent of the value of a product. Direct writing-off ofcorporate debt is also outlawed.

6.2.2 Exclusions

As with agriculture, particular forms of subsidy are excluded from theagreement (placed in a green box). These include environmental adap-tion and fundamental R&D activities (research not directed to indus-trial or commercial objectives and aimed at the widening of scientificknowledge). Subsidies below the per-unit level of 2 per cent of valueor 4 per cent of import volume are automatically excluded fromthe agreement. Subsidies for social costs, direct debt-forgiveness andthe provisions of privatisation programmes are also excluded from theagreement.

Regional aid policies are also excluded from the agreement and havebeen placed in the green box. Such policies must meet fairly broad cri-teria, but must be aimed at the reduction of regional disparities in acountry and must be targeted at the poorer regions in a country. In thiscontext it is interesting to note the relation between this agreementand the one on the use of trade-related investment measures (TRIMs).Under the TRIMs agreement, policies aimed at placing (nationwide)trade-distorting conditions on investment are severely limited by theWTO. In fact, regional incentives also aim to attract investment and sodistort trade. The handling of industrial incentives under the subsidiesagreement, rather than in the TRIMs agreement, was a manoeuvre bydeveloped countries to maintain their own trade-distorting TRIMswhile limiting TRIMs used by developing countries.

6.3 Current incentives in SADC

Generally, investment (both domestic and foreign) responds to a sus-tained improvement in domestic economic fundamentals, and investorstend to be motivated by lower costs and higher efficiency of production.In particular, an export-friendly environment would include minimallegislation and bureaucratic interference, and be free from anti-exportbias, with clear, easily accessible benefits. The establishment of anexport sector in any country is initiated with a readily available sup-ply of inputs which feed into a developing manufacturing sector whichideally, in turn, develops an export market as production becomes

132 Nora Hill

JEN-06.QXD 3/31/00 10:12 AM Page 132

more competitive. Linkages should be developed sequentially withinthe industry to allow businesses to be established at all levels. Productionfor export cannot therefore be isolated from the pipeline developmentof the industrial sector in a holistic development strategy. Enclaveexports rarely support general industrialisation.

As part of general industrial policy, countries make use of a range ofspecific interventions to facilitate investment in production generallyand in export development specifically.

Most SADC countries offer duty rebates or drawbacks on importedraw materials for export manufacture which are compatible with WTOrulings.2 This reduces costs, making these products more competitiveon the export market. This allowance is a vital aspect in the costing ofproducts for the export market, as the imported components or rawmaterials from countries with lower costs of production (includinglabour) or large export incentives are generally far cheaper than thelocal products. Duty free importation of capital equipment for themanufacture of exports occurs fairly generally in SADC. In severalcountries this measure is also linked to other investment incentives formanufacturers. South Africa offers a duty credit on product and rawmaterials which compensates for high duties by allowing duty-freeimportation which, in turn, boosts company profits with domesticsales of these products. As tariffs are reduced this measure becomesincreasingly less important to firms.

Reduced tax structures are designed to encourage investors who man-ufacture with an emphasis on exports and, although contrary to WTOrulings, are widely offered by many of the non-SACU members of SADC.

Support for the financing of exports through pre- and post-shipmentcredits is offered by most SACU countries. This measure is compatiblewith WTO rules.

Export processing zones (EPZs) have been developed in some of thecountries following the success of Mauritius in promoting exports inthis way. An alternative is the creation of industrial free trade zones orindustrial development zones (IDZs) being developed by Mozambiqueand proposed in South Africa.3 Unless the customs and policing facili-ties within a country are very well developed, difficulties in preventinggoods produced in EPZs from leaking into the local market are a realthreat to local industry and neighbouring customs union countries.

It is surprising that matching grants in support of the promotionof exports are available in only two of the SADC countries, Namibiaand South Africa. This is one of the support systems acceptable tothe WTO and is needed desperately for any overseas expenditure on


JEN-06.QXD 3/31/00 10:12 AM Page 133

foreign marketing, particularly by those countries with unfavourableexchange rates. The South African EMIA type scheme may be used asan example of the development of such support (see Appendix A3).

Special sector incentives are offered by a few of the countries. Theseoccur mostly in sensitive industries such as agricultural, clothing andtextiles, shoes, and the automotive industry. These schemes, which areessentially protective, are contrary to the WTO rulings. Allowanceshave been made for those industries which are restructuring as dutieson sensitive products are being reduced, but this is strictly temporary,and the allowance is being phased out.

There is considerable inequity in the structure of SADC countries’export and investment incentives, and this has caused political prob-lems in discussions about intra-SADC trade. For example, South Africa’strade surplus with the region has been explained in terms of its exportpromotion schemes. There is a perception by South Africa’s neigh-bours that the export incentives give South African products a marketadvantage which the governments of most smaller countries cannotafford. This is only partly true. The withdrawal of South Africa’sGeneral Export Incentive Scheme has, in fact, had little impact on thegrowth in volume of South African exports to the region comparedwith previous years. It is likely that there is a range of factors whichhave contributed to the trade imbalance, including a higher level ofdevelopment, cheaper inputs and lower running costs througheconomies of scale. Across Southern Africa the structure of incentiveshas tended to depend not only on each country’s ability to affordthem, but also on the importance each country has attached to export-ing. A few of the countries have no export promotional programmes atall and many still display an anti-export bias. Tanzania, for example,has only recently removed the legislation requiring a licence to export.

6.4 Overcoming negative perceptions

Africa is perceived as a third world producer of raw materials. If this isto change, all countries in the region need to think in terms of encour-aging the production of manufactured goods for the global market.

Other southern hemisphere ex-colonies have succeeded in com-pletely reorienting their economies. Australia and New Zealand bothsuffered, in economic terms, from a ‘fortress mentality’. Earlier in thetwentieth century their economies were characterised by:

� a commodity-based export market,

134 Nora Hill

JEN-06.QXD 3/31/00 10:12 AM Page 134

� highly protective industrial policies including subsidies, import quo-tas and high import tariffs, in the belief that protection would pro-duce a diversified and dynamic manufacturing sector,

� a rigid industrial relations system, which encouraged high wageswithout accompanying increases in productivity,

� a wide range of largely inefficient government enterprises.

From the mid-1980s both countries implemented comprehensive tradeliberalisation accompanied by vigorous export promotion, and havesubsequently enjoyed export-led economic growth of between 3.0 and4.5 per cent a year for over a decade (in spite of strong compe-tition from East Asian countries). Unilateral trade liberalisation wassupplemented by regional cooperation. The introduction of theAustralian–New Zealand Closer Economics Relations Agreement in1983 encouraged economic integration. Free merchandise trade acrossthe Tasman Sea has existed since 1990, resulting in Australia’s now pur-chasing 43 per cent of New Zealand’s manufactured exports. Australiais still New Zealand’s fastest growing market.4

This example may be considered as instructive for SADC countries. Itis clearly possible for primary commodity-producing southern hemi-sphere ex-colonies that are a long way from the world’s largest marketsto implement successful industrial restructuring. An export-led strategyis important to boosting industrialisation in Southern Africa. This willrequire a programme which is simple, unencumbered by bureaucraticred tape, and workable in management-scarce economies. New initia-tives will have to be phased in over a period with flexibility and lack ofpressure from international organisations to conform to stringentrequirements within the allocated time frames. Any export programmedesigned for the region should constantly have the global market as itsgoal. In other words, regional trade liberalisation needs to be perceivedas complementary to and not a substitute for a general opening up tointernational trade.

The challenge of introducing an overriding policy to support anexport-led industrial and economic reform package in Southern Africais complicated by the developmental and wealth inequities – and thehuge variation in protection of industries – that characterise theregion. There are fears on the part of many of the smaller countriesthat South Africa’s dominance will hinder their own development. Infact, the larger SADC partners can provide useful regional examples ofsuccessful restructuring strategies. Policies and programmes whichhave been successfully implemented by any country can be adapted


JEN-06.QXD 3/31/00 10:12 AM Page 135

and adopted in the region. Some harmonisation of incentives will benecessary in order to safeguard against competitive investment andexport incentives to attract firms.

6.5 Conclusions

Up-to-date, easily accessible international information is essential forexporters, and is difficult and costly to obtain. In order to promotetrade links within SADC, a SADC depot, which collates and maintainsa database of available information for exporters on the Internet,would prove invaluable. The following information could be accessed:

� product standards and specifications,� regulations and legislation for products in the different SADC coun-

tries,� duties and documentation requirements,� packaging requirements,� potential importers,� training programmes.

The lack of schemes for financing of investment and export supportpackages in poorer SADC countries may inhibit export development.Many of the SADC countries have no export promotion and very leaninvestment packages. It is suggested that countries should seek to bringtheir export promotion measures into line with WTO rules. Someregional rationalisation of export promotion programmes within theSADC countries could both facilitate market consistency and lightenany additional financial burden on cash-strapped countries: for exam-ple, SADC members could cooperate on combined regional stands atinternational trade fairs and regional representation on trade missions.Although in principle all schemes should be self-supporting, once thesteps of WTO compatibility and regional rationalisation have beentaken, poor countries might ask for external funding for the set-upcosts of market development programmes, as these are the only accept-able WTO export incentive. It is possible that World Bank finance maybe sourced for matched funding grants for marketing.

A duty credit scheme, based on exported values, has proved to besuccessful in supporting South African industries which experience diffi-culties in the local sourcing of raw materials. This is particularly impor-tant for sensitive industries: the South African automotive and clothingindustries both have protection from imported products, but are still not

136 Nora Hill

JEN-06.QXD 3/31/00 10:12 AM Page 136

internationally competitive without extra support. However, this mea-sure is not compatible with the WTO ruling, and negotiation with theWTO may be necessary to maintain these incentives in SADC countriesas duties are phased out. A WTO-compatible alternative, which is alreadyused by many SADC countries, is the facility to have a drawback or rebateof duty on raw materials or components used for exported products.These measures have costs, however: duty drawbacks and rebates are notinstrumental in reducing tariffs; however, they increase legislation anddocumentation, raising costs and therefore effectively decreasing protec-tion of those industries they initially set out to promote.

The cost of overseas marketing is costly. Export marketing andresearch grants support and encourage exporters to seek new marketsand maintain existing ones. These may include trade fair participation,visits to obtain and develop markets, and appointment of agents ortrade missions abroad. Very few products can be exported or customersretained without constant visits to the markets. The importance ofmarketing and research has not been fully recognised by many coun-tries and is one of the most important support measures. There is nodoubt that each country should have some sort of support forexporters for overseas marketing.

It may be necessary to review export credit guarantee schemes, par-ticularly with a view to making access easier for small- and medium-scale enterprises. Governments may wish to consider reinsurancethrough public finance bodies in order to cover political risks, althoughmost insurance should be handled by the private sector.

Overriding all support systems and export incentives is the devel-opment of an export environment as free from bureaucratic control aspossible, in which industries may develop and operate within a freemarket. Zambia is a good example of such an environment. All anti-export biases should be identified and steps taken to remove them.

It is necessary to build SADC’s image as an investment location(O’Brien, 1997). The SADC trade and industry and/or finance andinvestment sectors should target countries outside the region which arelikely to be interested in investing in Africa, and supply their chambersof business and relevant government departments with informationabout workshops and presentations, and circulate a regular copy of anew publication akin to the Commonwealth African InvestmentAlmanac, say the ‘SADC Investment Opportunity Guide’. This shouldbe supplemented with occasional media campaigns.

Business contacts within SADC should be promoted (O’Brien, 1997).The relevant sectors should organise regional business workshops for


JEN-06.QXD 3/31/00 10:12 AM Page 137

138 Nora Hill

industries where complementarity is high, for example in textiles andclothing, leather and shoes. Encounters between broader-based busi-ness groups, like chambers of commerce and industry, should also beorganised. The focus should be on developing constructive private sec-tor input into policy debates and on information exchange. The pri-vate sector bodies should manage these encounters and cover theirown costs. SADC sector management could, however, commissionstudies of industries meeting industrial restructuring challenges.

An appropriate exchange rate policy has allowed Southern Africanproducts to compete competitively in the international market inrecent years, resulting in an increase in exports. This is probably moreimportant than direct export-promotion strategies (see Chapter 2). Thiswill need to be maintained, as the devaluation of many of the FarEastern currencies will threaten African manufacturers with cheaperimports. An appropriate exchange rate deals simultaneously withexport promotion and import protection, deflecting requests for pro-tection in the form of quotas or tariff increases.

Countries wishing to encourage exporters must have a general envi-ronment supportive of exporting. The restructuring of export-ledindustries, export promotion programmes, the removal of constraininglegislation and documentation, and the availability of raw materials orinputs sets an environment in which exporting is profitable.

The most important factors on which countries should concentrateto encourage exports are:

� a bias-free environment in which to operate,� information and training which is readily accessible and up to date,� financial support with overseas marketing and research,� easily accessible data on export procedure, documentation and

standards.

It is important that the rules of origin defined in trade agreementsbetween SADC members be harmonised with the rules of origin in theFTA. Moreover, the range of new negotiations either taking place orimminent, like the new Lomé arrangements, should also be har-monised, in order to simplify the monitoring and policing procedures,especially at border controls.

Notes

1 The procedures apply only to disputes between WTO members; there is noregulation of anti-dumping or countervailing duties imposed against non-WTO member countries.

JEN-06.QXD 3/31/00 10:12 AM Page 138

2 If the duty rebate does not result in exports being sold at a price below thatpaid on the domestic market, the rebate is WTO-compatible.

3 EPZs are generally enclosed customs bonded areas which are regarded as aforeign entity without being subjected to the host country’s legislation, likelabour laws, customs duties and quotas. Products may not be sold into thehost country’s domestic market unless they go through customs and theusual import procedure is followed. Industrial Free Trade Zones or IDZs arenot necessarily in an enclosed area governed by a customs post. They havebenefits such as drawback of duty on imported raw materials or inputs forexported products. Strict records of domestic and export sales and theimported raw materials included in them are inspected by customs. Duty ispaid on the imported inputs of domestic sales only. Companies must con-form to the legislation and regulations of the country in which they arelocated. The type of products manufactured in an EPZ are determined by theinvestor while the products manufactured in an industrial zone may be clus-ter based (goods and services for a specific industry), sectorally based orregionally based .

4 For details about the strategy pursued by Australia and New Zealand, seeDFAT (1988) and Massey (1995).


JEN-06.QXD 3/31/00 10:12 AM Page 139

7Compensatory MechanismsCarolyn Jenkins

140

7.1 Introduction

Even if all countries benefit from a free trade area, they do not neces-sarily all benefit to the same degree. Compensatory mechanisms areused to transfer some of the gains from regional trade liberalisation tothose countries that benefit less from the new arrangements. The issueof compensation can become politically important in the negotiationof regional trade agreements, especially in the situation where oneeconomy dominates, as in Southern Africa.

The potential role for compensation is, in the end, a question ofpolitical economy. It is about ensuring that regional cooperation isbeneficial to all participating countries, despite the asymmetries thatmay characterise the direct benefits from trade and investment.Mechanisms that mitigate these asymmetries, typically by enhancingthe flow of resources from core to peripheral countries, may broadenthe benefits – and hence increase the sustainability – of an FTA.

International experience, however, suggests that such mechanismsare not always essential in creating sustainable trade arrangements.Furthermore, compensation does not necessarily involve cash pay-ments. Indeed, the alternative proposals considered in this chapter sug-gest that other methods are more likely to contribute to increasingtrade and investment – thereby contributing to development andgrowth – in Southern Africa.

7.2 The case for compensation

The purpose of regional economic integration is to improve resourceallocation, which, in turn, should raise the absolute incomes of all

JEN-07.QXD 3/31/00 10:19 AM Page 140

participating countries. However, international experience suggeststhat the benefits from regional trade integration (in terms of trade vol-umes and new inward investment) tend to flow disproportionately tothe larger partners to the agreement. The relative incomes of somepartners may therefore diverge – even if all are growing more rapidlythan before – and, as some countries grow faster than others, the emer-gence of a few poles of industrialisation should be expected. For thisreason, among others, the issue of compensatory mechanisms is apotentially important component of the set of complementary policiesto accompany the liberalisation of regional trade.

It is important to note that the issue of compensation – in the formof government-to-government fiscal transfers – usually arises withinthe context of customs unions and not free trade areas. Customsunions are characterised by free trade between participating countrieswith a common external tariff (CET) applied to the rest of the world. Afree trade area, on the other hand, typically involves zero tariffs onsubstantially all trade within the area but member countries remainfree to set their own extra-regional tariffs.

The theoretical case for payment of compensation within a customsunion arises from the fact that countries which are net exporters toother customs union members enjoy greater gains, while net importersmay experience some loss (assuming that there are no dynamic gainsfrom increased intra-union trade). The underlying reason for differen-tial benefits is that the presence of the CET removes individual coun-tries’ discretion in adjusting the prices paid for imports via tariffadjustment. The CET is generally set at a level whereby the price ofimportables produced within the customs union is higher than theworld price – that is, the price is equal to the world price plus the tariff.(The external tariff can therefore be viewed as a measure of the ineffi-ciency of local production or the extent of distortionary domestictaxes.) The result is that consumers in the customs union pay morethan the world price for goods from all sources, regardless of whetherthe goods are produced domestically, in customs union partners or inthe rest of the world. The losses associated with these ‘taxes’ on con-sumers in the union are offset both by payments to member govern-ments out of the customs revenue pool and by the gains tomanufacturers within the union arising from the price-raising effect ofthe CET on domestic exports to partner countries. As a result, countriesthat are net exporters to other members of the union enjoy enhancedgains out of the arrangements – which is even greater if substantialtrade diversion occurs. For this reason, there is a case for compensation

Compensatory Mechanisms 141

JEN-07.QXD 3/31/00 10:19 AM Page 141

to be paid by net exporting members of the union to their regionalpartners such that the gains from membership of the union are sharedequitably.

For example, country A is a computer-importing country. It is amember of a customs union together with country B, which has acomputer-manufacturing industry. This industry is protected by theCET from external competition from more efficient computer manu-facturers in country K. Because of the tariff, consumers of computers incountry A have to pay more for computers, whether they are made incountry B or in country K. If the government of country A was able toreduce the tariff, its citizens would have access to cheaper computers.The additional money consumers are paying goes either into the tariffrevenue pool (if they import from K) or straight to producers in B (ifthey import from B). In the latter case, where B is a net exporter, thepresence of the CET effectively transfers income from A to B. The roleof compensation (in this case from B to A) is to offset these transfers.

Two other important arguments for the payment of compensationwithin a customs union are the possible polarisation of industry in thelarger economies of the union, and, in the case of arrangements likethe Southern African Customs Union (SACU), the lack of fiscal discre-tion in smaller members when the CET and excise taxes are deter-mined unilaterally by the largest member.

As SADC is currently contemplating a free trade area and not a cus-toms union, there is no question of either the unilateral setting of tar-iffs by South Africa or the price-raising effect of a CET. Under an FTA,there is no loss of sovereignty and each country is able to lower theprices it pays for importables by setting its own tariffs. Nevertheless,the polarisation of investment away from the smaller members towardsthose regional economies that are larger and more diversified is possi-ble. For this reason, the argument for compensation within the SADCFTA tends to be based on:

� South Africa’s current dominance in regional trade and the likeli-hood that the trade imbalance in South Africa’s favour will probablyincrease with the FTA; and

� the probability that South Africa will attract foreign direct invest-ment at the expense of its smaller neighbours.

Furthermore, some SADC members have expressed their hope that thecurrent compensatory arrangements within the SACU will be extendedto the rest of the region on developmental grounds.

142 Carolyn Jenkins

JEN-07.QXD 3/31/00 10:19 AM Page 142

7.3 International experience

The international experience of compensation in regional tradearrangements is mixed. Below we briefly consider the arrangementsthat have emerged in North and South America, West Africa andEurope. Each of these regions demonstrates different aspects of theneed for and experience of compensation.

7.3.1 Compensation is not always necessary

Compensation has not, in practice, proved indispensable in customsunions, let alone in free trade areas. MERCOSUR (the South AmericanMercado Commún del Sur), for example, has negotiated a commonexternal tariff without compensation. Here, the principal trade-off hasbeen that certain exceptions to the external tariff regime had to beaccepted by all members in liberalising intra-MERCOSUR trade (Bulmer-Thomas, 1997). (It is worth noting that if such exceptions are toonumerous, the outcome begins to resemble a free trade area rather thana customs union.) In spite of the absence of fiscal compensation tosmaller partners, the growth in intra-MERCOSUR trade has been suffi-ciently high to encourage the continued participation of all members.

Compensation arrangements have also not been a necessary featureof asymmetric free trade areas, i.e. between economically stronger coun-tries and those that are considerably smaller. For example, the NorthAmerican Free Trade Area (NAFTA) was sold to the American public onthe grounds that the United States would have a larger trade surpluswith Mexico than already existed. In spite of this, no provision wasmade for the compensating transfer of resources between the USand Mexico. Had aid of this type been included, it is most likely thatNAFTA would not have been approved (Weintraub, 1997). In otherwords, although it was anticipated that the US would enjoy a net gainfrom the FTA, there was no consideration given to the paying of com-pensation to Mexico, which feared a polarisation of investment in theUS and domestic deindustrialisation through competition from USmanufacturers. Moreover, there was also no question on the part ofeither Canada or the US that low-wage, low-skilled Mexican workerswould be given greater freedom than existed already to seek work else-where in the FTA.

7.3.2 Compensation can become unsustainable

The West African Economic Community (CEAO) had a system of fiscalcompensation, despite the fact that the trade agreement was never


JEN-07.QXD 3/31/00 10:19 AM Page 143

fully implemented and there was no common external tariff. Thiscompensation was linked to the degree of preference that countriesoffered and received as well as to net intra-CEAO trade balances. Netexporters to the Community, Côte d’Ivoire and Senegal, were the prin-cipal contributors to the compensation fund. In spite of the relativesuccess of the CEAO in maintaining a high degree of regional trade (byAfrican standards), the arrangement was abandoned at the end of the1980s, both because cooperation in trade and other areas was limitedand because the compensation arrangements were unacceptablyexpensive to the net contributory countries (Robson, 1997).

7.3.3 Compensation as a transitional mechanism

Significantly, the new Union Économique et Monétaire Ouest-Africaine(UEMOA), which is, in part, a response to the deficiencies of the CEAO,and which does intend to establish a customs union, has a provision forcompensation which is purely transitional. The UEMOA treaty allows forcompensatory transfers for revenue losses associated with the introduc-tion of a common external tariff. Payments are to be made through aspecial fund, probably based on the static real income losses to theCommunity’s net importers during the period over which the CET isbeing phased in (Robson, 1997). In the longer term, compensation pay-ments will cease and will be replaced with structural and developmentfunds, the object of which is not to compensate for disparities in costsand benefits but rather to finance mechanisms to encourage the balanceddevelopment of the UEMOA in order to make it politically sustainable.

7.3.4 Compensation through structuraland development funds

Within the UEMOA, it is recognised that there is already a structuralpolarisation of development between the two larger economies – Côted’Ivoire and Senegal – and the other members – Benin, Burkina Faso,Mali, Niger and Togo – which may be entrenched by an effective singlemarket. Development funds, out of which infrastructure or humancapital investment in the poorer countries can be financed, are viewedas a mechanism for promoting a greater degree of convergence withinthe common market. The creation of structural funds may well proveto be decisive in securing internal credibility for the Union by ensuringthat all members are perceived to benefit. It has been suggested thatadditional donor support (which might not be available for financingdirect intra-UEMOA compensatory transfers) could assist with financ-ing regional developmental policies (Robson, 1997).

144 Carolyn Jenkins

JEN-07.QXD 3/31/00 10:19 AM Page 144


This issue has also been critical for the European Union (EU) in gainingthe continued support of weaker members. Structural and developmentfunds have been established to facilitate transfers between richer andpoorer EU members, and this is viewed, at least in part, as payment ofcompensation to marginal areas (which lose out in competition withprosperous areas) for gains to the Community as a whole. Supranationalregional policy, which complements (and, in some cases, substitutesfor) national policy, commenced in 1975 with the establishment of theEuropean Regional Development Fund and, since then, the resourcesdevoted by the European Commission to regional development haveincreased substantially. EU regional policy is designed to increase eco-nomic activity in stagnating or poorer regions, primarily by raisingcompetitiveness in areas which are too heavily reliant on decliningindustries or which are geographically peripheral (Begg et al., 1995).The Commission’s approach is dominated by the provision of subsidiesfor investment in infrastructure and education and direct incentivesfor inward investment. As important as these may be, it has beenshown that there is a nexus of conditions which must simultaneouslybe in place if productivity, and therefore living standards, is toimprove. These are a high degree of local competition, sophisticatedlocal customers and suppliers, and social infrastructure (Porter, 1990).Although economic integration is, in theory, supposed to improve theallocation of resources, so reducing regional disparities, in practice it isunrealistic to expect that either labour or capital mobility will be suffi-cient to achieve this (Begg, 1995).

The EU arrangements are not without difficulties. They have notbeen equally successful in all regions. Leonardi (1995) argues, forexample, that the failure of southern Italy to develop despite largetransfers from the European Commission reflects a climate which islargely inhospitable to business. Moreover, the accession to the EU ofrelatively underdeveloped countries, like Spain, Portugal and Greece,has massively increased the scale of regional disparities in Europe. Theaccession of other countries from Eastern Europe will widen theinequality still further, to the extent that disbursing developmentfunds under existing criteria will become untenable:

Factor mobility will not make an appreciable difference to this[inequality] and, at a more general level, market mechanisms cannotbe relied on to make sufficient impact. Developing sufficiently power-ful economic levers to deal with regional imbalance does not lookeither economically or politically feasible. At a more basic level, a

JEN-07.QXD 3/31/00 10:19 AM Page 145

146 Carolyn Jenkins

growing body of evidence suggests that regional problems are causedby a multiplicity of interrelated factors which makes them much moreimpervious to policy initiatives than would otherwise be the case.

(Begg et al., 1995)

7.3.5 Implications from international experience

The preceding review has shown that the existence and success of com-pensatory mechanisms are far from universal features of regional tradearrangements. In a free trade area, which is what is envisaged by SADC,there is no strong economic argument for fiscal transfers. Even incustoms unions, where economic arguments for fiscal transfers apply,it is by no means the norm that compensation is paid. Moreover, whentransfers are made, the provision of resources does not necessarily pro-duce development in peripheral areas.

The payment of compensation is generally dependent on the willing-ness of net contributors to make the transfers, which, in turn, dependson the extent of the growth in their intra-regional trade – from bothtrade creation and trade diversion – net of the drain on their resourcesfrom making payments to their less developed partners. The greater thenumber of poorer economies that are members of a union, the greaterthe burden on the richer member(s) of compensatory or developmentaltransfers. Because transfers are not uniformly successful in achievingdevelopmental objectives, the incentive for richer countries to keep pay-ing simply to retain the participation of smaller members in the customsunion is reduced. At some point the situation becomes untenable – richermembers are likely either to refuse payment altogether or require changesin existing payments formulae if further fiscal transfers are to be made.

Larger, richer countries are steering away from open-ended com-mitments to continue paying compensation, particularly if customsunions have the potential to grow by the addition of poorer countries.Increasingly, regional groups are looking to alternative methods offinancing developmental expenditure in poorer countries to improvethe benefits of economic integration to all members.

7.4 Review and assessment of the SACUrevenue-sharing mechanism

7.4.1 The objectives and provisions of theSACU revenue-sharing arrangements

Several SADC members view revenue-sharing arrangements in SACU asa precedent for the form that compensation payments might take in

JEN-07.QXD 3/31/00 10:19 AM Page 146

the proposed FTA. SACU is one of the oldest customs unions in theworld and its compensatory mechanism is considered particularly suc-cessful (O’Connell, 1997; Robson, 1997). For these reasons, the SACUarrangement is reviewed and assessed briefly below.

The present SACU Agreement was signed in 1969 and was explicitlyaimed at encouraging the development of Botswana, Lesotho andSwaziland and the diversification of their economies. (Namibia did notbecome a formal member until independence in 1990.) In order tocompensate these countries for what they argued were the disadvan-tages of being in a customs union with a more developed country,namely, the trade diversion effects, the polarisation of industrial devel-opment between core and peripheral areas, and the loss of fiscal sover-eignty, an ‘enhancement factor’ of 42 per cent is included in therevenue-sharing formula. Key issues concerning revenue sharing inSACU are explored in the text box.


Issues in revenue sharing in the Southern AfricanCustoms Union

All customs, excise and sales duties (but not general sales tax) aswell as import surcharges collected in the five SACU countries arepooled at the South African Reserve Bank. The formula which pro-vides the basis for calculating the amount due to each of the BLNScountries is calculated in three stages (with the residual of pooledrevenue being the share due to South Africa):

1. The common revenue pool is divided among the partners in pro-portion to their annual imports and their production and con-sumption of dutiable goods.

2. Then, an enhancement factor is included, so that the formula forcompensated revenue is 1.42 times the basic amount due to thecountry.

3. The third stage of the calculation (dating from 1976) provides theBLNS countries with a stabilised rate of revenue of about 20 percent of expenditure on dutiable goods. This is calculated as fol-lows: if the enhanced rate of revenue is not equal to 20 per centof expenditure on dutiable goods, then one-half of the differ-ence between the enhanced rate and 20 per cent is either addedto or subtracted from 20 per cent, subject to the constraints thatthe stabilised rate may not be less than 17 per cent or greaterthan 23 per cent.

JEN-07.QXD 3/31/00 10:19 AM Page 147

148 Carolyn Jenkins

In order to compensate the smaller enonomies for the price-raisingeffect of the CET, the first stage of the formula includes BLNSimports from South Africa but not vice versa. However, becausemost BLNS imports are from South Africa and hence are duty-free,they actually contribute very little to the common revenue pool byway of duties collected.

By including excise duties and sales tax, the formula takes theagreement beyond that of a pure customs union and some wayalong the path of fiscal harmonisation which is a characteristic of aneconomic union.

The effect of the stabilisation factor (the third stage of the calcu-lation), in recent years, has been to increase the nominal enhance-ment factor (the second stage of the calculation): for example,instead of being 1.42, the nominal multiplier in 1991/2 stood at 1.94(Maasdorp, 1993). Despite this, Leith’s (1992) calculations showedthat Botswana could gain slightly, on a static basis (i.e. ignoringtransitional and long-term dynamic effects), from having its ownindependent tariff regime. It may well be that calculation of whatthe other smaller countries could raise on their own by applying theSACU CET would also show that the effective enhancement wasmuch lower than the nominal figure of 94 per cent.

The actual payments made to BLNS out of the common pool inany one year do not equal the accrued revenue (revenue inclusive ofthe stabilisation factor) for that year. The reason for this is that rele-vant statistics are not available to enable their accrued revenue tobe calculated immediately. Instead, there is an elaborate formula formaking payments in respect of any given year over the followingtwo-year period in three instalments. A common argument in theliterature is that, because the cash flow always lags behind theaccruals, this may be regarded as an interest-free loan to SouthAfrica, and that the shortfall actually declines in real value becauseof inflation. However, Walters (1989) argues that, because estima-tion errors are corrected each year, cash flow will lag accruals only ifthe absolute growth of accrued revenue is increasing, in which casethe formula will forecast too low a value for accruals. The problem,then, is less the method of payment and more the implict assump-tion that revenue growth is constant.

There has been an overall downward trend in South Africa’s shareof the common revenue pool. The main reason for this is that theBLNS economies are highly open with a high propensity to import

JEN-07.QXD 3/31/00 10:19 AM Page 148


7.4.2 The renegotiation of the SACU agreement

The SACU agreement has been undergoing renegotiation sinceDecember 1994, with many of the issues discussed in the text boxbeing raised as part of the debate. Little information on the directionof the negotiations has been made available to the public, but it is wellknown that the major issues have been the revenue-sharing formulaand the institutional structure of a proposed Secretariat together withthe control of tariff policy. At the same time, South Africa and theBLNS governments have been working closely on the trade negotia-tions with the EU, SADC and Zambia. However, this cooperationshould not mask the fact that there are very real differences betweenSouth Africa and the BLNS countries on trade policy issues.

At present, the revenue-sharing formula is not one of these differ-ences. Although the new formula has not been made public, several fea-tures have been identified. The formula ensures that BLNS revenuewill not be destabilised suddenly. It will exclude excise duties, sur-charges and the enhancement and stabilisation factors but will com-pensate BLNS for the price-raising effects of the common external tariffon total imports. There will be an implicit enhancement factor forpolarisation and loss of fiscal discretion. The concept of South Africa’sshare being the residual after calculating the shares of the other coun-tries will disappear; instead the share of each member will be specifi-cally calculated. Lags between receipts by the pool and disbursementsto countries are to be minimised. Finally, a five-year review mechanismhas been proposed.

Under the new formula BLNS would be responsible for setting andcollecting their excise duties, but customs duties would continue to bepooled before being distributed. The net effect will be that BLNS willreceive about 60 per cent of the new customs duty-only pool; none theless, this share, together with the excise duties they raise indepen-dently, is expected to result in a decline of customs and excise revenuebecause of tariff liberalisation.

and, with average rates of economic growth exceeding that ofSouth Africa, the numerator in the formula has grown more rapidlythan the denominator.

The CET is set by the South African Board on Tariffs and Trade.This means that South Africa effectively sets tariffs for all SACUcountries unilaterally.

JEN-07.QXD 3/31/00 10:19 AM Page 149

150 Carolyn Jenkins

The major source of dissent has surrounded the institutions to governthe revised agreement. Smaller members want a Secretariat that wouldalso be a supranational tariff-setting institution. South Africa had indi-cated that it is reluctant to cede such vital decision-making powers to asupranational body so long as there is no agreement between all SACUpartners on industrial policies. South Africa’s stance, which has beencriticised by other customs union countries, is probably also based onthe view that, under South Africa’s control, SACU, unlike other regionalorganisations in Africa, has functioned effectively – and more cheaply.As part of the negotiations, South Africa had offered BLNS each a seaton the Board of Tariffs and Trade, in the interests of more democraticdecision-making. More recent reports suggest that some agreement hasbeen reached on the establishment of a Secretariat to manage the com-mon revenue pool and administer the common external tariff system.

7.4.3 Implications for the SADC FTA

It is essential for the future of economic integration in Southern Africathat the SACU agreement be renegotiated successfully. Failure to do sowould send a negative message to the rest of SADC: the same fivecountries which had failed to reach an agreement would now beinvolved in other moves towards trade integration, and the sameobstacles could again arise. If South Africa and the BLNS countries areunable to improve the SACU agreement, they are hardly likely to worktogether more harmoniously under any other institution aiming tobecome an authentic economic integration arrangement.

On the other hand, even if all five do reach agreement about chang-ing the SACU arrangements, this would not imply that any or allwould be equally happy extending these to the whole of SADC. In par-ticular, South Africa – or Mauritius as a net exporter – is unlikely toagree to pay compensation under the same scheme to between 9 and12 other SADC members. Thus, if weaker countries are to be compen-sated for the trade-diverting effects of a free trade area, means otherthan fiscal transfers will, in all probability, need to be found to ensurethe sustainability of regional trade liberalisation in SADC.

7.5 Alternatives to fiscal compensation

There is no doubt that trade liberalisation involves risks for govern-ments, the primary danger being that the short-term costs (in terms ofjob losses and reduced profits in previously protected sectors, possibletrade deficits and customs revenue losses) will mobilise domestic

JEN-07.QXD 3/31/00 10:19 AM Page 150

producer opposition before the longer-term benefits (in terms of eco-nomic growth and job creation, and lower prices for consumers) cantake effect. If, within an FTA, regional trade imbalances are seen towiden, there will be even stronger political pressure to bear on the gov-ernments of countries perceived to be losing out. The political sustain-ability of any regional group depends therefore on the perception thatall are gaining something from the arrangement. This is a political andnot an economic argument for resource flows (including foreign aidand investment) to offset trade imbalances. Compensation is onemeans of securing such flows.

The point of offsetting payments is not the provision of an alterna-tive source of revenue for cash-constrained governments, but an equi-table distribution of benefits between participating countries:

The primary objective of compensation should be to equalize benefitsto private economic agents rather than to national governments. Thiscan best be achieved by extending employment and investmentopportunities and opening up goods and services markets in themore advanced countries to those from the economically weakerones. Nevertheless, political sensitivity will have to be taken intoaccount in addition to purely economic arguments. Thus, there willhave to be workable means of transferring compensation betweengovernments. In implementing any such scheme, it will be essentialto avoid negating the benefits that should accrue to the private sector.

(Mansoor and Inotai, 1991)

If, in an FTA, there are no economic grounds for the provision of directgovernment-to-government transfers, there may still be reasons, bothpolitical and economic to enhance the intra-regional flows of resourcesfrom core to peripheral economies in order to redistribute the gainsfrom freeing regional trade. This is particularly true where core eco-nomies attract most foreign direct investment from outside the region.There are several mechanisms that may be used to encourage cross-border flows.

7.5.1 Liberalising exchange controls

One means of facilitating private flows of funds outwards from coreeconomies is to remove exchange controls on intra-regional flowsof funds. This will enable private capital in core economies to seekprofitable investment opportunities in neighbouring countries, takingadvantage of possibly cheaper labour or different endowments of rawmaterials for production for the larger market.


JEN-07.QXD 3/31/00 10:19 AM Page 151

Within SADC, this is an obvious and important complement to theestablishment of the FTA. There are implications which will need to beaddressed, not least that countries that still operate capital controls willnot wish those that do not (like Zambia) to be an open window forcapital flight. One way in which this can be controlled is by liberalisingforeign direct investment first. This is, in fact, what South Africa isalready doing. Its exchange control regime is considerably more liberalfor investments in SADC than for investments elsewhere in the world.(Note that, strictly speaking, this applies to non-CMA members ofSADC, as there are no controls on capital flows within the CMA.) IfSouth Africa runs a capital account deficit in its regional balance ofpayments, this will offset the large current account surplus.

7.5.2 Free movement of labour

A second potential means of redistributing the benefits of the FTA isto allow free movement of labour within and between membereconomies. In theory, if labour can move from areas or industries thatdecline to those that grow, income and remittance flows will redistrib-ute the gains from the new industrial growth areas.

In practice, with high unemployment of unskilled labour in mostcountries in Southern Africa – and shortages of indigenous skilledlabour in all of them – free movement of labour between regionaleconomies is unlikely to be given approval within SADC in the nearfuture. Until national labour markets are functioning more efficiently,it is probably undesirable to allow the free movement of labour acrossmember countries’ borders. The same reason eliminated the possibilitythat Mexicans would be given freedom to seek employment in Canadaor the US as part of NAFTA, even though the other movable factor ofproduction, capital, is able to flow with few restrictions. However, overthe longer term, labour mobility would help reduce regional disparities –and the associated social costs.

As a starting point, SADC governments should encourage the freemovement of labour within national economies. As production isexpected to expand under the FTA, the unrestricted movement of labourshould facilitate the growth of employment rather than the raising ofunit labour costs. In the longer run, this process should also distributethe gains of regional trade to a larger proportion of the population.

7.5.3 Asymmetric phasing in of tariff reduction

The asymmetric phasing in of the FTA, which has already been acceptedin principle by member states, is itself a redistributive mechanism, as it

152 Carolyn Jenkins

JEN-07.QXD 3/31/00 10:19 AM Page 152

provides non-reciprocal access for a period of time to the market of thelargest economy. The proposal is that the SACU members would, onratification of the FTA treaty, reduce or remove immediately tariffs onabout three-quarters of products originating in SADC. Within fiveyears, tariff removal on almost 90 per cent of imports from SADCcountries would be completed. Non-SACU countries would have eightyears to phase down tariffs on intra-SADC trade. This strategy will allowdomestic and foreign (largely South African) investment in the regionto establish itself before the gradual removal of protective barriers.Although this is likely to prolong economic distortions, it is probablynecessary for the building of industrial capacity in less diversifiedeconomies, as it is possible to damage (or even destroy) existing manu-facturing by too rapid a liberalisation, even if firms have the potentialto be more efficient. At the same time, the codifying of a time framefor removing protection should encourage existing firms to take stepsto become more efficient – an incentive that is severely diminished ifprotection is believed to be indefinite. It is hoped that the building ofindustrial capacity in this way will not only enhance two-way trade inthe region, but also encourage labour to remain at home.

In fact, South Africa is not waiting for the implementation of theFTA to begin unilaterally reducing its tariffs on its regional imports. InMarch 1998 it announced that it was considering the removal of allduties on 60 per cent of tariff lines which affect neighbouring coun-tries with effect from 1 January 2000. This will effectively lengthen thephase-in period for smaller countries, as their eight-year phase-downwill commence only when the FTA programme begins. It is not yetclear how this proposal will affect the smaller SACU countries.

In the negotiations to establish the FTA, attention should be givento (i) the desired degree of asymmetry in the transition to the FTA, and(ii) the position of the BLNS members of SACU. Moreover, thetimetable for liberalisation should be regarded as a maximum period,with acceleration but not postponement being possible.

7.5.4 Regional investment incentives and development

A fourth alternative consists of adapting the EU practice of regionalinvestment incentives and infrastructural and educational development.The model proposed by the UEMOA – of transitional compensationpayments during moves towards a common external tariff followed bythe establishment of regional developmental funds – is particularlyinteresting for SADC, as it involves a grouping of poor developing


JEN-07.QXD 3/31/00 10:19 AM Page 153

countries. As the UEMOA is in the process of setting up a full customsunion, the payment of compensation is appropriate. However, the netexporting countries have expressed their unwillingness to continue tomake compensatory transfers after a period of adjustment by the othermembers. The suggestion that structural and developmental fundswithin the UEMOA be at least supplemented by donors is also interest-ing. This would possibly involve a re-prioritisation of aid, rather thanan increase in the aggregate amount received by participating countries.

The idea of a regional infrastructure investment programme, possiblyinvolving the establishment of a development fund in Southern Africais not new. Regional investment in infrastructure has historically beena central focus of SADC. Moreover, SADC finance officials have discussedthe establishment of a fund to support development in the region. Thisissue is being considered by SADC’s Finance and Investment SectorCoordinating Unit (FISCU).

There are several advantages to having at least one focus of the pro-posed redistribution mechanism on investment in infrastructure, espe-cially, for example, in transport and telecommunications, and electricitygeneration and distribution:

� There is good evidence that such expenditure has a significant impacton growth. For example, Easterly and Rebelo (1993) find a very strongrelationship (with a ‘very high coefficient’) between transport andcommunications investment and growth.

� To the extent that such investment fosters increased intra-regionaltrade by facilitating access to regional markets, it is an obvious com-plementary policy to trade liberalisation and hence an obvious can-didate for compensating expenditure.

� From a political economic perspective, it is likely to prove easier toconvince South Africa (and others) to fund expenditure on regional‘merit goods’ than to fund pure transfers to other countries.

The Maputo Corridor project, like other ‘corridor’ projects now in vari-ous stages of planning and implementation, is a prime example ofboth the type of project and the structure of financing that seemsappropriate for ‘compensatory’ initiatives. It is expected to have a strongpositive impact on growth in both South Africa and Mozambique; itwill foster increased intra-regional trade; and it has attracted strongpolitical support throughout the region.

Similar arguments (possibly less strong) might also be made forregional expenditure on education, particularly technical education.

154 Carolyn Jenkins

JEN-07.QXD 3/31/00 10:19 AM Page 154


Some standardisation of educational qualifications and apprenticeshiparrangements would enhance the value of such expenditures (seeChapter 5).

These arguments are relevant regardless of the share of the redistribu-tion package that is ultimately funded by a redirection of donor assis-tance to the region versus contributions from countries in the region.They are likely to be particularly important to the extent that SADCmembers argue for new funds from donors to assist in the transition toa sustainable FTA.

Inevitably, it is necessary to sound a note of caution. The provision ofresources for developmental projects does not necessarily producedevelopment (see Leonardi, 1995, with reference to southern Italy). Thequality of projects, the extent of private sector involvement and the gen-eral macro- and microeconomic environment are crucial for the impactof any scheme. Furthermore, African development finance institutionshave more often been unsuccessful than the reverse in financing work-able schemes with widespread benefits. Finally, in the creation (or mod-ification) of any fund or institution, checks need to be built in to makecertain that resources are used to encourage economic growth and arenot diverted to finance political clienteles.

A development fund should include contributions from SADCmembers, possibly related to their share of intra-regional trade. Eachmember could pay into the fund a percentage ‘tax’ on their exportsto other members of the Community. The pool could be supplementedby the redirection of aid, conditional on progress with intra-SADCtrade liberalisation.

The funding of specific projects would need clear criteria. Thesecould include:

1. demonstrable trade- and income-enhancing benefits; 2. evidence that at least two or more SADC member states would bene-

fit from the implementation of the proposal; 3. full compliance with the SADC liberalisation timetable by each

country applying for funds for the project; 4. the provision of some co-financing by each country applying for the

funds (either public or private sector); and 5. a budget demonstrating how the recurrent costs (including mainte-

nance) incurred by the project will be financed over the first tenyears following its completion.

The principle of co-financing is important, and a three- or four-wayco-financing structure appears the most attractive, with funding from

JEN-07.QXD 3/31/00 10:19 AM Page 155

the regional pool, applicant country governments, the private sectorand possibly donors. Co-financing by the private sector is especiallyimportant. Not only do the infrastructure needs of the region far out-strip the budgetary resources of member countries (even combined), butprivate sector co-financing helps to ensure that the projects chosen areeconomically viable. While a degree of public funding will continue tobe essential in many infrastructural projects, there is an increasing rangeof successful examples within the region of how the private sector canplay a constructive role. The Development Bank of Southern Africa hasaccumulated extensive experience with arranging finance for public-private initiatives, including transport links, water supplies and otherprojects, a number of which have an important regional dimension.

Following project approval, financing from the regional develop-ment fund should only be released once domestic participants havecarried out their obligations and local funds have been spent. This hasbeen a feature of EU Community Support Framework programmes: themost under-developed areas of Italy, for example, now have a domes-tic/external co-financing ratio of 1 : 1, and external funding is releasedonly once internally derived national and private money has beenspent. The results have been ‘radically changed in a positive direction’(Leonardi, 1995). A similar procedure for disbursement, together withthe requirement of private sector involvement, should help discouragecountries from participating in projects with low or even negative ratesof return in SADC.

Having member states co-apply for projects of mutual interest hasseveral advantages. It reduces the potential for purchasing plantand equipment that are incompatible with a rational deployment ofresources from a regional perspective; it increases the chances thatphysical cross-border links are improved; it increases cooperation at anational level; and it raises intra-group pressure for compliance withthe trade liberalisation timetable by all members (when projects will beturned down if at least one co-applicant is not on target).

The approval of applications for projects will be politically sensitive,and it is therefore imperative that this be the task of a supranationalbody with political autonomy and a clear mandate to make decisionsbased on transparent criteria, such as those suggested above. It willbe more cost-effective to strengthen and use existing institutions thanto create a new one. Strictly speaking, regional investment is theresponsibility of FISCU, although projects will overlap with the con-cerns of other coordinating units, like transport, water or trade. Theproject-approval body does not need to be a separate permanent

156 Carolyn Jenkins

JEN-07.QXD 3/31/00 10:19 AM Page 156

commission; a committee that meets several times a year could bemore appropriate. Such a committee should be composed of represen-tatives from, say, the SADC Secretariat, FISCU and one or two othercoordinating units (these could change depending on the nature of theproposed project); as well as representatives of those who are providingthe finance (the financial institution which administers the fund, theprivate sector and the external donor). Those who provide the fundingcould have a casting vote in cases where the committee is undecided.

Finally, it is important that any plans to establish a developmentfund to increase transfers to poorer economies be coordinated withproposals for development finance made by FISCU. This is necessary toavoid duplication of institutions or claims on donors. In general, thecoordination of donor support in mitigating industrial polarisation(and in other areas) is critical. In the past, there has been duplicationof effort in some areas and other important areas have been over-looked. While a degree of duplication can stimulate debate on somekey issues, there may be a lack of capacity among SADC members toabsorb a wide range of inputs. In this regard, there may be scope forcommissioning regular overviews when a variety of consultants’reports on very similar topics have been produced.

7.6 Concluding comments

In theory and in practice, there is no clear case for fiscal compensationto accompany regional trade arrangements. However, the issue of com-pensation is politically important in the context of the proposed SADCFTA due to the dominance of South Africa in the regional economy.Creating a sustainable framework for regional trade, may thereforerequire some mechanisms for ensuring that the potential gains fromregional trade liberalisation – in terms of stronger economic growththrough increased trade and investment – are shared broadly amongstthe member states.

This chapter sets out a range of measures that can help to achievethe aims of compensation while avoiding the difficulties associatedwith simple fiscal transfers. These include liberalisation of exchangecontrols; the asymmetric phasing in of tariff reduction; and the promo-tion of regional investments in infrastructure possibly through aregional development fund. It should be emphasised that these mea-sures are not mutually exclusive. Indeed, a combination of initiativesmay well be prove to be a useful approach to encouraging a politicallysustainable move towards free trade in Southern Africa.


JEN-07.QXD 3/31/00 10:19 AM Page 157

References

158

Adam, C. and D. Bevan (1997), ‘Fiscal restraint and the cash budget in Zambia’,mimeo, Centre for the Study of African Economies, University of Oxford.

African Development Bank (1993), Economic Integration in Southern Africa, 3 vol-umes, Oxford: Oxford University Press.

Aron, J. (1997), ‘Measuring currency misalignment: the importance of real shocksand regime changes’, Quarterly Review, Centre for Research into Economics andFinance in Southern Africa, London School of Economics, October.

Aron, J. (1998), ‘Political, economic and social institutions: A review of growthevidence’, Working Paper WPS/98-4, Centre for the Study of AfricanEconomies, University of Oxford.

Aron, J., I. Elbadawi and B. Kahn (1997), ‘Determinants of the real exchangerate in South Africa’, Working Paper WPS/97–16, Centre for the Study ofAfrican Economies, University of Oxford.

Bakoup, F., A. Bessaha and L. Errico (1995), ‘Regional integration in Eastern andSouthern Africa: The Cross-Border Initiative and its fiscal implications’,Working Paper WP/95/23, International Monetary Fund.

Bank of Botswana (1996), Economic Review.Bank of Botswana (1997), Botswana Financial Statistics, January.Bank of Mauritius (1996), Annual Report.Bank of Mozambique (1997), Statistical Bulletin, September.Bank of Namibia (1996), Quarterly Bulletin, September.Bank of Tanzania (1996), Economic and Operations Report.Barro, R. and X. Sala-i-Martin (1991), ‘Convergence across states and regions’,

Brookings Papers on Economic Activity, 1:1991, The Brookings Institution,pp. 107–58.

Begg, I. (1995), ‘Factor mobility and regional disparities in the European Union’,Oxford Review of Economic Policy, 11(2).

Begg, I., G. Gudgin and D. Morris (1995), ‘The assessment: regional policy in theEuropean Union’, Oxford Review of Economic Policy, 11(2).

Berg, E. (1988), Regionalism and Economic Development in Sub-Saharan Africa,USAID.

Bhattacharaya, A., P. Montiel and S. Sharma (1996), ‘Private capital flows to Sub-Saharan Africa: an overview of trends and determinants’, mimeo, InternationalMonetary Fund.

Bulmer-Thomas, V. (1997), ‘Regional integration in Latin America since 1985:open regionalism and globalisation’, in A. El-Agraa (1997).

Cabalu, H. (1995), ‘The East Asian “Miracle”: Can it Happen in Australia?’,paper presented at 24th Australian Conference of Economists, Adelaide,September.

Central Bank of Swaziland, Annual Report, various issues.Central Statistical Office (1997), National Accounts, 1985–1996, Zimbabwe.Central Statistical Service (1997), Statistics in Brief, South Africa.Chambers of Commerce and Industry, Annual Report 1996, Mauritius.

JEN-REF.QXD 3/31/00 10:22 AM Page 158

Coetzee, Z., K. Gwarada, W. Naudé and J. Swanepoel (1997), ‘Currency deprecia-tion, trade liberalisation and economic development’, South African Journal ofEconomics, 65(2).

Collier, P. and J. Gunning (1996), ‘Trade liberalisation and the composition ofinvestment: Theory and an African application’, Working Paper WPS/96–4,Centre for the Study of African Economies University of Oxford.

——(1999), ‘Explaining African economic performance’, Journal of EconomicLiterature, 37, 64–111.

Corden, M. (1985), Protection Growth and Trade, Basil Blackwell, ch.17 ‘Exchangerate protection’.

CREFSA (1997), ‘South African exchange control reform: an update’, QuarterlyReview, April.

De Bonis, V. (1997a), ‘Regional integration and commodity tax harmonization’,Policy Research Working Paper no. 1848, The World Bank.

——(1997b), ‘Regional integration and factor income taxation’, Policy ResearchWorking Paper no. 1849, The World Bank.

Decaluwé, B., D. Njinkeu and L. Bela (1995), ‘UDEAC case study’, presented atthe AERC workshop on Regional Integration and Trade Liberalisation, Harare.

Deloitte Touche Tohmatsu International (1997), Taxation in Sub-Saharan Africa,International Tax and Business Guide.

De Melo, J. and A. Panagariya, eds. (1993), New Dimensions in RegionalIntegration, Cambridge University Press.

De Melo, J., A. Panagariya and D. Rodrik (1993), ‘The new regionalism: a coun-try perspective’, in J. de Melo and A. Panagariya, eds. (1993).

DFAT (1988), Australia’s Trade Policies, Department of Foreign Affairs and Trade,Canberra.

Devereux, M. and M. Pearson (1990), ‘Harmonising corporate taxes in Europe’,Fiscal Studies 11:1, February (21–35).

Dollar, D. (1992), ‘Outward-oriented developing economies really do grow morerapidly: Evidence from 95 LDCs, 1976–1985’, Economic Development andCultural Change, 40(2): 523–44 .

Dowrick, S. and D. Nguyen (1989), ‘OECD comparative economic growth1950–1985: catch-up and convergence’, American Economic Review, 79(5),pp. 1010–30.

Easterly, W. and S. Rebelo (1993), ‘Fiscal policy and economic growth: an empir-ical investigation’, CEPR .

Economist Intelligence Unit, Country Profile, various issues for SADC countries.Economist Intelligence Unit, Country Report, various issues for SADC countries.Edwards, S. (1993), ‘Openness, trade liberalisation and growth in developing

countries’, Journal of Economic Literature, 31(3).Egovu, E. (1996), Regional Industrial Location Strategy: Draft Report for Malawi,

Zomba: University of Malawi Economics Department.El-Agraa, A. (1997), Economic Integration Worldwide, Macmillan.Elbadawi, I. (1995), ‘The impact of regional trade/monetary integration schemes

on intra-sub-Saharan African trade’, presented at the AERC workshop onRegional Integration and Trade Liberalisation, Harare.

Evans, D. (1996), ‘Trade policy strategies for Southern Africa: Building SADCtrade policy capacity’, Discussion Paper, Commonwealth Secretariat.

References 159


——(1997), ‘Impact of the removal of tariffs for the Free Trade Area of theSouthern African Development Community (SADC)’, Occasional Paper No. 5,London: Commonwealth Secretariat.

Evans, P. and J. Walsh (1995), The EIU Guide to the New GATT, EconomistIntelligence Unit.

Fine, J. and S. Yeo (1994), ‘Regional integration in Sub-Saharan Africa: Dead endor fresh start?’, mimeo, Africa Economic Research Consortium.

Foroutan, F. (1993), ‘Regional integration in Sub-Saharan Africa: Past experi-ences and future prospects’ in J. de Melo and A. Panagariya (eds.) (1993).

Gillis, M., C. Shoup and G. Sicat (eds.) (1990), Value Added Taxation in DevelopingCountries, The World Bank.

Harvey, C. and C. Jenkins (1992), ‘The unorthodox response of the SouthAfrican economy to changes in macroeconomic policy’, Discussion Paper 300,Institute of Development Studies, University of Sussex.

Imani Development (International) Ltd. (1997a), ‘Study to Determine TariffSchedules for the Implementation of the SADC Protocol on Trade’, Harare.

Imani Development (Malawi) Ltd (1997b), ‘Study to Determine the Impact ofthe SADC FTA on Malawi’, Blantyre.

International Monetary Fund (1997a), Exchange Arrangements and ExchangeRestrictions: Annual Report 1997.

International Monetary Fund (1997b), International Financial Statistics Yearbook.International Monetary Fund, Staff Country Report, various issues for SADC

countries.Isimbabi, M. (n.d.), ‘The WTO Agreement & Financial Services in African

Countries: A Review of Policy & Research Issues’ (EAGER Project).Jenkins, C. (1997), ‘Regional integration is not enough’, Quarterly Review, Centre

for Research into Economics and Finance in Southern Africa, London Schoolof Economics, April.

Jenkins, C. and L. Thomas (1997), ‘Is Southern African ready for regional mone-tary integration? Convergence, divergence and macroeconomic policy inSADC’, Research Paper No. 10, Centre for Research into Economics and Financein Southern Africa, London School of Economics.

King, M.A. and D. Fullerton (1984), The Taxation of Income from Capital: AComparative Study of the United States, the United Kingdom, Sweden and WestGermany, University of Chicago Press.

Krishna, K., A. Ozyildirim and N. Swanson (1998), ‘Trade, investment andgrowth: nexus, analysis and prognosis’, Working Paper 6861, National Bureauof Economic Research.

Kritzinger van Niekerk, L. (ed.), (1997), ‘Towards strengthening multisectorallinkages in SADC’, Halfway House: Development Bank of Southern Africa.

Krueger, A. (1997), ‘Free trade agreements versus customs unions’, Journal ofDevelopment Economics, Vol. 54.

Laird, S. (1997), ‘MERCOSUR: objectives and achievements’, Staff WorkingPaper TPRD-97–002, World Trade Organization.

Leith, J. C. (1992), ‘The static welfare effects of a small developing country’smembership in a customs union: Botswana in the Southern African CustomsUnion’, World Development, 20(7).

Leonardi, R. (1995), ‘Regional development in Italy: social capital and theMezzogiorno’, Oxford Review of Economic Policy, 11(2).

160 References


Maasdorp, G. (1993), ‘Trade’, in G. Maasdorp and A. Whiteside, RethinkingEconomic Cooperation in Southern Africa: Trade and Investment, Johannesburg:Konrad Adenaeur Stiftung.

Mansoor, A. and A. Inotai (1991), ‘Integration efforts in Sub-Saharan Africa: fail-ures, results and prospects – a suggested strategy for achieving efficient inte-gration’, in A. Chhibber and S. Fischer (eds), Economic Reform in Sub-SaharanAfrica, The World Bank.

Massey, P. (1995), New Zealand, Market Liberalisation in a Developed Economy, StMartin’s Press.

Mauritius Expenditure, Development and Investment Authority, Mauritius: the‘Heaven’ for Investors.

Ng, F. and A. Yeats (1997), ‘Open economies work better! Did Africa’s protec-tionist policies cause its marginalization in world trade?’, World Development,25(6), pp. 889–904.

Nomvete, B., G. Maasdorp and D. Thomas (1997), Growth with Equity, CapeTown: Francolin Publishers.

O’Brien, P. (1997), ‘Industrial policy issues in SADC’, report prepared forGTZ.

O’Connell, S. (1997), ‘Macroeconomic harmonization, trade reform, andregional trade in SubSaharan Africa’, in A. Oyejide, I. Elbadawi and P. Collier(eds), Regional Integration and Trade Liberalization in SubSaharan Africa, vol. 1,Macmillan.

Organisation for Economic Cooperation and Development, GeographicalDistribution of Financial Flows to Aid Recipients, various issues.

Organisation for Economic Cooperation and Development (1991), Taxing Profitsin a Global Economy: Domestic and International Issues, Paris.

Page, S. (forthcoming), Regionalism Among Developing Countries, Macmillan.Pasha, H. and M. A. Iqbal (1994), ‘Taxation reforms in Pakistan’, Pakistan Journal

of Economics, X, 1–2, 47–75.Porter, M. (1990), The Competitive Advantage of Nations, Cambridge, MA.Reserve Bank of Malawi, Financial and Economic Review, various issues.Robson, P. (1997), The Economics of International Integration, London: Unwin

Hyman.——(1997), ‘Integration in Sub-Saharan Africa’, in A. El-Agraa (1997).Rocha, J. (1996), ‘Regional industrial strategy for Southern Africa; a report on

Angola’, Johannesburg: Minerals and Energy Policy Centre.Rodriguez, F. and D. Rodrik (1999), ‘Trade policy and economic growth: a skep-

tic’s guide to cross-national evidence’, Working Paper 7081, National Bureau ofEconomic Research.

Rodrik, D. (1989), ‘Credibility of trade reform – a policymaker’s guide’, TheWorld Economy, 12(1).

Sachs, J. and A. Warner (1995), ‘Economic reform and the process of global inte-gration’, in W. Brainard and G. Perry (eds), Brookings Papers on EconomicActivity, 1:1995, The Brookings Institution, pp. 1–118.

Sachs, J. and A. Warner (1997), ‘Sources of slow growth in African economies’,Journal of African Economies, Vol. 6 No. 3, pp. 335–79.

SACOB (1998), ‘Explanatory note on: The Southern African Customs Union’sproposed trade offer to the Southern African Development Community’,South African Chamber of Business.

References 161


SADC (n.d.), Trade, Industry and Investment Review, Gaborone: Southern AfricanDevelopment Community.

——(1997), Industrial Change and Trade Policy in SADC, Gaborone: SouthernAfrican Development Community.

SADC Human Resources Department Sector (n.d.), ‘Protocol on Education andTraining’, Gaborone: Southern African Development Community.

Sala-i-Martin, X. (1997), ‘I just ran two million regressions’, American EconomicReview Papers and Proceedings, May, 87(2), pp. 178–83.

Senona, M. P. (1996), Budget Speech 1996/97, Ministry of Finance and EconomicPlanning, Lesotho.

South African Department of Trade and Industry (1997), ‘Export Incentives’.——(1997), ‘Incentive Schemes’.South African Reserve Bank, Quarterly Bulletin, various issues.Southern African Consulting Group (1997), ‘Transport and Communications

Integration Study for Southern Africa’, Maputo.Standard Bank, Key Indicator, various issues.Stevens, C. (1997) ‘The EU and South Africa: Slow progress towards “free” trade’,

Quarterly Review, Centre for Research into Economics and Finance in SouthernAfrica, London School of Economics, April.

Stotsky, J. and A. WoldeMariam, (1997), ‘Tax effort in Sub-Saharan Africa’,Working Paper WP/97/107, International Monetary Fund.

Tanzi, V. (ed.) (1990), Fiscal Policy in Open Developing Economies, InternationalMonetary Fund.

——(1991), Public Finance in Developing Economies, Edward Elgar.——(1995), Taxation in an Integrating World, The Brookings Institution.Taube, G. and H. Tadesse (1996), ‘Presumptive taxation in Sub-Saharan Africa:

Experiences and prospects’, Working Paper WP/96/5, International MonetaryFund.

TechnoServe (1997), ‘Unrecorded Cross-Border Trade between Tanzania and HerNeighbours: Implications for Food Security’.

Walters, J. (1989), ‘Renegotiating dependency: the case of the Southern AfricanCustoms Union’, Journal of Common Market Studies, 28(1).

Wangwe, S., H. Semboja and G. Kahyarara (1996), ‘Regional industrial strategyfor Southern Africa: the case of Tanzania’, Dar es Salaam: Economic and SocialResearch Foundation.

Weintraub, S. (1997), ‘The North American Free Trade Agreement’, in A. El-Agraa (1997).

Wood, A. (1994), North–South Trade, Employment and Inequality, IDSDevelopment Studies Series, Oxford: Clarendon Press.

World Bank, African Development Indicators, various issues.World Bank (1995), World Data, CD-ROM.World Bank (1997), Global Development Finance.World Trade Organisation (WTO) (1996), Annual Report 1996: Trade and Foreign

Direct Investment.ZimConsult (1996a), ‘Regional industrial location study: the case of

Mozambique’, Harare.——(1996b), ‘Regional industrial location study: the case of Zambia’, Harare.——(1996c), ‘Regional industrial location study: the case of Zimbabwe’, Harare.

162 References


Appendix A1Review of Taxation Policies andGovernment RevenueRichard Hess

163

This appendix describes the tax and revenue frameworks of SADC members. It isbased on information as at the first half of 1998. Data reported in this appendixare from Imani Development and other private sector sources (Deloitte Touche,1997), SADC government publications, and IMF and World Bank publications.

A1.1 Comparative analysis of commonpatterns and trends in the tax base

There are large divergences between the various SADC countries in their taxa-tion policies. Whilst there are some similarities in terms of the types of taxeslevied, albeit with varying rates, there are also a number of variations in types oftaxes applied in the different countries.

However there are some commonalties and similar trends:

Small tax baseThe tax base for direct taxes is very small, since in all the SADC countries exceptMauritius, only a relatively small proportion of the population is in formalemployment and paying income tax. Although there are often large informalsectors in all the countries, it is always very difficult for governments to tax peo-ple engaged in this sector adequately. The number of corporate bodies is alsogenerally small, so corporate taxation is also usually only from a small base.Although indirect taxes have a broader base, given the low levels of consump-tion by large proportions of the populations in many SADC countries, the baseis again relatively small. High levels of taxation as in many SADC countries willtraditionally cause people to find ways of tax evasion and avoidance.

High tax evasionIt is very difficult to quantify the levels of tax evasion in each country, butrecent exercises in Zimbabwe by the Department of Taxes and by theDepartment of Customs and Excise to increase collection have shown interest-ing results. ‘Operation Tax Net’ in 1997 in Zimbabwe, under which tax officials

JEN-APP1.QXD 4/1/00 10:06 AM Page 163

made spot calls on many businesses to check on tax payments, collected Z$30million in three weeks in Kariba, Z$300 million in Harare in four weeks andZ$126 million in Bulawayo in a similar time period. Furthermore, it has beenrevealed that only 50 per cent of the companies on the Registrar of Companiesrecords are on the records of the Department of Taxes. The Department ofCustoms and Excise in Zimbabwe, under ‘Operation Bhadharai’ (meaningOperation Pay) during the period October–December 1997 is believed tohave netted Z$200 million in additional revenue through closer examinationof goods.

Another example of large-scale tax evasion is evidenced by a recent study(TechnoServe, 1997) commissioned by USAID in Tanzania which monitored thelevel of informal unrecorded cross-border trade between Tanzania and its neigh-bours. This study estimated that the overall value of informal cross-border tradewith Tanzania’s neighbours was worth US$270 million in the year 1995/6, ofwhich the total value of unrecorded imports was around US$100 million. In rel-ative terms the informal trade could be equivalent to the formal cross-bordertrade. This study ‘concludes that substantial trade occurs unofficially alongTanzania borders with far reaching policy implications on GDP, governmentrevenue and regional food security. The existence of unofficial trade on a signif-icant scale implies that the government are not reliably informed about theirtrade situation, and that the revenue loss to the exchequer could be enormous.’

Broadening the tax bases and greater dependency on indirect taxesMost SADC countries are trying to broaden their tax bases both for direct andindirect taxes. Measures include introducing value added taxes to replace salestaxes, since a VAT covers a broader section of the economy and is not so easilyevaded as sales tax. As countries reduce their levels of direct taxation, especiallycorporate taxes, there has been a tendency to increase the base for indirect taxesand to increase the rates being charged on such taxes.

Lowering of direct tax and customs duty ratesIn an effort to stimulate greater economic activity and reduce the incidence oftax evasion and avoidance, several countries in the region have been reducingtheir marginal rates of direct tax. Most countries are also reducing their levels ofcustoms duties, both in terms of bands and in actual rates. In some cases this isbeing done in terms of WTO requirements (e.g. South Africa and Mauritius)whilst in most other countries (Malawi, Tanzania, Zambia and Zimbabwe) it isbeing done as part of structural adjustment. Whilst this sometimes results inlower absolute levels of duty collection, this is not always the case, since collec-tions sometimes increase with lowering the rates because of increased levels ofimports and greater compliance.

Special incentive schemesSeveral SADC countries have established a number of special schemes withincentives which may reduce or remove liability for corporate taxation.Mauritius has the largest number of such schemes, which include ExportProcessing Zones, Export Services Zones, Free Port; Pioneer Industry Status, andOffshore Business Activities. Of these, EPZs are the most common in the SADC

164 Richard Hess


region, with several countries having introduced such schemes or planning toso introduce.

The percentage of total revenue raised by each type of tax is given in Table A1.This table shows that there is no real pattern or trend in proportions of govern-ment revenue from the different tax types.

The percentage of tax revenue raised by each type of tax is given in Table A2.Customs revenue as a proportion of tax revenue appears to be relatively con-stant, with no trend apparent throughout SADC. However there are someexceptions, such as Mauritius, where the proportion from customs revenue isnoticeably declining. The percentage of direct tax is falling in a few countries,which indicates a shift from direct taxation to indirect taxation, although insome countries there is a significant increase in this proportion. The only realtrend is with indirect tax, which shows that this proportion of tax revenue isgenerally increasing in most SADC countries, although not very significantly.

South Africa is by far the most dominant source of customs revenue on SADCimports for the non-SACU SADC countries, as shown in Table A3. South Africaaccounts for between 70 and 98 per cent of customs revenue on SADC importsfor each country. Revenue from other SADC sources is relatively insignificant,except for the SACU countries themselves, for which Zimbabwe is the dominantsource.

Table A4 shows there is also no consistency in trends in total government rev-enue. Over the period 1990–6/7 the level of government revenue as a propor-tion of GDP has noticeably increased in some countries, such as Lesotho andZambia, whilst in some countries it has noticeably decreased, such as in

Review of Taxation Policies and Government Revenue 165

Table A1 Percentage of total government revenue by type of tax

Customs revenue Direct tax Indirect tax

1990 1995 1996 1990 1995 1996 1990 1995 1996

Angola n/a n/a n/a n/a n/a n/a n/a n/a n/aBotswana 13.1 16.4 15.4 38.5 31.7 21.0 1.6 4.2 4.5Lesotho 43.6 49.1 45.0 8.7 15.0 13.4 16.0 12.9 11.1Malawi 17.0 22.1 22.0 33.5 27.8 45.0 8.6 28.5 26.1Mauritius 45.7 34.0 33.5 23.4 24.1 26.5 20.6 23.9 25.6Mozambique n/a 24.0 22.2 n/a 16.6 14.1 n/a 47.8 50.9Namibia 25.3 27.9 29.8 33.3 27.2 26.4 23.9 31.2 32.0South Africa 4.0 1.8 1.8 54.7 54.2 56.1 38.0 40.8 38.6Swaziland 45.3 47.8 49.4 29.6 31.9 27.2 13.0 13.6 14.4Tanzania n/a n/a 27.6 n/a n/a 21.9 n/a n/a 26.2Zambia 17.1 11.8 11.6 39.7 32.8 36.4 37.6 47.8 43.7Zimbabwe 13.8 16.1 17.2 36.0 43.1 42.3 20.7 24.5 26.5

Notes: 1. SACU countries have customs and excise revenue figures combined.2. Botswana government revenue includes mineral revenue, which is not included

under any of the above sections. Mineral revenue accounted for the followingpercentages of total government revenue: 1990 – 54%; 1995 – 53%; 1996 – 47%.

3. Customs revenue for South Africa is net of SACU payments.


166 Richard Hess

Table A2 Percentage of tax revenue by type of tax

Customs revenue Direct tax Indirect tax

1990 1995 1996 1990 1995 1996 1990 1995 1996

Angola n/a n/a n/a n/a n/a n/a n/a n/a n/aBotswana 24.7 31.3 37.7 72.3 60.6 51.3 3.0 8.1 11.0Lesotho 63.6 63.8 64.7 12.7 19.4 19.2 23.3 16.8 16.0Malawi 17.0 22.1 22.0 33.5 27.8 45.0 8.6 28.5 26.1Mauritius 50.8 41.4 39.1 26.0 29.4 30.9 22.9 29.1 29.9Mozambique 27.9 26.3 24.1 15.7 18.2 15.2 53.7 52.3 55.3Namibia 30.6 32.0 33.8 40.2 31.1 29.9 28.9 35.7 36.3South Africa 4.1 1.9 1.8 56.6 56.0 58.1 39.3 42.2 40.0Swaziland 50.5 50.8 52.5 33.0 34.0 28.7 14.5 14.5 15.3Tanzania 25.9 21.6 30.4 n/a n/a 29.0 39.8 31.5 24.2Zambia 18.1 12.8 12.7 42.1 35.6 39.9 39.8 51.6 47.5Zimbabwe 15.3 18.9 19.3 39.8 50.5 47.4 22.9 28.7 29.7

Notes: 1. SACU countries have customs and excise joined together, probably a nominalimpact.

2. Botswana government revenue includes mineral revenue – this is not includedunder any of the above sections.

3. Customs revenue for South Africa is net of SACU payments.4. In addition to the taxes as given, there are often miscellaneous other taxes which

are not stated in the table, hence the totals may not add up to 100 per cent.

Table A3 Percentage shares of customs revenue from SADC imports by country,1995

Imports by: Malawi Mauritius Mozambique Tanzania1 Zambia Zimbabwe SACUfrom:

Angola2 0.00 0.00 0.00 0.00 0.00 0.01Botswana 1.00 0.08 0.03 0.90 0.63Lesotho 0.00 0.00 0.00 0.05 0.00Malawi 0.00 0.23 0.69 0.04 4.95Mauritius 0.00 0.00 0.14 0.18 0.37Mozambique 0.10 0.04 0.54 0.15 1.21Namibia 0.20 0.14 0.65 0.41 0.12South Africa 70.80 96.76 83.25 90.0 86.29 98.40Swaziland 7.10 1.12 6.08 1.30 0.14Tanzania 0.20 1.26 0.00 1.14 0.02 1.68Zambia 0.90 0.00 0.15 0.30 4.66Zimbabwe 19.60 0.60 9.61 8.54 87.12Total 100.00 100.00 100.00 100.00 100.00 100.00

Notes: 1Data for Tanzania not available. Estimates made based on 1996 import data.2Data for Angola not available.


Botswana and Zimbabwe, whilst in others it has stayed around the same level orshown an inconsistent pattern. Furthermore there are very large variations inthe actual proportions of GDP accounted for by government revenue, rangingfrom a high of over 60 per cent in 1996/7 in Lesotho to levels of less than20 per cent in Malawi, Mauritius and Mozambique.

Tax revenue as a percentage of GDP also does not appear to have any particu-lar trend in the SADC countries. This percentage has been significantly increas-ing over the period 1990–6/7 in Lesotho and Zambia, whilst it has been fallingin Botswana, Mozambique, Swaziland and Zimbabwe. Again there are large vari-ations in the percentage of GDP accounted for by tax revenue, ranging fromover 40 per cent in 1996/7 in Lesotho to less than 10 per cent in Mozambique.


Table A4 Total government revenue as a percentageof GDP

1990 1995 1996/7

Angola 40.0 37.6 n/aBotswana 55.0 42.9 37.4Lesotho 49.3 58.1 69.3Malawi 22.6 18.9 17.3Mauritius 18.1 21.3 19.0Mozambique n/a 13.1 07.1Namibia 34.1 36.1 36.1South Africa 25.4 25.3 26.4Swaziland 44.7 35.0 34.7Tanzania n/a n/a 20.0Zambia 10.7 29.6 34.2Zimbabwe 39.3 33.1 29.6

Table A5 Tax revenue as a percentage of GDP

1990 1995 1996/7

Angola 28.0 24.8 n/aBotswana 29.7 18.2 15.0Lesotho 33.8 44.8 48.1Malawi 19.6 16.2 16.0Mauritius 16.3 17.5 16.3Mozambique n/a 12.0 06.6Namibia 28.2 31.5 31.5South Africa 24.6 24.7 25.6Swaziland 38.5 33.8 33.1Tanzania 19.7 14.2 18.1Zambia 10.1 27.4 31.5Zimbabwe 35.5 28.2 26.4


A1.2 Comparative review of current tax policies

This section looks at the range of taxes for each significant section of tax in theSADC region.

A1.2.1 Corporate taxNormal corporate tax for most companies in SADC is between 30 and 40 percent. The highest taxes are in mining with around 70 per cent for diamondmining companies in Angola, 55 per cent for diamond mining companies inNamibia and 42 per cent for petroleum mining in Namibia. The highest normaltax for domestic companies is 45 per cent for service and trade companies inMozambique, followed by 39.375 per cent for all domestic companies (and47.775 per cent for foreign branches) in Zimbabwe. Botswana has the lowestcorporate tax at either 15 per cent or 25 per cent, although a number of coun-tries have established Export Processing Zones that offer beneficial rates to com-panies that can meet their criteria. The following table provides a summary ofcorporate tax rates across SADC members. The structure of tax rates is inevitablycomplicated by, for example, export and investment incentive schemes. Moredetailed descriptions can be found in later in this appendix (in the country-by-country analysis) and in Appendix A3.

A1.2.2 Individual taxThe marginal rate for normal income tax for individuals in SADC is predomi-nantly between 30 and 35 per cent. Income tax in all the countries variesaccording to the income bracket of the individual. The number of bands variesfrom two in Lesotho to 12 bands in Tanzania. The highest taxation on the topbracket is in South Africa at 45 per cent, followed by Zimbabwe at 42 per cent(including a ‘development levy’). Angola has the lowest rate of taxation at15 per cent. The levels of individual income tax are seen to act as disincentivesto people in terms of work, in the countries with higher rates of individual tax-ation. The high rates of taxation also encourage high levels of tax evasion.

A1.2.3 Withholding taxPayments out of the country to non-residents attract some form of taxation inmost SADC countries. Taxation levels for different methods of earnings oftenvary in the different countries. Withholding taxes in the SADC countries aregenerally between 10 and 20 per cent. The highest rate is that on services inMozambique which attracts 30 per cent and Lesotho which places 25 per centwithholding tax on payments going out of the country. Mauritius and SouthAfrica do not apply a withholding tax.

A1.2.4 Capital gainsIn some countries capital gains taxes are viewed as being income tax, thereforethe rate of capital gains tax varies according to the benefit. In other countries,capital gains are taxed separately. The rates vary between 0 per cent (inNamibia, South Africa, Swaziland, Tanzania and Zambia) and 40 per cent inMozambique.

168 Richard Hess


Review

of Taxation Policies and Governm

ent Revenue

169Table A6 Corporate tax

Country Normal company tax Mining Non-resident companies Manufacture Other

Angola Profit �US$5m 25% Diamonds: 7.5% on See normal 40%�US$5m �US$30m 35% gross value of sales and company tax Additional 10% forProfit �US$30m 45% 65% tax on annual income > US$200

profitsOther 3–10% ofgross value

Botswana Basic tax 15%; additional The government has a 25% See normal tax 10% (the additional large shareholding in all company taxtax may be offset the major mining against 15% withholding companiestax on dividends)

Lesotho 35% See normal 35%�25% of 15%company tax repatriated profits

Malawi 38% See normal 43% See normal Life assurance 24%company tax company tax

Mauritius 35% See normal See normal company 15% Listed co. 25%company tax tax, unless double Investment co. 15%

taxation agreement Offshore banks 15%

Mozambique Trade & services 45% See normal 40%Agriculture 35% company tax

Namibia 35% Other 57% See normal See normalDiamond mining 55% company tax company taxPetrol mining 42%


Table A6 (Continued)

Country Normal company tax Mining Non-resident companies Manufacture Other

South Africa 35% Gold 51�(255/x), 40% See normal Long-term insurers Secondary tax 12.5% x�ratio of taxable company tax 30–35%

to gross income Retirement funds(gross interest andnet rentals) 17%

Swaziland 37.5% 27% 15% See normalcompany tax

Tanzania 35% See normal 20% on remittance See normalcompany tax of profits company tax

Zambia 35% See normal See normal See normal Agriculture 15%company tax company tax company tax Banks 35–45%

Listed co. 30%

Zimbabwe 39.375% See normal 47.775% See normalcompany tax company tax

170R

ichard Hess


Review


ent Revenue

171Table A7 Individual tax

Normal income tax Payments to non-residents

Angola K0–2,500,000 0% See normalK2,500,000–10,000,000 4% income tax K10,000,000–25,000,000 K400,000�6%K25,000,000–50,000,000 K1,300,00�10%K50,000,000� K3,800,000�15%

Botswana P0–20,000 0% P0–35,000 5%P20,000–35,000 5% P35,000–50,000 P1,750�10%P35,000–50,000 P750+10% P50,000–65,000 P3,250�15%P50,000–65,000 P2,250�15% P65,000–80,000 P5,500�20%P65,000–80,000 P4,500�20% P80,000+ P8,500�25%P80,000� P7,500�25%

Lesotho M0–30,000 25% 25%M30,000� M7,500�35%A personal tax credit of M2,640 was introducedin April 1996.

Malawi K0–6,000 0% See normal income tax K6,000–18,000 16%K18,000–42,000 K1,920�27%K42,000� K8,400�38%

Mauritius Rs0–15,000 5% See normal income tax Rs15,000–35,000 Rs750�15%Rs35,000–55,000 Rs3,750�25%Rs55,000� Rs8,750�30%The bands refer to gross taxable income, whichexcludes, among other items, a range ofpersonal reliefs.


172R

ichard Hess


Normal income tax Payments to non-residents

Mozambique Mt0–390,000 6% 30%Mt390,000–1,170,000 Mt23,400�15%Mt1,170,000� Mt140,400�30%The bands refer to monthly income; taxpayers with remuneration less than Mt340,000 areexempt; this amount acts as a floor for disposable income

Namibia N$0–15,000 0% See normal income taxN$15,000–20,000 10%N$20,000–30,000 N$500�15%N$30,000–40,000 N$ 2,000�20%N$40,000–50,000 N$ 4,000�25%N$50,000–80,000 N$ 6,500�30%N$80,000� N$ 15,500�35%

South Africa R0–30,000 19% See normal taxR30,000–35,000 R5,700�30%R35,000–45,000 R7,200�32%R45,000–60,000 R10,400�41%R60,000–70,000 R16,550�43%R70,000–100,000 R20,850�44%R100,000� R34,050�45%There is a tax rebate of R3,215

Swaziland E0–13,000 0% See normal income taxE13,000–16,000 12%E16,000–20,000 E360�16%E20,000–24,000 E1,000�20%


Review


ent Revenue

173E24,000–28,000 E1,800�24%E28,000–32,000 E2,760�28%E32,000–36,000 E3,880�32%E36,000–40,000 E5,160�36%E40,000� E6,600�39%

Tanzania Shs0–20,000 0% See normal taxShs20,000–50,000 7.5%Shs50,000–80,000 Shs2,250�10%Shs80,000–110,000 Shs5,250�12.5%Shs110,000–140,000 Shs9,000�15%Shs140,000–200,000 Shs13,500�17.5%Shs200,000–300,000 Shs24,000�20%Shs300,000–400,000 Shs44,000�22.5%Shs400,000–500,000 Shs66,500�25%Shs500,000–600,000 Shs91,500�27.5%Shs600,000–700,000 Shs119,000�30%Shs700,000� Shs149,000�35%

Zambia K0–1,200,000 10% See normal income taxK1,200,000–1,800,000 K120,000�20%K1,800,000� K240,000�30%There is a tax rebate of K60,000 deductedfrom tax payable as above

Zimbabwe Z$0–9,000 0% See normal income taxZ$9,000–15,000 20%Z$15,000–30,000 Z$1,200�25%Z$30,000–45,000 Z$4,950�30%Z$45,000–60,000 Z$9,450�35%Z$60,000� Z$14,700�40%


A1.2.5 Inheritances and donationsAgain, there is a wide variation between what individual countries charge in thefield of inheritances and donations. Namibia, Swaziland, Tanzania and Zambiado not charge taxes in these areas, with Mauritius not charging estate duty andhaving nominal charges on donations. Lesotho and Mozambique have taxes

174 Richard Hess

Table A9 Capital gains tax

Angola 15%Botswana 25% for companiesLesotho Treated as income taxMalawi Treated as income taxMauritius Almost non-existentMozambique 40%Namibia NoneSouth Africa NoneSwaziland NoneTanzania NoneZambia NoneZimbabwe 20% on marketable securities or dis-

posal of immovable property. 10% on listed securities.

Table A8 Withholding tax

Angola 15% for dividendsBotswana 15% for dividends, interest, royalties, consulting fees.

Entertainers and sportsmen are subject to 10% and contrac-tors to 25% although this is negotiable

Lesotho 25% for dividends, interest, royalties, natural resource payments, management charges and trustee’s fees. All other payments to non-residents attract 10%

Malawi 15%Mauritius No withholding taxes, with the exception of payments on

interest which is dependent on the countryMozambique Dividends 18%, service fees attract 30% for salaries and 15%

for the balanceNamibia Dividends 10%, royalties 10.5%South Africa No withholding taxesSwaziland Dividends 15%, interest and construction fees 10%, entertain-

ers and sportsmen 15%Tanzania 20% on profit remittedZambia 15% on dividends, interest, royalties, rent, management and

consultancy feesZimbabwe Dividends 20%, dividends from listed companies 15%, interest

10%, fees, remittances and royalties 20%


varying from zero to 33.5 per cent and one to 30 per cent respectively. SouthAfrica has the highest flat charge of 25 per cent and Zimbabwe has 20 per cent.

A1.2.6 Transaction chargesTransaction charges are made up of either sales tax or value-added taxes, taxeson sales of shares and taxes on sales of immovable property. Angola and


Table A10 Taxes on inheritances and donations

Angola n/aBotswana Companies 12.5% Individuals 5%Lesotho 0%–33.5%Malawi 0%–10%. Donations are subject to

income tax in the hands of the donorMauritius No estate duty. Donations of land

attract 10% paid by the doneeMozambique 1%–30%Namibia NoneSouth Africa 25%Swaziland NoneTanzania NoneZambia NoneZimbabwe 20%

Table A11 Transaction charges

Angola 1.5% to 150%Botswana General sales tax varies from 5%–15% with a mode of 10%.

Transfer duty on non-agricultural land is 5%, on agricul-tural property is 30%Lesotho General sales tax 10%, immovable property 3%–4%, share

transfers 1%Malawi VAT 20%, transfer of immovable property 3%Mauritius Sales tax 8%, immovable property 12%Mozambique Building transfer tax 7.25%–14.5%, consumption tax

5%–150% with most taxes from 5%–30%, circulation tax5%–20%, share transfers 0.4%

Namibia General sales tax 8% on goods, 11% on services, sharetransfer 0.2%

South Africa VAT 14%Swaziland General sales tax 12%, transfer of immovable property 6%,

share transfers 1%Tanzania Sales tax 10%, stamp duty 1.5%Zambia VAT 17.5%, property and share transfer 2.5%Zimbabwe Immovable property 6%, sales tax 17.5% on normal, 27.5%

on luxury, share transfer 0.35%


176Table A12 Summary of taxation by country

Corporate Individual Withholding Capital Inheritances Transaction tax tax tax gains and donations taxes

Angola Diamond mining, 0–15% Dividends 15% 15% – 1.5%–150%�/�70%Others by value25–45%

Botswana 25% Residents 0–25% 15% 25% Individuals 5% General salesNon-residents 5–25% Companies tax 10%

12.5%

Lesotho Manufacturing 15% Residents 25–35% 25% As income 0–33.5% General salesOther 35% Non-residents tax tax 10%

25% Transfer 4%Shares 1%

Malawi Residents 38% 0–38% 15% 38% 10% VAT 20%Life assurance 24% Imm. property 3%Non-residents 43%

Mauritius Offshore banks, 5–30% – Nominal Nominal tax Sales tax 8%investment co. & on donations Transfer 11% manufacturing 15%

Listed co. 25%Others 35%

Mozambique Manufacture 40% Residents 6–30% Dividends 18% 40% 1–30% ConsumptionAgriculture 35% Non-residents 30% Services 30% 5–150%Trade and Buildingsservices 45% 7.25–14.5%

Shares 0.4%


177Namibia Non-mining 35% 0–35% Dividends 0% 0% General

Diamond 10% sales tax 8% mining 55% Royalty on goods, 11% on

Petroleum 10.5% servicesmining 42%

Other mining 57%

South Resident 35% 19–45% 0% 0% 25% VAT 14%Africa Non-resident 40%

Secondary tax12.5%

Gold mining�/� 50%

Swaziland Residents 37.5% 0–39% 10–15% – – General sales Mining 27% tax 12%Non-residents 15% Imm. property 6%

Shares 1%

Tanzania Residents 35% 0–35% 20% on profit – – Sales tax 10%remitted Imm. property 1.5%

Zambia Agriculture 15% 10–30% 15% – – VAT 17.5%Banks 35–45% Property 2.5%Listed co. 30%Other 35%

Zimbabwe Residents 39.375% 0–42% (including 10–20% 20% 20% Sales taxNon-residents development levy) 17.5%47.775% Shares 0.35%

Imm. property 6%

Note: This table is intended as a summary of the key features of the tax systems in SADC. For further details see the earlier tables in this section andlater in this appendix.


Mozambique have consumption taxes that vary between 0 and 150 per cent.Most other general sales taxes are between 5 and 15 per cent, with Malawi(20 per cent) and Zimbabwe and Zambia (17.5 per cent each) providing theexceptions. Taxes on share transfers vary between 0 and 3 per cent, with taxeson immovable property varying between 0 and 6 per cent.

A1.2.7 Double taxation agreementsThere is a large variation between the countries in terms of double taxationagreements. Some countries, such as Mauritius have a very large number ofsuch agreements, whilst others, such as Angola, do not have any. There are alsodifferences in the ways in which these agreements impact on taxation.

A1.3 Comparative review of taxation andgovernment revenue by country

This section provides information on the tax systems in SADC on a country-by-country basis.

A1.3.1 Angola

Corporate taxIn the case of mining, royalties vary between 3 per cent and 10 per cent of grossvalue of minerals produced depending on type of mineral and the importanceof the project.

A production tax, which is payable monthly, on the gross value of diamondsales is set at 7.5 percent. In addition to that a revenue tax of 65 per cent islevied on the year’s profit. This tax is payable in four instalments, i.e. January,April, June and October.

Other corporate tax is levied as follows:

� 25 per cent of net profit up to US$5 million� 35 per cent of net profit up to US$30 million� 45 per cent of net profit above US$30 million

Withholding taxes on dividends is levied at 15 per cent and a capital gains tax(CGT) of 15 per cent. The CGT can be reduced to 10 per cent on some projects.

For the petroleum producing areas the following taxes are applicable:

� For Cabinda Province a 20 per cent tax is levied,� Other provinces a basic tax of 12.5 per cent and an additional tax of 4.33 per

cent is levied,� Petroleum transaction taxes are 70 per cent,� Petroleum profit tax – a basic tax of 50 per cent is levied plus an additional

tax of 15.75 per cent.

Other taxes� Conveyance tax – 10 per cent,� Income tax on residents and non-residents (if work more than 183 days p.a.

in Angola) – 10–15 per cent,

178 Richard Hess


� Capital transfer tax – 10–30 per cent,� Production and consumption tax on goods produced in Angola or

imported – 1.5 per cent to 150 per cent depending on type of good,� Export tax varies and averages around 4 per cent,� Stamp duty – 0.5 to 1 per cent,� Employers’ contribution to social security 5 per cent of salary and additional

remuneration paid. Employees pay 2 per cent of their salary and additionalremuneration paid.

Angola does not have a double taxation agreement with any country.The right to repatriate capital, dividends and other distributions of profit is

guaranteed by law. In terms of the Foreign Investment Act 1994, an investor ispermitted to remit abroad dividends up to 100 per cent of net profits after taxesand reserves have been paid. The percentage of profits that can be remitted asdividends depends on the investment’s importance to national development, itslocation and the length of pay-back period. (Formerly, dividends remitted couldnot exceed 25 per cent of invested capital.)

The investment legislation grants the following rights to investors:

� exemptions or reductions in taxes for set periods,� exemptions or reductions in import and export duties,� permits the remittance abroad of dividends of up to 100 per cent of net prof-

its after taxes,� permits the borrowing from domestic and foreign sources subject to certain

conditions,� guarantees that proceeds from liquidation of an investment can be repatriated,� indemnifies investors in the event of expropriation.

There are no export incentives.

TariffsThe tariffs indicate a high variance around the average tariff of 21.1 per cent.There does appear to be a cascading element to the tariff structure as machineryand vehicles are grouped towards the lower end of the spectrum, whilst some ofthe more luxury items such as fur skins and artificial fur with a maximum tariff,pearls and precious stones and special woven fabrics attract higher tariffs. Tariffson textiles and clothing are generally around 30 per cent, whilst agriculturalproducts show no distinct pattern.

A1.3.2 Botswana

Income taxThe source basis of taxation is applied in Botswana, although citizens and somecompanies may be subject to tax on their income from foreign sources.

The following income tax rates are applicable irrespective of whether an indi-vidual is married or single, male or female. Individuals will be considered to be aresident for tax purposes if they are physically present in Botswana for morethan 183 days in any tax year. Individuals are also taxed on the value of anybenefit or advantage arising from employment, whether in cash or otherwise.



Corporate tax

As can be seen from Table A15, the company tax in Botswana is in two tiers.The basic tax is paid by all companies which have any taxable income. The sec-ond tier of company tax is also payable, but may be offset by the 15 per centwithholding tax on dividends paid by the company. If the company manages topay the correct dividends, so that the withholding tax on the dividends equalsthe additional company tax (ACT), then the company ends up paying onlybasic tax. Thus the company tax rate actually paid varies according to theamount of dividends paid to the shareholders.

There are a number of payments made to non-residents that are subject towithholding tax of 15 per cent, these include: dividends, interest, royalties, con-sulting fees. Entertainers/sportsmen are subject to 10 per cent withholding taxand contractors to 25 per cent although this is negotiable to 0 per cent.

These taxes are final taxes (i.e. the recipients of the dividends do not declarethe after-tax dividend on their tax assessment forms) and apply to paymentsmade to a foreign address.

180 Richard Hess

Table A13 Income tax for residents

Taxable income as exceeds: But does not exceed: Tax payable:

P0 P20,000 P0P20,000 P35,000 P0�5%P35,000 P50,000 P750�10%P50,000 P65,000 P2,250�15%P65,000 P80,000 P4,500�20%P80,000� P7,500�25%

Table A14 Income tax for non-residents


P0 P35,000 5%P35,000 P50,000 P1,750�10%P50,000 P65,000 P3,250�15%P65,000 P80,000 P5,500�20%P80,000� P8,500�25%

Table A15 Corporate tax

Basic Additional Total

Resident companies 15% 10% 25%Non-resident companies 25% 25%


Botswana has double tax agreements with Mauritius, South Africa, Swedenand the United Kingdom. These withholding tax rates are not reduced by thedouble tax agreements, other than in the case of the agreement with Mauritius.

Capital gains tax

Inheritances and donationsThe value of inheritances and donations is subject to capital transfer tax.

Transaction taxesThe basic rate of sales tax on goods and professional services is 10 per centalthough this varies from 5 to 15 per cent on certain goods. Transfer duty onnon-agricultural property, value above P20,000, is 5 per cent and on agriculturalproperty is 30 per cent.

Government revenueAs can be seen from Table A18 the mineral (diamond) revenue for the govern-ment is substantial, 47.42 per cent of income in 1995/6. The significant


Table A16 Capital gains tax

Taxable gains But does Tax payable:as exceed: not exceed:

Resident & non-resident P0 P10,000 P0individuals P10,000 P35,000 P0+5%

P35,000 P50,000 P1,250�10%P50,000 P65,000 P2,750�15%P65,000 P80,000 P5,000�20%P80,000� P8,000�25%

Companies P0� 25%

Table A17 Capital transfer tax rates

Taxable value But does Tax payable:as exceeds: not exceed:

Resident & non-resident P0 P100,000 P0�2%individuals P100,000 P300,000 P2,000�3%

P300,000 P500,000 P8,000�4%P500,000� P16,000�5%

Companies P0� 12.5%


proportion of non-tax revenue is also indicative of an economy that is wellmanaged.

In the financial year 1995 Botswana earned US$290 million from the totalCommon Customs Pool. This was 20 per cent of total tax revenue. The amountof revenue earned on direct imports from SADC countries was approximatelyUS$1 million, which is 0.3 per cent of the total Customs Revenue, and 0.06 percent of total government revenue. It was confirmed by Botswana Governmentofficials that the amount was of minimal significance to government revenue.

A1.3.3 Lesotho

Income taxThe source basis of taxation is applied in Lesotho, although residents are alsosubject to tax on their income from foreign sources.

182 Richard Hess

Table A18 Government revenue (P m)

1993/4 1994/5 1995/6

Tax revenue 3,677.2 68.62% 3,629.5 81.15% 4,016.9 73.51%Customs andexcise 822.3 15.34% 711.8 15.92% 829.4 15.18%

Mineral revenue 2,278.7 42.52% 2,349.4 52.53% 2,591.4 47.42%Non-mineralincome tax 420.5 7.85% 386.9 8.65% 356.9 6.53%

Other taxes 155.6 2.90% 181.4 4.06% 238.3 4.36%Export duties 0.5 0.01% 0.4 0.01% 0.5 0.01%Taxes on property 6.3 0.12% 4.1 0.09% 6.0 0.11%Taxes onmotor-vehicles 4.2 0.08% 6.6 0.15% 7.3 0.13%

Business &professionallicences 7.4 0.14% 4.2 0.09% 9.6 0.18%

General salestax 137.2 2.56% 169.2 3.78% 185.7 3.40%

Non-tax revenue 1,495.6 27.91% 767.3 17.16% 1,411.2 25.83%Interest 204.0 3.81% 200.5 4.48% 231.6 4.24%Other propertyincome 1,116.5 20.83% 452.5 10.12% 1,063.5 19.46%

Fees charges &reimbursements 127.7 2.38% 95.9 2.14% 102.7 1.88%

Sale of fixedassets and land 47.5 0.89% 18.4 0.41% 13.3 0.24%

Grants 186.2 3.47% 75.7 1.69% 37.1 0.68%Recurrent 1.2 0.02% 40.3 0.90% 5.1 0.09%Development 185.1 3.45% 35.3 0.79% 32.0 0.59%Total revenue 5,359.1 100.00% 4,472.5 100.00% 5,464.4 100.00%


Residents earning under M30,000 are taxed at 25 per cent, with those earningabove this limit being taxed at 35 per cent �M7,500. Non-residents are taxed at25 per cent. These tax rates are applicable irrespective of whether an individualis married or single, male or female. In the case of interest income earned by aresident individual, there is a final withholding tax of 10 per cent. The tax onfringe benefits granted to employees is payable by the employer at the corporatetax rate and is not subject to tax in the employee’s hands. Individuals will beconsidered resident for tax purposes if they are present in Lesotho for morethan 182 days in any consecutive 12-month period, or have their normalplace of abode in Lesotho and are present in Lesotho for any part of the year ofassessment.

Manufacturing companies are taxed at a rate of 15 per cent p.a. Incomederived from other sources is taxed at 35 per cent. The corporate rate of tax of35 per cent applies to all income of a Lesotho branch of a non-resident com-pany. In addition, a 25 per cent branch profits tax is payable on after-taxincome which is repatriated.

The following payments made to non-residents are subject to 25 per centwithholding tax: dividends, interest, royalties, natural resource payments, man-agement charges and trustees’ fees. All other payments to non-residents arecharged 10 per cent withholding tax. No tax is withheld on dividends paid outof manufacturing income. These rates are reduced by the double taxation agree-ments Lesotho has with South Africa and the United Kingdom. An agreed revisedagreement with the United Kingdom has not yet been ratified in Lesotho.

Capital gains taxCapital gains are treated as ordinary income and are subject to income tax.

Inheritances and donationsThe value of a deceased estate is subject to estate duty at progressive rates of dutyof 0 per cent to 33.5 per cent. There is a M600 abatement on the dutiable valueof an estate. Donations are taxed as ordinary income in the recipient’s hands.

Transaction taxes

The general sales tax is 10 per cent, however a new Sales Tax Act was introducedwith effect from 1 August 1996. In terms of this Act, certain vendors may nowclaim input tax credits. There is a bilateral agreement between Lesotho andSouth Africa within which each country collects GST/VAT on purchases madewithin its borders and transfers the monies to the other country’s treasury.


Table A19 Transaction taxes

Rate

Sales tax 10%Transfer duty – immovable property 3%–4%Marketable securities tax – share transfers 1%


Lesotho is in the process of moving from GST to VAT. Sales tax is levied on elec-tricity and telecommunications at the rate of 5 per cent and on liquor at20 per cent. The transfer duty on immovable property is 3 per cent and 1 percent on share duties.

Government revenue

The customs receipts of M1,006.0 million, in 1996/7 account for 49.8 per centof total revenues and grants, reflecting Lesotho’s continued reliance on SACUreceipts in their finances.

The 1995/6 budget had a surplus of M156.3 million. This surplus expressed asa percentage of GNP was estimated at 33 per cent. The surplus was mostly dueto increased revenue from sales tax due to improved tax collection measuresand also from Customs Union receipts resulting from the continuing imple-mentation of the Lesotho Highlands Water Project (LHWP). Customs receiptsalone accounted for 53.8 per cent of total revenue in that year.

Of all SACU member countries, Lesotho is the most fiscally dependent onremittances from the SACU revenue pool; during the period 1990/6, receiptsfrom SACU averaged 50.2 per cent of central government recurrent revenue.However, Lesotho does not trade extensively with SADC, hence the advent of aSADC free trade area will have very little impact on Lesotho’s SACU customsrevenue. Customs revenue earned on direct imports from SADC countries isnegligible.

A1.3.4 Malawi

Income taxThe source basis of taxation is applied in Malawi. All dividends are tax-free inthe hands of individuals or corporate shareholders.

184 Richard Hess

Table A20 Lesotho government revenue 1996/7 (M m)

Total revenues and grants 2,019.4 100.0%

Customs receipts 1,006 49.8%Income tax 301 14.9%General sales tax 235.5 11.7%Other 476.9 23.6%

Table A21 Individual income tax


K0 K6,000 K0K6,000 K18,000 K0�16%K18,000 K42,000 K1,920�27%K42,000� K8,400�38%


People earning less than K6,000 do not pay income tax; those in the bandbetween K6,000 and K18,000 pay 16 percent; the next band up to K42,000 pays27 per cent and above this the charge is 38 percent.

A married woman’s income is generally taxed separately from her husband’sincome. The same set of income tax rates is applicable irrespective of whether aperson is married or single, male or female. Individuals are also taxed on thevalue of any benefit or advantage arising from employment. Individuals areconsidered to be resident for tax purposes if they are resident in Malawi for 183days or more in any tax year to 31 March. Non-resident individuals are subjectto a 15 per cent withholding tax on gross income.

Corporate taxThe following annual rates of taxation are applied to the various types ofcorporations.

Payments made to non-residents are subject to withholding tax of 15 per cent.The rates of withholding tax are not reduced by any double taxation agree-ments. Malawi has double taxation agreements with France, The Netherlands,Norway, South Africa, Switzerland and the United Kingdom.

Capital gains taxCapital gains are treated as ordinary income and are subject to income tax.No capital gain is recognised on the disposal of a taxpayer’s principal residence.

Inheritances and donationsThe value of a deceased estate is subject to estate duty at progressive rates ofduty of 0 per cent to 10 per cent. Donations are subject to income tax in thehands of the donor.

Transaction taxes


Table A22 Corporate income tax

Rate

Normal company tax 38%Branches of foreign companies 43%Companies in an export processing zone 15%Life assurance companies 24%


VAT 20%Stamp duty – share transfers –Stamp duty on transfer of immovable property 3%


Value-added tax is levied at 20 per cent on goods and services. There is no taxa-tion on share transfers. Transfer of immovable property attracts a stamp duty of3 per cent.

Central government revenue

Two countries accounted for 90 per cent of Malawi’s customs revenue onSADC imports in 1995: South Africa (70.8 per cent) and Zimbabwe (19.6 percent). The SADC countries contribute approximately 50 per cent of all importduty revenue as well as surtax. Import duty has ranged around 17 per cent ofgovernment revenue over the period from 1994–6. Given that import dutieson SADC imports constitute around 50 per cent of all duty collections, revenueon SADC imports accounts for approximately 8 per cent of total governmentrevenue.

The products which account for the largest proportion of customs revenue onimports from SADC include motor vehicles, fuel, wheat flour, chemicals, andfood and beverage products.

TariffsThe Malawian tariff structure is multifaceted as there are four categories: a fullrate (the base rate), an MFN rate (by default 5 percentage points less than thebase rate), a COMESA rate (substantial reductions across the board with fewrates above 12 per cent), and a zero Zimbabwe rate (based on the bilateral agree-ment). Malawi offers a 70 per cent reduction on COMESA imports. The Malawitariff follows a cascading structure with capital goods and raw materials beingzero-rated (mostly), intermediate goods with rates at between 10 and 30 percent, and finished goods with rates up to the maximum MFN rate of 45 per cent.

Very few imports from the SADC countries come in at high tariff duties.A bare 0.2 per cent of SADC imports come in at a nominal duty of greaterthan 30 per cent Most of the SADC imports are concentrated at the lower end ofthe duty spectrum. 59.3 per cent of all SADC imports come in at duty rates below5 per cent. Prominent commodities coming in at very low duty rates are salt, sul-phurs and earths (1.7 per cent), cereals (0.1 per cent), and fertilisers (0 per cent).

Malawi has no charges of equivalent effect.

186 Richard Hess

Table A24 Government revenue (K m)

1995/6 1996/7

Taxes on income and profits 1,390.00 31.91% 1,845.00 32.21%Taxes on goods and services 1,414.71 32.48% 1,924.14 33.59%Taxes on international trade 1,100.00 25.25% 1,472.00 25.70%Import duties 749.00 17.20% 1,000.00 17.46%Export duties 347.00 7.97% 450.00 7.86%Miscellaneous duties 4.00 0.09% 22.00 0.38%Stamp duties, trade marks, 9.00 0.21% 10.00 0.17%patents

Non-tax revenue 442.13 10.15% 477.00 8.33%Total revenue 4,355.84 100.00% 5,728.17 100.00%


A1.3.5 Mauritius

Income taxResidents are taxed on world-wide income, except for earned income derivedfrom outside Mauritius which is only taxed in Mauritius if it is received there.Non-residents are only subject to tax in Mauritius on income derived from asource in Mauritius. All dividends are tax-free in the hands of individual orcorporate shareholders.

Individuals earning below Rs15,000 p.a. are subject to 5 per cent income tax;in the band below Rs 35,000 p.a. it is 15 per cent; below Rs 55,000 it is 25 percent; and above this 30 per cent. These above income tax rates are applicableirrespective of whether a person is married or single, male or female, resident ornon-resident. Individuals are also taxed on the value of any benefit arising fromemployment. Individuals will be considered resident for tax purposes if:

� they are domiciled in Mauritius, unless their permanent place of abode isoutside Mauritius,

� they have been present in Mauritius for 183 days or more in that incomeyear; or,

� they have been present in Mauritius for 270 days or more in that incomeyear and the two preceding income years.

In general, companies have a June year-end for tax purposes. Companies areassessed and pay tax annually in arrears, i.e. income earned in the year ended30 June 1997 (year of income) is used to determine the taxable income andhence the tax liability for the June 1998 year (year of assessment).

Corporate tax


Table A25 Income tax rates for individuals

Taxable income But does Tax payable:as exceeds: not exceed:

Rs0 Rs15,000 5%Rs15,000 Rs35,000 Rs750�15%Rs35,000 Rs55,000 Rs3,750�25%Rs55,000� Rs8,750�30%


Rate

Incentive scheme companies, unit trusts and approved investmenttrust companies 15%

Manufacturing enterprises 15%Listed companies 60 per cent of which are held by the public(other than incentive companies) 25%


Withholding tax rates: Non-residentsThere are, in general, no separate withholding taxes. However where a paymentis made from Mauritius to someone who is absent from Mauritius at the date ofpayment, income tax at the normal rates must be withheld from such payment.Royalties and dividends payable to non-residents are exempt from tax.

The tax withheld on any interest where a double taxation agreement isapplicable, is at an agreed rate levied in lieu of the normal tax rate. Mauritiushas double taxation agreements with Belgium, Botswana, China, France, Germany,India, Indonesia, Italy, Kuwait, Luxembourg, Madagascar, Malaysia, Mozambique,

188 Richard Hess


Rate

Listed incentive companies 25%Freeport and international companies ExemptOffshore banks, trusts and companies registeredprior to 1 July 1996 0%

Offshore banks, trusts and companies registeredafter 1 July 1996 15%

All other companies (including resident trusts) 35%

Table A27 Withholding tax rates on interest in terms of double taxationagreements

Recipient’s country Rate Recipient’s country Rateof residence of residence

Belgium1 10% Mozambique1 8%Botswana 12% Namibia1 10%China 10% Pakistan 0%France1,2 Russia 0%Germany1,2 South Africa 0%India1,2 Singapore 0%Indonesia 10% Sri Lanka1 10%Italy1,2 Swaziland 5%Kuwait3 0% Sweden1 15%Luxembourg1 0% United Kingdom1,2

Madagascar 10% Zimbabwe1 10%Malaysia 15%

Notes: 1. Where interest is paid by banks it is exempt.2. Interest payable other than by banks is taxed only in source country.3. Where the beneficial owner of the interest carries on business through a perma-

nent establishment (PE) or performs independent personal services from a fixedbase and the debt claim is effectively connected with the PE or fixed base, the taxcharged shall not exceed five per cent.


Namibia, Pakistan, Russia, Singapore, South Africa, Sri Lanka, Swaziland,Sweden, United Kingdom and Zimbabwe. Treaties in the pipeline includeCanada, Lesotho, Oman and Vietnam.

Capital gains taxCapital gains tax applies only to land held for less than 15 years which is sub-divided by the owner into five or more lots for sale. The rate up to five yearsis 30 per cent, from five to ten years it is 25 per cent and from ten to 15 years20 per cent. A land development tax also exists.

Inheritances and donationsThere is no estate duty. Donations tax is payable at the rate of ten per cent onany gratuitous transfers of property during the donor’s lifetime. This tax ispayable by the donee.

Transaction taxesSales tax is levied at 8 per cent but is not applicable to services other than a tele-phone service or electricity services supplied to a commercial customer. Thesales tax system is to be replaced by VAT on both goods and services during1998. Hotel and restaurant tax of 10 per cent is charged on gross receipts arisingfrom the supply of goods and services in respect of accommodation (includingthe letting of a hall), food and drink and catering. This tax is likely to bereplaced by VAT when it is introduced. The transfer duty on immovable prop-erty is 10 per cent if the consideration is Rs100,000 or less and 12 per centthereafter. A surcharge of 10 per cent of the duty paid is also levied. Exemptionsare available on the first purchase. The transfer of immovable property withina family may be exempt from duty in certain circumstances. This duty doesnot apply where the transfer has been subject to donations tax. The tax rate is10 per cent for transfers effected within five years of acquisition. Otherwise therate is 5 per cent.

Government financeTaxes on international trade still constitute a major source of revenue for theGovernment. Levies on imports represented 36.0 per cent of total revenue andgrants in 1995–6. The other major component of indirect taxes, namely taxeson domestic goods and services (comprising amongst others, excises and salestax), accounted for 26.9 per cent of total revenue and grants during the sameperiod. Individual income taxes, corporate taxes and taxes on properties, capitaland financial transactions provided 7.3 per cent, 7.4 per cent and 6.4 per centrespectively, of total revenue and grants.

Individual income tax revenue increased by 12.4 per cent in 1995–6, corpo-rate tax revenue increased by 4.7 per cent in the same period. Import dutieswent down by 6.5 per cent in 1995–6 and by 6.0 per cent in 1994–5.

Mauritian customs revenue receipts from SADC country imports indicate asomewhat one dimensional pattern, in that 97 per cent of all revenue isgathered on imports from South Africa. There are two reasons for this. First,



South Africa is Mauritius’s dominant trading partner in the SADC region, andsecond, as South Africa is not a part of COMESA, the tariff rates levied on herproducts are commensurately higher than those levied on the products fromCOMESA countries. Customs revenue based on imports from SADC countries in1995 amounted to US$37.6 million. In this year, duty collected on imports fromSADC countries accounted for 13 per cent of total import duties. In 1995 importduties on SADC imports accounted for around 5 per cent of governmentrevenue.

There are two significant products that account for a large degree of Mauritiancustoms revenue from SADC, namely petroleum products and vehicles. Thesetwo categories alone accounted in 1995 for 30.2 per cent of all revenue gatheredfrom SADC imports.

TariffsThe tariff structure, which consisted of 60 different tariff rates, was reduced toeight rates in 1994. The maximum MFN tariff was reduced from 600 per cent to80 per cent. In fact, 4,400 products were subject to a significant tariff reductionthen. Other tariffs and charges of equivalent effect were then combined into asingle customs tariff. Mauritius offers a 70 per cent reduction on COMESAimports. The present tariff structure applies eight different rates ranging from0 per cent to 80 per cent. An additional 20 percentage points is applied to non-preferential sources. The rates are, however, not classified according to large cat-egories of products. In fact, there are anomalies, whereby, in some cases, inputsare taxed at a higher rate than the imported finished products. More than60 per cent of the tariffs have a tariff equal to or less than 20 per cent. The mostcommon tariffs are 0 per cent, 15 per cent and 20 per cent. The number of prod-ucts subject to 80 per cent is quite high and covers about 15 per cent of totalproducts.

Main products which are taxed at zero include food items such as live ani-mals, preserved foods, fruits and vegetables, and raw materials and other inputsfor the textile industry. Medicaments, chemical products, machinery, paper andinputs for iron and steel products are the main products bearing a tax of 5 percent. The other tariff rates cover a wider range of products. However, productsin the 55 per cent and 80 per cent range include products such as cars, spirits,luxury items and some products which are locally produced.

The weighted tariffs indicate a very high variance around the mean of21.8 per cent. Only 2.4 per cent of goods (by value) enter the country attariff weights exceeding 50 per cent. The six chapters with the highest tariffsshow miniscule trade with SADC, with only 0.04 per cent of total trade enteringunder these chapters. At the bottom end of the scale 12.8 per cent of goods byvalue enter the country at tariff rates lower than 2 per cent.

Excise duties, which are applicable both for local and imported products,sometimes have differential rates on imports. There are some differences inthe way excise duties are calculated on imported and locally produced items,which thereby cause a discriminatory effect on imported goods. They thereforeconstitute a charge of equivalent effect.

190 Richard Hess


A1.3.6 Mozambique

Income taxThe source basis of taxation is applied in Mozambique. Income tax is withheldfrom residents at source in accordance with the applicable table of rates onremuneration (earned income), investment and other types of income. Thesewithholding taxes represent final taxes. An individual’s year of assessment is thecalendar year from 1 January to 31 December.

The same set of personal income tax rates are applicable irrespective ofwhether a person is married or single, male or female. Individuals are also taxedon the value of any benefit or advantage arising from employment. Individualswill be considered to be resident for tax purposes if they reside in Mozambiquefor more than 180 days in a tax year, or if resident for a shorter period and on31 December (being the last day of the tax year) they occupy a residence undercircumstances indicating an intent to continue occupancy on a regular basis.Freelance work is subject to tax at a flat rate of 30 per cent. Residents or non-resident expatriates paid in a foreign currency may elect to be taxed at a flat rateof 30 per cent (refer to withholding taxes below).

Corporate taxManufacturing firms are taxed at 40 per cent, companies involved in agricultureare taxed 35 per cent and those in trade and services are taxed 45 per cent.Certain payments made to non-residents are subject to withholding tax. Therates are set out in Table A29.

Withholding tax ratesDividends are taxed 18 per cent. For service fees 30 per cent applies in respect ofthe salary component of the fee and 15 per cent in respect of the balance. Thesetaxes are final taxes.



Monthly income But does Tax payable:as exceeds: not exceed:

MT0 MT390,000 6%MT390,000 MT1,170,000 MT23,400�15%MT1,170,000� MT1,140,400�30%

Table A29 Non-residents (companies& individuals)

Rate

Dividends 18%Service fees 15%–30%


Mozambique has signed a double taxation agreement with Portugal. It hassigned an agreement with Mauritius which has not yet been ratified.

Capital gains taxCapital gains are taxed at a flat rate of 40 per cent.

Inheritances and donationsEstate duty/donations tax is paid by the beneficiary/recipient. The rate variesfrom 1 per cent to 30 per cent and is dependent upon the amount and the rela-tionship between the donor and recipient.

Transaction taxes

Government revenue

Taxes on international trade accounted for 19.8 per cent of the government’stotal revenue in 1996. It is anticipated that this revenue should increase as thecollection of taxes on international trade is privatised.

192 Richard Hess


Rate

Building property transfer tax – first/subsequentdisposal1 7.25%; 14.5%

Consumption tax2 5% to 150%Circulation tax (sales tax)3 5%; 10%; 20%Marketable securities tax – share transfers 0.4%

Notes: 1. All land is owned by the Government. The property transfer tax is therefore basedon the property value excluding the value of the land.

2. Consumption tax is levied on imports and on goods at the production stage. Therates vary from 10 per cent to 150 per cent for luxury goods and 5 per cent to30 per cent for other goods.

3. The rate is 5 per cent on imported goods and services and manufactured goods;10 per cent on wholesale and retail trade and services and the tourism industry(hotels, restaurants, etc.); and 20 per cent for public telecommunication services.

Table A31 Government revenue 1996 (US$ m)

Total revenue 3,479

Tax revenue 3,193Taxes on income and profits 633Taxes on goods and services 1,732Taxes on international trade 688Other taxes 140

Non-tax revenue 286


It is estimated that revenue on SADC imports accounted for approximately5.1 per cent of total revenue in 1995. Unfortunately, the data are not availableto calculate the actual customs revenue earnings on imports from the SADCcountries. We therefore have to estimate the revenue. The bulk of duties col-lected by Mozambique would be on imports from South Africa, due to the factthat the largest proportion of Mozambique’s imports from SADC countries in1995 were drawn from South Africa. The only other significant sources of rev-enue receipts from SADC countries in 1995 were Swaziland (6.08 per cent of thetotal) and Zimbabwe (9.61 per cent of the total).

Mozambique collects a large proportion of revenue on imports from SADCcountries from a relatively small number of goods. In 1995, the 20 largest cate-gories (at the four-digit level) accounted for approximately half of Mozambique’sestimated revenue receipts from SADC countries. While the number of goodsaccounting for a large portion of Mozambique’s revenue collection from SADCcountries is relatively narrow, the range of goods making up the most importantcategories is diverse, with the largest category – passenger motor vehicles –accounting for 5.91 per cent of Mozambique’s estimated revenue receipts fromSADC countries in 1995.

TariffsImport duties were lowered towards the end of 1996 in Mozambique, in anattempt to reduce the volume of smuggling that was occurring, as well as in anattempt to stimulate the economy. Although it has been claimed that tariffs arenow in bands as prescribed by the WTO, with raw materials and capital goodsreceiving the lowest tariffs and finished goods the highest, this does not alwaysseem to be the case. The tariff book still has a mixture of tariffs for similargoods. The new tariff book that was issued towards the end of 1996 has how-ever grouped tariffs into finished products, intermediate products, capital goodsand raw materials.

Mozambique’s maximum tariff is 35 per cent, though few SADC productscome in at these high levels. Only 0.7 per cent of Mozambique’s SADC importsenter at duty rates in excess of 30 per cent; 18.5 per cent of Mozambique’simports enter the country at duty rates below 5 per cent. The balance of importsfrom SADC are spread amongst the other two digit categories although twochapters capture most of this trade. These are vehicles, which have a duty rateof 6.9 per cent and account for 24.5 per cent of all SADC imports, and machin-ery, which has a duty rate of 5.2 per cent and accounts for 9.4 per cent of totalSADC imports.

A1.3.7 NamibiaThe source basis of taxation is applied in Namibia.

Income taxThere is one set of income tax rates for all individuals irrespective of whether aperson is married or single, male or female, resident or non-resident. Marriedpersons are taxed separately. There are no abatements or rebates. Individuals aretaxed on the value of any benefit or advantage arising from employment.



Corporate taxNon-mining organisations are taxed at 35 per cent. Diamond mining attracts55 per cent, petroleum mining 42 per cent and other mining an equation of60–(480/x), where x is the ratio expressed as a percentage of taxable incomefrom mining operations to gross income from mining operations. The mini-mum applicable rate is 25 per cent.

Withholding tax rates

The withholding tax on dividends of 10 per cent is a final tax. The withholdingtax on royalties of 10.5 per cent may be credited against the final assessed incometax liability. These rates may be reduced by double taxation agreements. Namibiahas agreements with Germany, Mauritius, South Africa, Sweden and the UK.Negotiations have been completed with France, Malaysia and Romania.Renegotiations of existing agreements are underway with South Africa and the UK.

Capital gains taxThere is no capital gains tax.

Inheritances and donationsThere is no estate duty or donations tax.

Transaction taxesSales tax on goods is 8 per cent and on taxable services (other than medical andtransport) is 11 per cent. Additional sales levy is raised on goods at the point of

194 Richard Hess



N$0 N$15,000 0%N$15,000 N$20,000 N$0�10%N$20,000 N$30,000 N$500�15%N$30,000 N$40,000 N$2,000�20%N$40,000 N$50,000 N$4,000�25%N$50,000 N$80,000 N$6,500�30%N$80,000� N$15,500�35%

Table A33 Withholding tax rates

Non-residents Rate

Dividends 10%Interest –Royalties 10.5%


import or manufacture and is in addition to the sales tax. Rates are 0 per centfor essentials, and 5 per cent, 10 per cent or 15 per cent for specified items. Theimportation and sale of goods used directly in a manufacturing process may, incertain circumstances, be exempt from the additional sales levy. Share transfersare subject to 0.2 per cent.

Government revenue

During the period 1990–6, receipts from SACU averaged 27.6 per cent of centralgovernment recurrent revenue. Customs revenue earned on direct imports fromSADC countries is negligible.


Table A34 Land transfer duty (individuals and companies)

Taxable value But does Transfer duty:as exceeds: not exceed:

N$0 60,000* 1%N$60,000* 250,000 600+5%N$250,000� 10,100�8%

*N$24,000 if unimproved land.Stamp duty, at a flat rate of 1 per cent is also payable on the value of landtransferred.

Table A35 Total revenue and grants from the 1996 Budget(N$ m)

Total revenue and grants 4523

Tax revenue 3,987Direct taxes 1,192

Personal taxes 695Company taxes 458Other taxes on income and profits 39

Indirect taxes 2,795Domestic taxes on goods and services 1,360Taxes on property 47Taxes on int. trade and transactions 1,348Other 40

Non-tax revenue 490Entrepreneurial and property income 294Fines and forfeitures 10Administrative fees and charges 186Other non-tax revenue 11

Grants 35


A1.3.8 South AfricaSouth Africa has principally a source base of taxation. However, in addition, res-idents (individuals and corporate entities) are taxed in South Africa on theirworld-wide investment income.

Income tax

The tax rates shown in Table A36 apply to all individuals irrespective of whethera person is married or single, male or female, resident or non-resident.

Corporate tax

Corporate entities are required to make a first provisional tax payment sixmonths into their financial year and a second provisional tax payment at theend of their financial year.

Capital gains taxThere is no capital gains tax in South Africa.

196 Richard Hess



R0 R30,000 19%R30,000 R35,000 R5,700�30%R35,000 R45,000 R7,200�32%R45,000 R60,000 R10,400�41%R60,000 R70,000 R16,550�43%R70,000 R100,000 R20,850�44%R100,000� R34,050�45%

Table A37 Corporate income tax rates

Companies and close corporations (other than gold mining)Normal income tax (other than long-term insurers) 35%Normal income tax – local branch of foreign company 40%Normal income tax – Long-term insurers(dependent on type of policy) 30–35%

Secondary tax on companies (STC) 12.5%

Gold mining companies – those not subject to STCGold mining income – normal tax 51–(255/x)

‘x’ is the ratio of taxable income to gross incomefrom gold mining expressed as a percentage

Other income – normal tax 42%

Retirement fundsTax on gross interest and net rentals 17%


Withholding tax ratesNo withholding tax is levied on dividend or interest payments made to non-residents.

Double taxation agreements

Inheritances and donationsEstate duty is payable on the dutiable amount of a deceased estate. In general,the estate of a person who was ordinarily resident in South Africa at the dateof death includes all assets irrespective of where they are situated. In addition,an asset which is located in South Africa may be subject to estate duty eventhough the owner was not ordinarily resident in South Africa at the date ofhis death.

The estate duty is 25 per cent.

Value-added taxVAT is levied at the standard rate of 14 per cent on both goods and services. Ingeneral, exports of goods or services are free of VAT (they are zero-rated), whilstimports of goods or services attract VAT. The VAT accounted for by a vendor iseffectively the VAT charged on his supplies (output tax) less the VAT incurred onhis inputs (input tax). A person making standard or zero-rated supplies of morethan R150,000 p.a. is obliged to register as a vendor.

A1.3.9 Swaziland

Income taxThe source basis of taxation is applied in Swaziland.


Table A38 Countries with which South Africa has comprehensive double taxa-tion agreements

Austria Hungary Netherlands SwitzerlandBotswana Israel Norway ThailandCanada Korea Poland UgandaDenmark Lesotho Republic of China (Taiwan) TanzaniaFinland Malawi Romania United Kingdom*France Mauritius Swaziland ZambiaGermany Namibia Sweden Zimbabwe

*The treaty with the United Kingdom was extended to the following countries: Grenada;Seychelles; Sierra Leone.

Table A39 Countries with which South Africa has double taxation agreementsin respect of sea and air transport only

Belgium Greece Italy PortugalBrazil Ireland Japan Spain


The above income tax rates are applicable irrespective of whether a person ismarried or single, male or female, resident or non-resident. Individuals are alsotaxed on the value of any benefit or advantage arising from employment.Dividends in excess of the E2,000 exemption are taxed at a flat rate of 10 percent if they are from companies listed on the Swaziland Stock Exchange and20 per cent if they are from other companies.

All companies are subject to a tax rate of 37.5 per cent, with mining compa-nies with a taxable income up to E20,000 attracting 27 per cent.

Withholding taxesDividends are taxed at 15 per cent, unless they are paid to companies incorpo-rated in Botswana, Lesotho or South Africa, which are not subsidiaries or branchesof companies registered elsewhere the rate is then 12.5 per cent. Interest andconstruction fees attract 10 per cent, with entertainers and sportsmen having15 per cent. These taxes are final taxes, but may be reduced by applicable dou-ble taxation agreements. Swaziland has agreements with Mauritius, South Africaand the United Kingdom.

Capital gains taxThere is at present no capital gains tax.

Inheritances and donationsNo estate duty or donations tax exists.

Transaction taxesGoods and services attract 12 per cent sales tax with the exception of alcoholicbeverages and tobacco products for which the sales tax is 25 per cent. Transferduty on immovable property worth more than R60,000 is 6 per cent, withlower rates for property valued at lower than that. Share transfers attract 1 percent duty.

198 Richard Hess



E0 E13,000 0%E13,000 E16,000 E0�12%E16,000 E20,000 E360�16%E20,000 E24,000 E1,000�20%E24,000 E28,000 E1,800�24%E28,000 E32,000 E2,760�28%E32,000 E36,000 E3,880�32%E36,000 E40,000 E5,160�36%E40,000� E6,600�39%


Government revenue

The SACU receipts represent a 3 per cent increase in representation from the lastBudget period. Company tax has fallen slightly due to legislation reforms. Salestax revenue is marginally up, due to increased economic activity and inflation.

During the period 1990–6, receipts from SACU averaged 44.8 per cent ofcentral government recurrent revenue. Customs revenue earned on directimports from SADC countries is negligible.

A1.3.10 Tanzania

Income taxResidents (including short-term residents) are taxed on world-wide income.Non-residents are only subject to tax in Tanzania on income derived from asource in Tanzania. Dividends paid to residents and non-residents are subject toa final withholding tax.

These tax rates are applicable irrespective of whether an individual is marriedor single, male or female. However, if a wife’s income is derived from her hus-band’s business, then their income tax is assessed jointly. Non-resident individ-uals are subject to tax using the same tax rates as for residents. Individuals willbe considered to be resident for tax purposes if they have a permanent home inTanzania and are present in Tanzania in any one tax year, or alternatively, ifthey do not have a permanent home in Tanzania either for 183 days or more inthe tax year or an average of 122 days p.a. over a three-year period. The tax oncertain benefits granted to employees is payable by the employee.



Rate

Sales tax 12%Transfer duty – immovable property first E40,000 2%

E40,001 to E60,000 4%E60,001� 6%

Marketable securities tax – share transfers 1%

Table A42 1997/8 Budget (E m)

SACU receipts 1,006 56%Company tax 232 13%Sales tax 224 12%Individual tax 184 10%Property income 13 1%Other revenue 142 8%


Corporate taxCompanies are taxed at 35 per cent.

Withholding taxThere is a 20 per cent withholding tax payable when a local branch of a foreigncompany remits its profits.

Certain other payments are subject to a withholding tax. The withholding taxrates differ according to whether the payment is to a resident or a non-resident.

The withholding tax is a final tax. Withholding taxes on payments made to non-residents in respect of dividends, interest and royalties on imported technologyby companies approved by the Investment Promotion Centre are subject toreduced rates. A 3 per cent royalty is charged for mineral exports and 5 per cent

200 Richard Hess



Sh0 Sh20,000 0%Sh20,000 Sh50,000 Sh0�7.5%Sh50,000 Sh80,000 Sh2,250�10%Sh80,000 Sh110,000 Sh5,250�12.5%Sh110,000 Sh140,000 Sh9,000�15%Sh140,000 Sh200,000 Sh13,500�17.5%Sh200,000 Sh300,000 Sh24,000�20%Sh300,000 Sh400,000 Sh44,000�22.5%Sh400,000 Sh500,000 Sh66,500�25%Sh500,000 Sh600,000 Sh91,500�27.5%Sh600,000 Sh700,000 Sh119,000�30%Sh700,000� Sh149,000�35%

Table A44 Withholding taxes

Payments to Payments toresidents non-residents

Dividends 15% 20%Interest 2% 15%Royalties 2% 30%Management or professional fees 2% 30%Rents 2% 40%Commercial transport 4% 4%Other goods and services 2% 2%


for diamond exports. Payments made to non-resident companies holding morethan 25 per cent of the share capital of a Tanzanian company will be treated as apayment to a resident. The withholding tax rates may be reduced by an applica-ble double taxation agreement.

Tanzania’s double taxation agreements and the withholding tax rates in termsof these agreements are with the following countries: Canada, Denmark, Finland,India, Italy, Norway, Sweden and Zambia. All of these tax treaties (except thetreaty with Italy), provide that no withholding tax can be levied on branchprofits.

Capital gains taxCapital gains tax was abolished with effect from 1 July 1996.

Inheritances and donationsThere is no donations tax or estate duty.

Transaction taxesA sales tax is imposed on locally manufactured goods, most imports and ser-vices at the point of providing them. The rate is 10 per cent on services ren-dered but varies in relation to goods, according to the item. Sales tax is to bereplaced by Value-Added Tax on 1 July 1998. Stamp duty is payable on a slidingscale, up to a maximum of 1.5 per cent of sales value.

Government revenue

Taxes on imports accounted for 27 per cent of the government’s revenue in 1995/6.Because of data problems, it has been impossible to get a breakdown of

import duty actually collected on imports from SADC countries for any onerecent year. However, it was possible to get some data on actual duty collectionsfor the first six months of 1996. We have, therefore, analysed the collections forthe first half of 1996 and made estimates for annual collections on the basisof doubling the figures for the first half-year. This assumes an even distributionof imports over the year, which we know is not necessarily the case, but is asgood an estimate as can be made. This gave an estimated collection of customsrevenue on SADC imports for the year of US$8.6 million. Imports from SADCaccounted for approximately 12 per cent of total import duty collected in 1996.


Table A45 Government revenue 1995/96 (Shs m)

Total revenue 448,373

Tax revenue 383,744Taxes on imports 121,243Sales and excise on local goods 94,712Income taxes 103,871Other taxes 63,918

Non-tax revenue 64,629


The duty collected on imports from SADC countries amounted to 2 per cent oftotal recurrent revenue.

The products imported from SADC in 1996 accounting for significant customsrevenue include food preparations, newsprint, sugar, soya bean oil, wine, beer,glass bottles, wheat flour, Kraft paper, iron and steel products.

TariffsA new customs tariff was introduced in June 1996 based on the HS system, atthe 8-digit level, as transposed nationally. The tariff structure included six rates:5 per cent, 10 per cent, 20 per cent, 25 per cent, 30 per cent and 40 per cent.No products are zero-rated. In June 1997 the maximum rate was reduced to30 per cent. They follow a cascading structure.

Tanzania is far behind the agreed timetable for reduction of COMESA tariffs.The position is that, although a new tariff book was issued in October 1996,which included preferential COMESA rates, these tariffs were not in force, pend-ing government ratification of these rates. The published COMESA rates gener-ally are 20 percentage points below the MFN rates, which means that onaverage the COMESA rates are 77 per cent lower than the MFN rates. In the June1997 budget the old COMESA rates which were operative were suspended. Thismeans that currently no preferential rates are applied to regional imports.

Tanzania applies excise duties to certain domestic and imported products.There are often differential rates applied to local products compared toimported goods, with local products often being excise duty free. This thereforeconstitutes a charge of equivalent effect.

A1.3.11 Zambia

Income taxThe source basis of taxation is applied in Zambia. Interest income earned by res-idents of Zambia is subject to income tax regardless of the source of the interest.

There is a rebate of K60,000 p.a. which is deducted from tax payable as calcu-lated above. The same set of income tax rates is applicable irrespective ofwhether a person is married or single, male or female, resident or non-resident.A married woman’s income is taxed separately from her husband’s income.Individuals are taxed on the value of any cash benefit, or any benefit capable ofbeing converted into cash, arising from employment. The deemed value of non-cash benefits (e.g. company cars and accommodation) are disallowed as a

202 Richard Hess

Table A46 Individuals income tax


K0 K1,200,000 10%K1,200,000 K1,800,000 K120,000�20%K1,800,000� K240,000�30%


deduction in the employer’s hands and such tax cost is therefore borne by theemployer. An individual is resident for tax purposes if he is present in Zambiafor at least 183 days in any tax year, or has entered the country with a view toestablishing residence.

Corporate tax

Withholding tax ratesCertain payments (whether to residents or non-residents) are subject to with-holding taxes. Where these payments are made to non-residents, though, thewithholding taxes are final taxes. Individuals will be regarded as resident for taxpurposes if they are present in Zambia for at least 183 days in any tax year, orhave entered the country with a view to establishing residence.

The rate of withholding tax is 15 per cent on dividends, interest, royalties,rent, management and consulting fees.

These rates may be reduced by applicable double taxation agreement. Zambiahas agreements with Canada, Denmark, Finland, France, Germany, India,Ireland, Italy, Japan, Kenya, Netherlands, Norway, Poland, South Africa, Sweden,Switzerland, Tanzania, Uganda and the United Kingdom.

Capital gains taxThere is no capital gains tax.

Inheritances and donationsEstate duty has been abolished with effect from 1 April 1996. No donationstax exists.

Transaction taxesVAT on goods and services is 17.5 per cent with exemptions on health, educa-tion, domestic house rentals, water, transport, books and newspapers and finan-cial services. Many basic foodstuffs and exports are zero-rated. Property transfertax, of 2.5 per cent, is payable on transfers of shares and land. An exemption isavailable in respect of certain group organisations.



Rate

Companies listed on the Lusaka Stock Exchange 30%Banks – first K100 million profit 35%

– balance 45%Farmers and exporters of non-traditionals products 15%Manufacturers and others 35%Large scale mining – minimum rate 35%


Government revenue

Trade taxes were budgeted to account for 18.6 per cent of the government’srevenue in 1997.

Duties collected by Zambia on imports from SADC countries amounted toUS$38.2 million in 1994, US$29.7 million in 1995, and US$37.0 million in1996. The sources of revenue closely reflects Zambia’s import structure, with thebulk of revenues being collected on imports from South Africa. In 1996, forexample, 83.56 per cent of Zambia’s duties from SADC countries were receivedfrom South Africa. The only other significant source of duties from SADC coun-tries is Zimbabwe, which contributed 11.59 per cent of duties collected byZambia from SADC countries in 1996. The duty collected on SADC imports in1995 represented 46 per cent of total customs revenue that year.

Duties collected by category closely reflect Zambia’s import structure. Capitalequipment and heavy industry goods, such as vehicles, machinery, structures ofiron and steel, fuels, and so on feature amongst Zambia’s most importantsources of revenue on imports from SADC. The 20 most important sources ofrevenue still, however, accounted for no more than one-quarter of dutiescollected by Zambia in 1994 and 1995.

TariffsIn recent years, Zambia has been rationalising its tariff structure. In the 1996budget, the Zambian authorities adopted an integral package of customs dutyreductions and removal of most exemptions to address the issues listed above.This resulted in a moderate cascading tariff structure ranging from 0 per cent to5 per cent for most capital goods and raw materials; 15 per cent for intermediategoods; and 25 per cent for finished products. Zambia offers a 60 per cent reduc-tion on COMESA imports.

204 Richard Hess

Table A48 Zambia’s budgeted revenue for 1997(K billion)

Company income tax 55.2Pay as you earn 193.1Other income tax 58.1Trade taxes 277.7Excise duties 152.7Domestic VAT 150.0Mineral revenue 20.0Non-tax revenue 93.5

o/w: fuel levy 13.0Privatisation receipts 5.2Fees and fines 75.3External assistance 488.9

o/w: Project support 358.9Non-project support 130.0

Total revenue 1,489.1


The Zambian tariff structure reserves high duties for two categories of prod-ucts, namely clothing and textiles and certain food products. All of these chap-ters face a duty of 25 percent. Zambia’s tariffs have a low variance and seem tobe concentrated around the upper end of the tariff rates despite the low ceilingof 25 percent. This is indicated by the average tariff which is 16 percent, whichis almost two-thirds the value of the highest nominal tariff. At the bottom ofthe tariff scale there is a diversity of manufactures, indicating lower tariff ratesfor manufactured goods, although cereals and vegetable extracts also enterunder these codes.

The maximum tariff rate of 25 per cent applies to more than 56 per cent ofthe tariff lines in the agriculture and fisheries sector. Food, excluding cereals, issubject to relatively high rates of 15 per cent or 25 per cent. The average appliedrate for agricultural imports is 18.2 per cent. Imports of food products bear anaverage rate of just over 20 per cent. These rates compare to an average rate inmanufacturing of 13.5 per cent. As with the tariff rate on imports of cereals, therate on maize was set at 5 per cent in 1996. The maximum rate (25 per cent)applies, inter alia, to prepared food, fruit and a certain category of processedfood crops.

Zambia has a 5 per cent Import Declaration Fee, which constitutes a chargeof equivalent effect.

A1.3.12 Zimbabwe

Income taxThe tax year-end in Zimbabwe has changed from 31 March to 31 December. Thechange is effective from 1997 resulting in the following 1997 tax years:

12 months from 1 April 1996 to 31 March 1997;9 months from 1 April 1997 to 31 December 1997.

Thereafter the tax year will run from 1 January to 31 December of each year.The source basis of taxation is applied in Zimbabwe.

There is one set of income tax rates for all individuals irrespective of whetherthe person is married or single, male or female, resident or non-resident.Married persons are taxed separately. In respect of tax years commencing on or




Z$0 Z$9,360 0%Z$9,360 Z$15,000 Z$0�20%Z$15,000 Z$30,000 Z$1,128�25%Z$30,000 Z$45,000 Z$4,878�30%Z$45,000 Z$60,000 Z$9,378�35%Z$60,000� Z$14,628�40%


after 1 April 1995, there is also a ‘Drought Levy’ or ‘Development Fund Levy’surcharge of 5 per cent of the net tax payable after the deduction of the credits.Foreign individuals who come to Zimbabwe to work are considered to be ordi-narily resident for tax purposes from the date of arrival. In the case of all otherindividuals, questions of residence are decided on the facts. Short-term worksuch as a consultancy assignment or employment on an installation contract isunlikely to cause the individual concerned to be regarded as ordinarily resident.Employees are taxed on the value of benefits received by virtue of their employ-ment.

Corporate tax

Local companies are taxed at 39.375 per cent and foreign companies’ branchesat 47.755 per cent. These rates include the 5 per cent ‘Drought Levy’ or‘Development Fund Levy’ which has become a permanent feature of theZimbabwe tax structure. The foreign companies’ branches tax rate includes theadditional 8.4 per cent tax on branch profits earned, which may be reducedwhere a double taxation agreement exists.

Withholding taxesCertain payments to non-residents are subject to withholding taxes.

These are final taxes, but may be reduced by an applicable double taxationagreement. Zimbabwe has agreements with Bulgaria, Canada, France, Germany,Malaysia, Mauritius, Netherlands, Norway, Poland, South Africa, Sweden andthe United Kingdom. Negotiations are underway with Namibia.

Capital gains taxThis tax is imposed at the basic rate of 20 per cent on any gain arising from thesale or disposal (including donation) of immovable property and marketablesecurities. However, a lower rate of 10 per cent applies to gains on the disposal

206 Richard Hess

Table A50 Income tax rates for companies

Rate

Local companies 39.375%Foreign companies’ branches 47.775%

Table A51 Withholding taxes

Dividends 20%Dividends distributed by a company listedon the Zimbabwean Stock Exchange 15%

Interest 10%Certain fees and remittances 20%Royalties 20%


of listed securities and on the disposal by an individual over 59 years of age ofhis principal private residence. Capital gains aggregating less than Z$5,000 inany one year are not taxable.

InheritancesEstate duty at a flat rate of 20 per cent is payable on the net value of an estatewhich exceeds Z$250,000 (where there is a surviving spouse) or Z$125,000 (nosurviving spouse).

Transaction taxes

The rate of sales tax is 17.5 per cent on services and basic goods; 27.5 per centapplies to listed luxury goods. Share transfers are taxed at 0.35 per cent.

Government revenue

Practically all of Zimbabwe’s customs revenue on imports from SADC comesfrom imports from South Africa (98.4 per cent in 1995). This is not surprisinggiven the high proportion of imports from that country and the fact thatimports from most of the other SADC countries enter under preferentialarrangements. The total revenue received on SADC imports in 1995 amountedto US$361.8 million. Total duty collections on SADC imports represented 31 percent of total duty collections. Revenue from total customs duties accounted for


Table A52 Stamp duty – transfer of immovableproperty (individuals and companies)

Value of property But does Duty payable:as exceeds: not exceed:

Z$0 Z$5,000 0.7%Z$5,000 Z$15,000 Z$35�3%Z$15,000 Z$100,000 Z$335�5%Z$100,000� Z$4,585�6%

Table A53 Percentage share in governmentrevenue

1996/7 1997/8

Personal income tax 28% 29%Company tax 12% 13%Sales tax 19% 20%Excise duty 4% 4%Customs 16% 16%Other 21% 18%


16 per cent of recurrent government revenue in 1995. Duty on SADC importstherefore accounted for 5 per cent of total government revenue.

Zimbabwe’s pattern of revenue receipts by product traded shows remarkablestability over the 1993–5 period with the same products appearing in eachranked list. Prominent tariff items are, inter alia, motor vehicles (diesel andpetrol), fossil fuels, chemical products (polypropylene, polyethylene, anhydrousammonia, etc.), personal effects and clothing.

TariffsThe new tariff regime announced in February 1997 is of a cascading nature.There was a major reduction in duty on raw materials – defined as goods whichhave not been subjected to any form of transformation in production – from arange of 0 to 40 per cent – to a flat rate of 5 per cent. Tariff rates on merit goodscomprising educational goods, medical goods and goods for the blind were alsoslashed. Educational goods now attract a flat duty of 5 per cent compared to0 to 40 per cent previously; customs duty on medical goods was unchanged at0 to 20 per cent, while the duty on goods for the blind was abolished from theexisting 0 to 10 per cent range. Tariffs on capital goods which ranged from0 to 25 per cent were abolished as well. Customs duty on tools was also loweredfrom 0 to 20 per cent to 5 to 15 per cent while a flat tariff rate of 15 per centwould be applied to spares. This compares favourably to a rate of 0 to56 per cent which was in existence. The duty on partly processed goods –defined as those goods that have significant value added – was reduced to a flatrate of 15 per cent from high rate of 0 to 55 per cent. Intermediate goods andconsumables now attract a duty of 20 to 50 per cent in contrast to the previousrate of 0 to 35 percent. Finished goods attract a duty of between 40 and 85 percent, with the highest duty imposed on batteries, electrical goods, luggage-wareand textiles and clothing. Specific duties are additionally levied on a number oftariff lines. Zimbabwe offers an 80 per cent reduction on COMESA imports.There is currently a surtax on finished goods and some intermediary goods of10 per cent, which constitutes a charge of equivalent effect.

A1.3.13 SACUGross duty and surcharge receipts by SACU countries from non-SACU SADC coun-tries fell by 95.9 per cent between 1993 and 1995. This dramatic fall is principallydue to the collapse in duty receipts from Zimbabwe over 1993–4. Substantialdeclines in duties received from Angola, Tanzania and Zambia were also recordedover the period 1993–5, although these declines all took place off low bases.Similarly, the considerable increase in duties received from Mozambique tookplace off a low base. Total revenue received on SADC imports in 1995 was US$8.2million, a decline from US$179.7 million in 1993. In 1995 revenue on importsfrom Zimbabwe accounted for 87.12 per cent of total revenue on SADC imports.

Gross revenue data for 1994 and 1995 reveal two significant features. First,more than one-half of gross duty and surcharge revenues are derived from the20 largest product categories. In both years trunks, suitcases etc. accounted formore than 10 per cent of gross revenues. Second, the major product categoriesare dominated by consumer-oriented products, such as furniture and appli-ances; clothing and footwear; and foodstuffs.

208 Richard Hess


There is only a very indirect relationship between the value of imports fromSADC and the duty collected therefrom, and the share of the SACU customsrevenue which each SACU member country receives. This is because of thenature of the Customs Union, whereby customs revenue is pooled. There is astabilisation factor, whereby the BLNS countries each receive a minimum payout from the SACU of 17 per cent of the value of their imports (irrespective ofsource) and South Africa retains the residual amount. The most important thingfor the SACU countries in general is the proportion of SADC duties collectedcompared to total duties collected, for this will give an indication of the rev-enue forgone by the formation of an FTA. It is clear that SADC revenues aresuch a small proportion of the overall customs pool as to be almost insignifi-cant. For example, in 1995 only 0.83 per cent of duties collected for the revenuepool were sourced in non-SACU SADC countries.

SACU tariffsThe SACU tariff very much reflects the South African need to protect industryand agriculture. The highest tariffs (83 per cent) are on clothing. Generally, hightariffs are on finished products; lower rates on raw materials and capital goods.Under the GATT offer, the highest rate will come down to 40 per cent (clothingand textiles). The new structure follows a more clearly defined cascading struc-ture with a maximum rate of 30 per cent except for key sensitive products.


Table A54 SACU tariff reductions and timetable – GATT offer

Commodity New tariff Phase-down period(%) (years)

Consumer goods 20–30 5Intermediate/capital goods 10–15 5Raw materials 0–5 5Clothing max. 45 12Textiles max. 25 12Assembled motor vehicles max. 50 8Motor vehicle components max. 30 8


Appendix A2Constraints on Foreign DirectInvestment by CountryRichard Hess

210

This appendix describes the constraints on foreign direct investment in SADC.It is based on information available in the first half of 1998.

A2.1 Angola

A2.1.1 Investment climate

Since 1991, Angola has been pursuing a policy of restoring market mechanismsand liberalising prices and foreign trade. Trade has been opened up to the pri-vate sector and several measures have been taken to encourage foreign invest-ment. Notwithstanding these measures, because of the war, implementationhas been slow. However, with the return of peace it is the Government’s inten-tion to encourage small enterprises and create a competitive and more stimula-tive business environment. In this context, the Government proposes thefollowing course of action:

� to reform the legal, regulatory and institutional system governing the privatesector so as to provide greater incentives for the promotion of small enterprises;

� to simplify the procedures for setting up and registering businesses;� to introduce measures to encourage small and medium size enterprises such

as tax reforms and other incentives;� to revitalise the National Institute for the Promotion of Small and Medium-

sized Enterprises (IMAPEM) in an effort to promote and modernise thedomestic industrial sector;

� to abolish import licences so as to permit the demonopolisation of theconsumer goods supply channel.

With the implementation of the above steps it is hoped that a competitive envi-ronment avoiding price distortions and aimed at stimulating domestic invest-ment and productivity and attracting direct foreign investment will be created.

Whilst, on the one hand, the Government is committed to creating an enablingenvironment for the development of a strong private sector, the bureaucracy,corruption, red tape and administrative costs induced by compliance withregulations in Angola, some of which date back to the socialist regime and


others that have remained unchanged since the late 1800s, tend to inhibit suchdevelopment.

Because the Government, during its first ten years of independence, adopted apolicy towards the private sector very much in keeping with its Marxist-Leninistphilosophy which was aimed at transforming Angola into a socialist state, verylittle encouragement was given to the private sector. In fact, the opposite courseof action was adopted in that all land, transport, communications, private med-icine, schools and legal practices were nationalised. Foreign investment was alsodissuaded by the presence of Eastern European management of key industriesexcept for the petroleum industry. Notwithstanding, in 1979 the Governmentpassed a bill to attract foreign investment. Understandably this had little success.

Angola announced in October 1990 that it was to introduce market reformsand in April 1991 it privatised 100 companies that it had nationalised in 1975at independence. This process involved attempting to persuade the former own-ers, most of whom had fled to Portugal, to return to Angola to resume business.The sale of the Cimangola cement company to a Scandinavian group in 1992and the signing of trade agreements with South Africa, Portugal and Zimbabweare seen as significant steps in recent years, but there is a long way still to go.Little, if any, transparency exists. The press, radio and TV are all controlled bythe Department of Revolutionary Orientation which is run by the ruling party.

Angola is a member of SADC, COMESA, the Multilateral Investment GuaranteeAgency (MIGA) and the World Trade Organisation (WTO). Although the govern-ment of Angola has declared itself willing to be involved in regional economicintegration, this is dependent on the successful conclusion of the civil war andreconstruction of the economy. It has not signed the SADC protocol on trade.

The Angolan economy rests on two pillars, namely, oil and diamonds, andrevenue from these funded the long civil war. The peace agreement between thetwo major protagonists is by no means secure, and peace is an obvious necessityif the country is to ever to break out of the poverty that is a way of life for somany Angolans. The challenges which the Angolan Government faces arelegion, many of them war-related, such as demining the main roads and caringfor the war wounded. Others are more economic in nature, such as infrastruc-tural rehabilitation and civil service reform.

A2.1.2 Infrastructure

An estimated 32 per cent of Angolans have access to safe water and 16 per centhave adequate sanitation facilities. Angola has the installed capacity to meet thedemand for electricity, however with so few operational assets, this is minimal.The road and railway infrastructure are in need of extensive rehabilitation –many of the roads are mined and a great number of bridges were destroyed orare unsafe because of the war. Foreign aid has slowly begun to address theseinfrastructural problems. The ports and airports are also in a state of disarray.Telecommunications require extensive upgrading, with most large organisationsand institutions relying on VHF communications.

A2.1.3 Production

Angola’s industrial production has experienced a downward trend and isnow estimated to be about half of what it was before 1975. This is due to the

Constraints on Foreign Direct Investment by Country 211


difficulties of importing raw materials, equipment and spares, the disruptivesupply of power and water, the destruction of infrastructures and the shortageof skilled manpower. Since independence the only sector which has expandedhas been the oil sector.

Since the resumption of the civil war in 1992, economic performance hasbeen mainly hampered by high levels of money supply and inflation, economiccontrols, damaged infrastructure and the lack of productive performance by thenon-oil economic sectors.

A2.1.4 Economic indicators

See Chapter 2.

A2.1.5 Investment incentives

See Appendix A3.

A2.1.6 Capital markets

No money market has been created. The main reason for this is the shortage ofliquidity by commercial banks.

Whilst there are no money or capital markets at this stage, a survey has beenconducted by an American consultancy into the formation of a stock marketand a task force has been formed to advise Government on the best method ofimplementation. This task force consists of members from BNA (the centralbank), commercial banks, Ministry of Finance, Ministry of Justice, Sonangol(petrol company) and the Ministry of Industry. Based on their findings, a stockexchange will be established, but before anything can be done, a Bill will haveto be formulated and presented to Parliament and suitable personnel found andtrained.

Foreign investment will not be allowed on the stock exchange.

A2.1.7 Impediments to investment

The following are the main constraints facing investors moving into theAngolan market:

� bureaucracy� corruption� the cost of doing business, e.g. registration procedures� difficulty and cost of obtaining visas� outdated legislation� high taxation for non-incentive scheme investors� lack of access to credit and poor banking facilities� poor telecommunications and infrastructure� Frequent power cuts� lack of technology� language barrier� war-torn infrastructure� difficulty of acquiring land

212 Richard Hess


� in the event of obtaining a company in terms of the privatisation policy,most equipment is either unserviceable or obsolete

� difficulty in travelling from one point to another, when engaging in agricul-ture, mining or forestry projects, due to landmines.

A2.2 Botswana


The Botswana Government is viewed by the international community in a goodlight – it must be considered as one of the best examples within the region ofhow to facilitate private sector activity. It has one of the oldest InvestmentProgrammes which is administered by the Botswana Development Corporation,which encourages private sector development and foreign investment. The pri-vate and public sectors are well monitored by an active Public AccountsCommittee and a free press.

Botswana – unlike many other members of SADC – has never experimentedwith socialism and accordingly has always encouraged private sector participa-tion in areas that in many other SADC countries were reserved for state control.


In spite of Botswana’s arid climate, 93 per cent of the population have access tosafe water and 55 per cent have adequate sanitation. Some electricity is producedby Botswana and the rest is imported from South Africa, Zambia and Namibia.

Botswana has a well-developed transport network to the east and efforts are cur-rently underway to link the western areas of Botswana and Namibia with the restof Botswana. There is a limited railway system, but there are links with the otherSouthern African countries. Air services also exist between the main centres inBotswana and with the neighbouring countries. Telecommunications routes arebeing expanded, the Internet is available and there is a cellular telephone network.

A2.2.3 Production

Some 80 per cent of the population are still involved in the agricultural sector.The formal economy is dominated by mining, although the absence of furtherdiamond deposits militates against this being a source of further growth. Thesmall manufacturing sector is agro-based, consisting mainly of meat processing.The Government continues to encourage manufacturing diversification, butthis is unlikely to produce the soaring growth rates that the diamond mininginvestment produced. The Botswana economy is heavily dependent on SouthAfrica for many of its imports.


See Chapter 2.


See Appendix A3.



A2.2.6 Capital market

All the necessary infrastructure is in place for the further development of thecapital market. This includes the one stockbroking firm, which currentlyhandles both the local stock exchange and the money market.

The level of development of the capital market is low for two reasons. First,the bond market for domestic issuers is in its infancy, because the BotswanaGovernment had previously supplied the market with as much long-termfinance as it needed. Second, investment institutions in Botswana tend to holdon to the shares and other assets they have bought, for several years at a time.There is thus a rather low turnover in the secondary market for shares, andthere could equally be a low turnover for the forthcoming BotswanaDevelopment Corporation bond once it has been issued.

A2.2.7 Impediments to investment

The constraints for investors include:

� government bureaucracy and inefficiency in dealing with investors� a very small domestic market� the economy is dominated by diamond mining and cattle, as such there are

very few linkages in the economy for other industries to develop in a mean-ingful way

� the arid climate does not attract large-scale commercial farming, whereas80 per cent of the population are involved in agriculture

� there is no legislation in Botswana which deals specifically with investment.Regulations governing investment are contained in the Companies Act, theFactories Act, the Employment Act, the Income Tax Act, and the FinancialAssistance Act amongst others

A2.3 Lesotho


Lesotho has experimented with some fairly weak forms of socialism since inde-pendence. However since King Moshoeshoe II died, private sector developmenthas been encouraged, particularly through the Lesotho National DevelopmentCorporation, which acts as a facilitator and investor. Foreign investment isencouraged and the country has attracted a number of Hong Kong-basedinvestors in the garments industry. Privatisation is encouraged, but there is notmuch to be done in this area. The trade union movement however is pressuringthe state to move away from privatisation. Corruption has existed for a longtime, but not necessarily any worse than in most other countries of the region.

Lesotho has a constitutional monarchy with an elected government.However, it is politically unstable, with South Africa playing a restraining roleon various political entities at different times. Despite this, growth performanceand economic management since independence have been one of the best inAfrica. Economic stability has been helped through the membership of SACUand the Common Monetary Area (CMA). Land pressure has been eased throughthe export of labour to South Africa. Lesotho has little commercial agriculture

214 Richard Hess


but has attracted some industry. The major development project is the HighlandsWater Project with South Africa.


Lesotho has a reliable source of power, mostly supplied by Eskom in SouthAfrica. The government is pursuing a policy to exploit Lesotho’s largelyuntapped hydroelectric potential in a bid to achieve self-sufficiency in energy bythe early part of the 21st century – once operational, the hydroelectric scheme ofthe Lesotho Highlands Water Project should meet all foreseeable requirements.

Lesotho’s mountainous terrain makes access to many areas difficult andLesotho relies heavily on its domestic air network for transport. The road net-work has been developed considerably to facilitate easier access to and from themore remote areas, and there are roads linking Lesotho directly with SouthAfrican export ports. Inland port and container facilities are also available.

With regard to air travel, the national airline and private companies providecharter flights to the 31 airstrips around the country, and Lesotho is directlylinked with Johannesburg International Airport.

The telephone system has been extensively modernised and expanded inrecent years with connections growing by an average of 13 per cent per year.There is direct dialling both locally and overseas.

Basic health care facilities are provided throughout the country and most ofLesotho’s inhabitants have access to health care.

A2.3.3 Production

Despite the fact that agriculture only contributes 13.2 per cent to GDP, themajority of the population practises subsistence agriculture. In the formal econ-omy manufacturing depends largely on farm products to support the milling,canning, leather, and jute industries; other industries include textile, clothing,and construction. There has been an impressive increase in manufactures, drivenby foreign investment especially from South Africa and Hong Kong, althoughthis was from a very low base. In 1992 light manufactures constituted 80 percent of all exports. Lesotho is still heavily dependent on South African remit-tances. Migrant earnings constitute approximately 50 per cent of Lesotho’s GNPand allow imports worth more than 1.5 times the value of domestic production.


See Chapter 2.


See Appendix A3.


Lesotho does not have a sophisticated financial structure nor a developed finan-cial market. The only participants in the money (short-term) and capital (long-term) markets are the Government with its issue of treasury bills and 5-year,



3-year and 2-year government bonds, and, as the major investors in these secu-rities, the commercial banks. The Central Bank supplemented the supply oftreasury bills by introducing commercial paper in December 1994. The inten-tion was that this would deepen the money market as well as mop up excessiveliquidity in the commercial banking sector. This facility was withdrawn in 1996in an effort to encourage commercial banks to be less risk averse and to lendmore directly to the private sector. In April 1992 the Central Bank establishedan auction market for treasury bills. This was initially done on a quarterly basisbut since December 1993 the auctions take place monthly. The effect of theseauctions has been the liberalisation of interest rates. With the exception of sav-ings deposit rates, all interest rates in Lesotho are now determined by marketforces and are positive in real terms.

A secondary market in the money and capital market securities does not exist,thus reflecting the underdeveloped and shallow nature of these markets.

A2.3.7 Investment impediments

The impediments for investors include the following:

� unstable political environment, with the ruling political party recentlyhaving split over the leadership of the party. In addition the relationshipbetween the Government and the King is often uneasy,

� bureaucracy, for example, import licences are only issued to licensed tradersand manufacturers resident in Lesotho and will only be issued for quantitiesnot in excess of local demand,

� high price of utilities,� poor banking facilities,� individuals and companies are unable to purchase land, they may only rent it,� poor transport infrastructure and mountainous terrain making access to

areas difficult, this is particularly impacting on the tourism industry. Muchof Lesotho is unspoilt dramatic mountainous terrain.

A2.4 Malawi


With no socialist leaning, Malawi has encouraged private sector development.However, prior to the multi-party elections, most of the economy was controlledby the Malawi Development Corporation and Press Holdings, both of which hadstrong ties with the then ruling party, the MCP and the former President. Inrecent years, with the move towards a more democratic government and multi-party elections, the country has seen an increase in foreign investment and thereinstatement of aid programmes. Malawi has embarked on a privatisation pro-gramme designed to divest control in the numerous organisations set up duringthe 30-year reign of Dr Banda. The process started only a couple of years ago, sonot many operations have yet been privatised. Nevertheless there is a compre-hensive programme for privatisation, which is well underway.

There is a free press which ensures that almost every scandal receives public-ity, with government dealings being relatively transparent. This, together withan opposition in Parliament, a Public Accounts Committee and the office of the

216 Richard Hess


Auditor General, acts as an excellent watchdog to uncover any impropriety onthe part of Government or its officers.

Bureaucracy is still a major problem and things move slowly. Political ten-sions also exist as the country learns to become democratic for the first time.

After 30 years of a one-party political system, in 1994 Malawi went through asuccessful election process in which a democratically elected government wasput in place. A national unity government has since been installed in which thesecond vice-president comes from the opposition party. Malawi is a member ofboth SADC and COMESA. Malawi has bilateral trade agreements with SouthAfrica and with Zimbabwe.


The Department of Water in the Ministry of Works is responsible for overallnational water resources management. Connections are carried out by the localwater board in each particular area. About 47 per cent of Malawi’s populationhave access to safe water, and 53 per cent to sanitation.

Malawi has developed a number of hydroelectric schemes since independencewhich have enhanced electricity-generating capacity. The rural electrificationprogramme has not progressed as well as expected, and at present about 3 percent of rural households have access to electricity.

Being a landlocked country, Malawi is heavily reliant on its road, rail and airroutes. The majority of Malawi’s international freight traffic is moved by roadthrough the country’s 14,000 km road network. In recent years, priority hasbeen assigned to the upgrading of roads, particularly to Tanzania, to open upthe route to the port of Dar es Salaam, and the road between Lilongwe and lakeMalawi to facilitate easy access for tourists. Rail freight links have also been bol-stered by the improvement of railways. Air Malawi has a modern fleet of aircraftand offers services to regional and domestic destinations. The airports atLilongwe and Blantyre have good cargo capacity as well as bonded and refriger-ated warehouse facilities.

A2.4.3 Production

The Malawian economy is predominantly agricultural with approximately 90per cent of the population living in the rural areas. Agriculture accounts for 40per cent of GDP and 90 per cent of export revenues. Its main exports aretobacco, tea, sugar, coffee and other agricultural products. Manufactures accountfor a mere 15 per cent of GDP.


See Chapter 2.


See Appendix A3.


The money and capital markets in Malawi are served by the Malawi StockExchange. The Malawi Stock Exchange (MSE) is effectively a sub-committee of the



Reserve Bank of Malawi and is regulated by the Stock Exchange Committee (SEC).The SEC comprises nine diverse representatives from the private and public sectorsof the economy. The MSE is seen to be the main facilitator of the Government’sprivatisation campaign. Increased activity in the equity market has been and isexpected to continue to be spurred by the Government’s privatisation programme.

The commencement of the stock market in March 1995 was a significant mile-stone in Malawi’s financial sector reform process. Historically, negative real interestrates and the absence of or access to inflation-hedged investments have con-tributed to a very low savings rate and savings culture in the country. Investmentinto property or assets was seen as one of the few ways of preserving ones wealthagainst inflation. The high-profile divestiture of profitable state-owned enterprisesis set to create a savings environment more conducive to real returns.

The MSE is not expected to fulfil the traditional role of raising significantamounts of new capital for the private sector in the short to medium term dueto the lack of demand, but is expected to increase efficiency, raise revenue forthe Government and broaden the shareholder base of disposed state ownedenterprises.


Impediments for investors include:

� the high rate of corruption,� the landlocked nature of Malawi means that 90 per cent of the goods are

transported by road and these are often of a poor standard,� there is a lack of law and order in many of the cities,� Malawi has a shortage of skilled labour and temporary employment permits

can take up to 12 months to process,� political tension following the replacement of Dr Banda as the president,� bureaucracy.

A2.5 Mauritius


Mauritius has always encouraged the private sector. The Export Processing Zoneswere established in the 1970s but only really took off in the 1980s. Appropriatelegislation and good market access caused a large number of investors to investin the EPZ. This has been the backbone of recent development. The other twopillars of the economy are sugar and tourism, both of which are also in privatehands. The government, however, is cautious of foreign investment in certainsectors of the economy, especially retail, other service industries and manufac-turing for the domestic market. But there is an openness to foreign investmentin the offshore sectors, which is being encouraged currently. This includesoffshore financial and insurance services and freeport operations.

Given the previous small role of the state in the economy, privatisation hasbeen limited. Nevertheless the national airline has been partially privatised andthere are plans to privatise the national telecommunications body.

There is a reasonably high level of transparency, nevertheless there is roomfor improvement. The press is very open, but the state runs the TV and radio.

218 Richard Hess


Mauritius became independent in 1968 and a Republic within theCommonwealth in 1992. The political situation is stable with a vibrant democ-racy and does not effect the economy.

One of the main priorities of the Mauritian Government has been tradeliberalisation. Import and export permits are no longer required except for a fewspecific products.


There is a regular supply of water in Mauritius and practically all Mauritianshave access to clean water and sanitation. The whole country is served withelectricity, which is essentially thermal. The remaining power is either suppliedby hydro-electric stations or produced from bagasse (a by-product of sugar cane).There are, however, frequent power cuts and not infrequent water stoppages,requiring private back-up systems to be installed. Adequate storage facilitiesensure a regular supply of petroleum.

The road network is 1,830 km long and provides easy access to all parts of thecountry. A highway links the Sir Seewoosagur Ramgoolam International Airport,situated at Plaisance, in the south-east of the country through the main townsin the centre of the country, including the capital Port Louis, to the north of thecountry.

Port Louis harbour includes a container terminal and terminals for the han-dling of bulk sugar, oil, wheat and cement. As part of its strategy to develop theisland as a Regional Trade Centre, the Government has established a free portand an airport zone. The airport has recently been modernised, and there areplans to expand it further. Mauritius has air links with Europe, India, the FarEast, Southern Africa and other Indian Ocean islands. Freight rates are nego-tiable with carriers based on bulk frequency.

The island’s telephone network is fully digitised with computer-controlledelectronic exchanges. The system provides International Direct Dialling facilitiesto all subscribers and automatic telex and facsimile links to most parts of theworld. A Packet Switched Data Service for high speed transfer of data and cellu-lar telephone systems are also available.

The public health service is free and all Mauritians have adequate access tohealth services. There are 11 private clinics on the islands, 12 public hospitalsand a large number of health posts and dispensaries.

A2.5.3 Product standards and quality

The Mauritius Standards Bureau (MSB) was originally established by theStandards Act in 1975 as a division of the Ministry of Commerce and Industry.The Bureau became a corporate body in July 1993 and the earlier legislation wasreplaced by the Mauritius Standards Bureau Act 1993. This catered for anexpanded role of the Bureau in the future industrialisation of the country andalso gave more flexibility and autonomy for its activities. MSB has adopted anintegrated approach to standardisation and quality. It establishes national stan-dards which take into account the requirements of customers and the capabilityof manufacturers. Consistent compliance with these regulations is ensuredthrough the use of third party quality assurance. This approach to standardisa-tion and quality makes the MSB responsible not only for standards formulation



and quality assurance but also for testing and metrology. The MSB has beencertifying companies to ISO 9000 since January 1995.

A2.5.4 Production

The Mauritian economy is diversified into tourism, agriculture (mainly sugar), andmanufactures (mainly clothing and textiles). The possible weaknesses of the econ-omy stem from the lack of diversity within each category. The agricultural sectoris dominated by sugar and the manufacturing sector by clothing and textiles.Furthermore, the industrial growth of the past decades has been built on drawingthe population fully into the labour market, quantitatively mobilising resources,rather than qualitatively improving them. This growth path appears to be at anend, and further gains will have to come via improved labour productivity.


See Chapter 2.


See Appendix A3.


The Stock Exchange Act 1989 institutionalised the more than century-old infor-mal capital market into an effective stock market. To date there are 40 officiallylisted companies and eight officially listed debentures. There are also threeforeign listings while 61 companies are listed on the over the counter market.

Market capitalisation currently stands at around Rs36 billion (US$1.8 billion)representing 45 per cent of GDP. Foreign participation as measured by the ratioof foreign turnover to yearly turnover currently stands at 23.5 per cent up from2.2 per cent in 1995, the first year during which foreign nationals were allowedto invest freely in the stock market. The increase in market capitalisation ismainly due to two additional debenture listings. With a view to encourage com-panies to be listed on the stock exchange as well as encourage investment in thestock exchange at the individual and company level, the Government intro-duced a series of tax-related incentives.



� the small domestic market,� high transport costs,� there is relatively full employment in the country, which has driven wages

up and required the country to import labour.

A2.6 Mozambique


Since the adoption of the Structural Adjustment Programme in 1987, the envi-ronment for business development has improved significantly owing mainly to

220 Richard Hess


the gradual liberalisation of prices, exchange rate, foreign exchange market andcredit; the introduction of new investment regulations, incentives and exportprocessing zones; and the privatisation of state enterprises.

However, the industrial sector has been mired in a severe depression, whichhas its roots in a host of mutually reinforcing factors: lack of capital, weak man-agerial and technological capacity, low productivity, and lack of competitivenessin open, liberalised markets. To revitalise and modernise the sector, Governmentpolicies are directed towards privatisation, support to private domestic and for-eign investment, competitive exports and import substitution and closer integra-tion with regional and world markets, in particular, to take advantage ofMozambique’s abundant natural and energy resources (e.g. cash crops, fisheries,agro-industry, mining products, hydro-electric power, natural gas). Governmentstrategy emphasises a promotional approach rather than a regulatory one.Constraints that still affect industrial, export and private sector investmentgrowth are being addressed. The investment code and incentive scheme wererecently revised and the investment process was streamlined and simplified.With donor assistance, the Government also renders support to small-scale enter-prise through the provision of foreign exchange for a range of industrial andcommercial activities as well as business development and assistance services.

The Government is committed to creating an enabling environment for thedevelopment of a strong private sector. However the bureaucracy, corruption,red tape and administrative costs, induced by compliance with regulations, tendto inhibit such development. As with Angola some of the active legislationdates back to the late 1800s.

As an example, a foreign company entering the country for the first timewithout the proper contacts can spend six months and up to 10 per cent of itsinitial investment in fees to get itself incorporated. Predictably, after their firstinvestment experience in Mozambique, companies hire expert advice from ex-functionaries, lawyers or consultant companies who will carry all necessarysteps quite expeditiously for a price. The main problem with incorporation ofcompanies is fees, which between notary and registry end up being about 5–6per cent of capital, and the delays created by the Impressa Nacional (NationalPrinting Press) – which has been known to take several months to produceArticles of Association. As many as 65 separate steps could be involved in settingup a business, which could take over a year in administrative procedures.

Extensive South African and Portuguese investment is evident throughout thecountry with the control of previously state-run enterprises, such as the brew-eries and cement factories, now being in the hands of external interests withtheir headquarters in either Lisbon or Johannesburg. Privatisation has nowreached the point where even the Customs Department has been handed overto the private sector to run – this was also an effort to reduce corruption.

The Investment Centre in Maputo is a hive of activity. It also has a branch inBeira and is continually updating its investment guidelines in an effort toattract further investment. The Government has also adopted a policy to sell 20million hectares of land it nationalised, although it appears that much of theland is going to members and friends of Frelimo, the ruling party, rather than tothe peasant farmers who are presently working it. In another related measure inan agreement between Presidents Chissano and Mandela, which did not passthrough Parliament, 1,000 Afrikaner farmers have been given land in northernMozambique’s sparsely populated Niassa Province.



The press is to some extent free. However, the daily newspapers in both themajor centres of Maputo and Beira are controlled by the ruling party. There aretwo TV stations, one of which is independent, in addition excellent reception ofTV broadcasts from South Africa can be received in the south and fromZimbabwe in the central region of the country.


Mozambique has copious water resources including more than 60 rivers andmany lakes. The Government has undertaken to supply water for domestic andindustrial purposes in urban centres. About one-third of Mozambicans haveaccess to safe water.

Mozambique has the potential to provide the country with cheap electricitywith a substantial surplus for export. The Cahora Bassa Dam, originally built bythe Portuguese to supply electricity to South Africa, will produce 2,200megawatts of power following completion of an ongoing rehabilitation project.In addition, further exploitation of the hydro-power resource along the Zambeziriver basin is being analysed.

The shortest and most cost-effective route to the sea for many of the exportsof landlocked Southern African countries is through Mozambique, with Maputoand Beira being the closest ports for Zimbabwe, Swaziland and parts of SouthAfrica, Zambia and Malawi. During the war, however, the country’s road and railtransport routes to its ports were constantly targeted for destruction by the rebelforces. Mozambique’s transport system is thus the focus of many new infrastruc-tural projects, the most significant being the Maputo, Beira and Nacala develop-ment corridor projects.

Traffic on all the major railway lines linking the ports has risen since theearly 1990s, as peace returned to the country, rehabilitation of the rail systemcommenced and port facilities were improved.

Around 60 per cent of the road network is in bad condition and many of therural roads are still dotted with land mines. A number of road rebuildingprojects are currently underway.

Maputo is one of the largest ports in Africa, and there are harbours at Beira,Matola and Nacala. Management of the ports has improved dramatically. Thenational air carrier, Linhas Aereas de Moçambique services nine provincial capi-tals, as well as Johannesburg and Harare. Light aircraft services are also available.

Mozambique has telephone, telex, facsimile, e-mail and package switchingfacilities in place. A cellular phone network (GSM) is in operation as from July1997, covering Maputo province in its initial phase.

A2.6.3 Production

Mozambique’s economy is almost completely dependent on primary products.The agricultural sector is the largest employer with many small-scale and subsis-tence farmers. Agriculture accounts for 50 per cent of GDP and 90 per cent ofexports. The agricultural sector has still not recovered from the civil war: outputis currently at 75 per cent of its 1981 level, and grain has to be imported.Industry operates at only 20–40 per cent of capacity. The economy dependsheavily on foreign assistance to keep afloat.

222 Richard Hess



See Chapter 2.


See Appendix A3.


No money market has been created yet. Nevertheless, external assistance (theBanco de Portugal) has been contracted to assist the Central Bank in dealingwith this matter.

There is no capital market functioni2ng in Mozambique, however a stockexchange is due to be opened in late 1999. Foreign investment will not beallowed on the stock exchange. Initially, there will only be four counters trading.



� bureaucracy,� corruption.� registration procedures and fees,� outdated legislation,� high taxation for non-incentive scheme investors,� lack of access to credit and poor banking facilities,� poor telecommunications and infrastructure,� frequent power cuts,� lack of technology and language barrier,� difficulty in acquiring land.

A2.7 Namibia


The press in Namibia is seen to be free. Namibia is considered one of the moststable and dynamic economies within the region and a protagonist of privatesector development. The private sector plays a strong role and foreign invest-ment is encouraged. Export Processing Zones legislation has recently beenenacted to encourage foreign investment.

The Namibian political situation is that of a stable democracy. In December1994, general elections resulted in a two-thirds majority for the government.


At present, Namibia is a net importer of energy; it could however become animportant exporter, should the plans to expand the hydro-power along theKunene river and/or commercial development of the large Kudu gasfield becomea reality. Water is a scarce resource in Namibia and the country is negotiating withneighbouring countries to share access to rivers, in order to meet future demand.



Walvis Bay has a deep-sea port with excellent berth and wharf facilities. Theport handles most of the country’s fish exports and is linked with Windhoekthrough rail and road. Two major trans-continental highway construction pro-jects are underway to improve Namibia’s link with neighbouring countries: theTrans-Kalahari linking Namibia with Botswana, and the Trans-Caprivi linkingNamibia with Botswana and Zambia. The former will considerably improvetransport linkages between Namibia and South Africa’s core industrial and eco-nomic centre, the Gauteng province. Namibia’s railway company, TransNamib,covers more than 2,382 km of track with the main line running from the SouthAfrican border via Windhoek to Tsumeb in the north, connecting with impor-tant centres such as Luderitz, Swakopmund and Walvis Bay.

Air Namibia operates domestic, regional (Angola, Botswana, South Africa,Zambia, Zimbabwe) and international (Frankfurt, London) scheduled passengerand freight services. Namibia has 28 licensed and some 300 unlicensed aero-dromes and airstrips.

Telecommunications are well developed and a rapidly expanding mobile tele-phone network covers the country’s main 10–15 centres.

A2.7.3 Production

The Namibian economy is resource-based. The ‘traditional’ exports have beenminerals (diamonds, uranium and base metals) and commercial agriculture(sheep and cattle ranching). Only about 400,000 Namibians out of populationof about 1.6 million can be classified as being fully in the formal economy, withthe balance being rural and engaged in subsistence agriculture. The challengesfacing the Namibian Government revolve around bringing the bulk of the pop-ulation into the formal sector and extending the services enjoyed by the major-ity of urban residents to the countryside.


See Chapter 2.


See Appendix A3.

A2.7.6 Capital marketThe Namibian Stock Exchange (NSE) was established in 1992, and must becounted as a success story. With a capitalisation of N$168 billion, it ranks as oneof the largest stock exchanges in Africa after the Johannesburg Stock Exchange( JSE). The volume in trading in the first six months of 1997 exceeded the 1996year mark. The stipulation that 35 per cent of pension funds must be investedlocally has led to a growth of dual listings on the NSE and JSE. The total numberof listings in 1997 was 32, many of which are also listed on the JSE.

There are four stockbroking firms, three of which trade under the names of largeSouth African members, and there are close links between the NSE and the JSE. AMemorandum of Understanding was signed with the JSE in August 1997, whichmeans that the two exchanges will work closely together. The NSE obtains techni-cal assistance from its Johannesburg counterpart which, in turn, benefits from dual

224 Richard Hess


listings. The NSE is relatively dependent on South Africa with regard to dual list-ings, and this has enabled it to grow rapidly in the five years of its existence.

The most popular sources of funding for companies listed on the NSE areequity financing, short-term loans, and issues of debentures and bonds.

The capital market is becoming an increasingly important source of funds forlong-term financing. This is evidenced by the growing number of listings on theNSE and the rising amount of funds raised through public offerings. TheGovernment believes that its development strategy requires a dynamic andinnovative capital market in order to meet new and expanded funding demandsfor capital investment.

There is a lack of liquidity in the bond market. Asset managers have to waitfor the maturity date before they can sell government bonds, and therefore asecondary market needs to be established in order to increase liquidity.


The small number of people in the private sector, means that some skills needto be imported, e.g. in information technology.

A2.8 South Africa


The first democratic elections in the history of the country were held in April1994. A Government of National Unity under the leadership of Nelson Mandelareplaced the previous Apartheid Government which had been in place since1948. A peaceful political transition was effected.

After the unbanning of the ANC in February 1990, management of the econ-omy slipped as the crisis of credibility suffered by the then regime prevented itfrom taking the fairly difficult decisions which were necessary to implement acredible macroeconomic strategy. During this time the economy essentiallymoved sideways, waiting for clear direction. After the elections of April 1994 theeconomy began to recover, and has since moved on to a 3–4 per cent p.a. growthpath. In addition, the restoration of international funding and the credibility ofthe new Government have restored investor confidence somewhat. South Africafaces enormous challenges, in particular extending services into black areas,increasing the labour absorption capacity of what is a capital-intensive economy,overcoming the housing deficit, meeting the expectations of the majority of itspeople, and eradicating once and for all the culture of non-payment of services.

The new Government, when it came to power, claimed that it was movingaway from the traditional ANC line of nationalisation of the economy, andwould follow a mixed economy approach. In practice this has happened, andprivatisation of some key industries is underway, thereby demonstrating com-mitment to this approach.

The press is relatively free.Investment South Africa was launched in February 1997 as the country’s

investment promotion agency. Its core functions are to promote South Africa asa destination for investment and to facilitate the needs of investors that investin South Africa.




South Africa is largely semi-arid and prone to erratic, unpredictable droughtsand floods. Many large storage dams have been constructed to regulate the nat-urally variable flow of rivers, and to ease water transfers between catchments.An important hydroelectric scheme is the Lesotho Highlands Water Project, ajoint venture with Lesotho.

South Africa is committed to increase access to electricity from the present50 per cent to 72 per cent of households by the year 2000. Currently, SouthAfrica supplies more than half of all electricity generated in Africa.

South Africa’s modern transport system plays an important role in thenational economy and in the economies of several other African states. Severalcountries in Southern Africa use the South African transport infrastructure tomove their imports and exports. The national road system connects all themajor centres in the country to one another and to neighbouring countries. Thesystem covers approximately 7,000 km of roads, of which about 660 km are tollroads. Road transport accounts for roughly 8 per cent of all freight being trans-ported by land in South Africa. The railway system is well developed, coveringabout 36,000 km of track, of which almost half is electrified.

Seven of the 16 biggest ports in the greater Southern Africa region are locatedin South Africa. The ports of Durban, Port Elizabeth and Cape Town providelarge container terminals for deep-sea and coastal container traffic.

The Airports Company operates nine state airports, three of which( Johannesburg, Durban and Cape Town) are classified as international airports.The national airline, South African Airways (SAA), serves both domestic andinternational routes. Privately run airlines compete with SAA.

South Africa has nearly 90 telephone lines for every 1,000 inhabitants.Telkom, South Africa’s major telecommunications company, offers telegram ser-vices, telex and teletex services, public e-mail and electronic data interchange,enhanced facsimile services, a telephone conference facility, and a nationwidenetwork of microwave channels to link the South African BroadcastingCorporation and M-Net television studios and transmitters. Optical-fibre net-works carrying voice and data have been established in and between all majorcentres. There are two cellular telephone networks in South Africa, and inMarch 1997 South Africa had approximately 800,600 cellular phone subscribers.Projections for the year 2000 currently stand at 3 million.

A2.8.3 Product standards and quality

South Africa has the most advanced systems of standards and quality assurancein the region. This is implemented though the South African Bureau ofStandards (SABS). There is also the South African Council for Certification ofQuality System Auditors (SACCQA) which is a counterpart of the IRCA in UK.SACCQA have a written examination to assess suitability of Quality SystemAuditors for registration.


See Chapter 2.

226 Richard Hess



See Appendix A3.


The South African money and capital markets are the most developed in theSADC region. The Johannesburg Stock Exchange ( JSE) is one of the larger stockexchanges in terms of market capitalisation – in 1996 it was ranked 16th in theworld. It is governed externally by the Stock Exchanges Control Act of 1985,and internally by its own rules and regulations. In 1984, the JSE established adevelopment capital market similar to Britain’s unlisted securities market. Someof the other financial institutions and mechanisms include finance companies,participation mortgage bonds, unit trusts and insurance companies.


� the degree of violent crime is one of the highest in the world, especially inthe major business centres,

� the labour unions are strong and reasonably militant, making strikes, sit-insand shut-outs reasonably normal,

� the retirement of President Mandela has created some uncertainties,� wage costs are relatively high.

A2.9 Swaziland

A2.9.1 Investment climateThe Swaziland National Development Plan, the eighth in a series of ‘rolling’plans recognises that the surge of investment into Swaziland in the period1987–91 arose mainly because of trade sanctions against South Africa.International companies, then based in South Africa realised that their bestinterest would be served by relocating elsewhere and as a result Swazilandsecured many foreign investments including that of Coca-Cola andFridgemaster. Pressure against South Africa began to ease in early 1990 after theNationalist Party accepted the need for political reform and the release ofNelson Mandela. Sanctions were lifted against South Africa in 1993. Since thenforeign investment from all over the world has been encouraged by the newGovernment in Pretoria resulting in a decline in interest in Swaziland. Whilstsome existing companies such as Usutu Pulp, Mhlume Sugar, Cadbury’s andFridgemaster have launched expansion plans, no new substantial investors havebeen attracted to Swaziland since 1991. Employment creation is extremely lowand unemployment is expected to increase. The Development Plan predicts thatforeign direct investment will decline in real terms and growth will losemomentum. It concludes that the need to stimulate labour-intensive invest-ment is becoming increasingly urgent.

The Swaziland Government falls under an absolute monarchy with the Kingas the Head of State, it has, however, full autonomy. There is continued pressurefor further democratisation from modernists which include the intelligentsiaand unionists.



Swaziland has always had an open policy to the private sector. A newanthracite mine was opened at Maloma in April 1995, which was a joint ven-ture between Carbon Ex and the Swazi Government. Whilst Swaziland enjoys arelatively high per capita income, the Government is concerned over the lack ofexpansion in the private sector. To this end, a major plan to stimulate investmentwas unveiled in June 1995. Its aim is to liberalise the economy, cut out bureau-cracy and to adopt a policy flexible, particularly towards tax incentives.

Swaziland has a free press, with numerous weekly and daily newspapers. Italso has, apart from its national television service, three radio stations, two ofwhich are private concerns.


Swaziland produces some electricity, but the bulk is imported from South Africa.The country has a railway system covering 300 km, connecting it with

Mozambique and South Africa. The system moves close to 4.5m tonnes of freightp.a. and provides an important link for imports and exports. The road system isin good condition, and the main route between Mbabane and Manzini is beingupgraded to accommodate the heavy flow of traffic on that route. The telecom-munications system has been upgraded during the recent years and a feasibilitystudy on the viability of a cellular network has been conducted.

An inland dry port, located at the Matsapha Industrial Estate, saves time andexpense for Swaziland’s importers and exporters using the Durban port. Therecent investments in the upgrading of Mozambique’s road, rail, and port inMaputo for exports, especially sugar which is freighted through this port, hasbeen beneficial to Swaziland.

Royal Swazi National Airways operates domestic and regional flights fromMatsapha International Airport. Airlinks between Swaziland and other regionalcapitals are frequent and well developed.

A2.9.3 Production

The traditional economy is based on subsistence agriculture, which absorbsmore than 60 per cent of the population. The formal economy is still domi-nated by agriculture, despite the increasing importance of manufactures, princi-pally because it provides inputs for the growing agro-industry. The principalagricultural industries are commercial forestry (mainly pine) and sugar cane.

Mining has declined in importance in recent years; high-grade iron oredeposits were depleted by 1978, and health concerns cut world demand forasbestos. Swaziland is heavily dependent on South Africa, from which it receives90 per cent of its imports and to which it sends about half of its exports.


See Chapter 2.


See Appendix A3.

228 Richard Hess



There is only one firm of stockbrokers, which also runs the Swaziland StockExchange (SSE). The reason for this is that there is insufficient turnover to sup-port several firms of stockbrokers and a separate SSE management. The inten-tion, however, is to split the two functions as soon as circumstances allow.

The development of the stock market will be affected by two important piecesof legislation, namely, the Securities Bill and the amendment to the CompanyAct. The latter should be enacted in 1998, but the Securities Bill has had achequered career for the last few years. The present version is considered to beunsuited to the needs of an emerging market and is consequently being revisedin consultation with other African stock exchanges. In the meantime the SSE isself-regulating.

The establishment of closer links between Southern African stock exchanges isbeing investigated under the auspices of SADC. The idea is to stimulate inter-trading by linking the stock markets through the Johannesburg Stock Exchange( JSE). The emerging stock markets would be able to use the JSE’s technology,and the SSE would benefit if exchange control were to be removed.

Although activity on the SSE is relatively dormant, there is clearly potential inSwaziland for longer-term investment which could be captured by the capitalmarket. This has been demonstrated by the success of the first unit trusts inmobilising funds in the domestic money market. Moreover, long-term contrac-tual savings institutions have continued to grow. At the end of the 1996/7financial year the contractual savings institutions held 54 per cent of longer-term government stock and the commercial banks the balance.

A2.9.7 Investment constraints

� with South Africa now being accepted by the international community,there are few reasons to use Swaziland as an alternative,

� there is low domestic demand,� the movement towards democracy could bring about some upheaval.

A2.10 Tanzania


Tanzania’s first president, Julius Nyerere pioneered the belief in a unique Africanvision of socialism. The country continues as one of the continent’s last ‘one-party states’, though the present Government has entered into dialogue withgroups with a view to encourage the development of multi-party democracy.

The country is a member of COMESA, SADC and the East African Community.Tanzania has embarked on an aggressive programme to encourage private sec-

tor investment after 30 years of disastrous experiments with African socialism.The donor community has made it clear that unless transparency and corrup-tion within the Civil Service is eliminated they will once more withdraw sup-port. The setting up of the Tanzania Revenue Authority to replace the Tax andCustoms Department was seen by most in the private sector as a step in theright direction. Transparency is now improving.



Tanzania has moved away from total state control to a policy of privatisation,with almost all Government enterprises being sold to the private sector.

The press in Tanzania is now free, resulting in daily critical reports, in all butthose publications controlled by the Government or Party, of misconduct inhandling public or private moneys or affairs.

The country has extensive unexploited natural resources in minerals, arableland and sea and freshwater fish. It has relatively cheap labour. The TanzaniaInvestment Centre (TIC) is there to facilitate investment applications into thecountry.

Tanzania is one of the poorest countries in the world with an estimated GNPper capita of US$90 in 1993. It has a population of about 28.7 million growingat approximately 2.5 per cent p.a.


The national Urban Water Authority administers urban water supply, andregional water engineers service the rural systems through local/village govern-ments. All district headquarters have water systems.

Wood-based energy resources accounted for approximately 90 per cent ofenergy needs in 1993. Petroleum met 9 per cent of energy needs, while hydro-electricity and coal provided the balance. Petroleum has to be imported, thusabsorbing large amounts of the country’s foreign exchange. There is greatpotential for developing alternative sources of energy, notably hydroelectricpower, coal natural gas and solar energy.

Tanzania is well served by international, land, sea and air transportation routes.In most parts of the transport sector, major rehabilitation works are being under-taken. The size of the country and its low population density make maintenanceand expansion of the transport infrastructure very costly. A road network con-nects Tanzania with Kenya, Malawi, Zambia, Uganda, Burundi and Rwanda, andany part of the country can be reached by the existing comprehensive road net-work of almost 54,000 km, of which 3,200 km are asphalt. Many roads are cur-rently in poor condition and a major rehabilitation project began in 1990.

Tanzania Railways Corporation runs the 2,600 km system linking Dar esSalaam with the central and northern regions. The Tanzania–Zambia RailwayAuthority (TAZARA) operates 1,860 km of track, 976 km of it in Tanzania, whichlinks Dar es Salaam with Kapiri Mposhi in Zambia. It is mainly used to transportZambian copper to Dar es Salaam port and Zambian imports in the oppositedirection. The principal coastal ports are Dar es Salaam, Tanga, Lindi, Mtwaraand Zanzibar. They are managed by the Tanzania Harbour Authority.

International airlines operate in and out of Tanzania through Dar es Salaamand Kilimanjaro airports. There is a third international airport on Zanzibar.There are also several regional airports and numerous landing strips for use bycharter planes. Air Tanzania operates regular services to most regional townsand has scheduled flights to neighbouring countries and to the Middle East.

Telecommunication facilities are available in most parts of the country. Thetelephone system in Dar es Salaam is being rehabilitated. Telephone, fax, telex,expedited mail service, private couriers and cellular phones are available.Tanzania has two earth satellite stations in Dar es Salaam with a total capacityof 420 channels.

230 Richard Hess


A2.10.3 Production

The Tanzanian economy is primarily agricultural in that 90 per cent of the pop-ulation are employed in this sector, which in turn is responsible for 58 per centof GDP. The manufacturing sector accounts for only 8 per cent of GDP andconsists mainly of light manufacturing.


See Chapter 2.


See Appendix A3.


After an intensive public education campaign by the Capital Markets andSecurity Authority (CMSA) potential investors have come to accept that there isa need to have a stock exchange in Tanzania. A number of potential localinvestors have shown enthusiasm to buy shares in firms through the Dar esSalaam Stock Exchange (DSE) in a bid to diversify their investment portfolioand spread risks with a possibility of reaching higher returns for other invest-ments. The Dar es Salaam Stock Exchange was launched in February 1998. Inthe past, most financial institutions have invested their money in treasury billsand bonds, and in real estate to the detriment of the productive sectors of theeconomy. The government intends to spread ownership of shares to as manypeople as possible in privatised state enterprises. In January 1997 the CapitalMarkets and Securities Act of 1994 was amended to include a provision forestablishment of collective investment schemes such as unit trusts.


� the TIC approval process is very time-consuming, because of poorly trainedstaff and slow decision-making by those in authority,

� the Tanzania Revenue Authority (TRA) concentrates more on revenue collec-tion than on ensuring investment project equipment and material isreleased speedily,

� customs bureaucracy can delay the release of goods for up to 90 days,� the infrastructure throughout the country is poor, especially in the provi-

sion of water and electricity for industrial and domestic use. Many roads arein a state of disrepair. The telecommunications network has been badlyinstalled,

� the labour force is described as unskilled, unmotivated, unimaginative andunproductive,

� the poor economy has led to reduced health levels and rampant diseasessuch as cholera, AIDS and malaria,

� the financial services are poor,� institutionalised savings to mobilise resources for investment in infrastruc-

ture do not exist and the existing financial institutions are dominated bycommercial banks that are very risk-conscious.



A2.11 Zambia


After nearly 30 years of one-party rule, Zambia changed its political landscapeby emerging with a multi-party democratically elected government in 1991. Thenew government has since embarked on economic liberalisation, privatisationof the parastatal companies and creation of a market-oriented economy. TheZambian Government has probably one of the most progressive privatisationprogrammes in Africa and has recently been praised by the IMF and the WorldBank for the progress made in this regard.

The relative ease of obtaining residence and work permits, is encouragingwould-be Zimbabwean investors (amongst others) to invest in Zambia.

Transparency – both the Government and donor agencies are seen to be mak-ing efforts to ensure that investor confidence is generated and maintained. Anindependent Revenue Authority has been established to take over customs andtax administration.

Though a highly urbanised economy with close to 60 per cent of its peopleliving in the cities, mainly in the Copperbelt, Zambia is still heavily dependenton agriculture. The market-oriented reforms that the Government has carriedout include the liberalisation of the financial markets, interest and exchangerates, and prices which are are now market determined. Agriculture, which tra-ditionally had been subject to comprehensive controls, has been freed. Importrestrictions have been removed, customs duties lowered and virtually all restric-tions on current and capital transactions eliminated. It now has probably thelowest tariff regime in SADC.


The Government of Zambia has embarked on the process of rehabilitating theroad network, which covers 35,168 km.

The rail network is also in need of urgent rehabilitation. Historically, Zambiahas been served by a rail line running south to South Africa via Zimbabwe andnorth through the Zambian Copperbelt to Kinshasa in DR Congo. ZambiaRailways is responsible for this rail line. In the mid-1970s another rail line link-ing Zambia and Tanzania became operational. This is jointly run by Zambia andTanzania through Tanzania–Zambia Railway Authority (TAZARA). Other promis-ing rail routes are Zambia–Mozambique (Beira line), Zambia–Malawi (Mchinjeline), Zambia–Namibia and Zambia–Angola. Construction of the Zambia–Malawi line has reached an advanced stage.

Lusaka International Airport is Zambia’s main airport connecting Zambia withother African countries and Europe. A number of local and neighbouring coun-tries’ airlines serve the regional market. British Airways operates flights betweenLusaka and London. Lusaka International Airport is assisted by three small air-ports in Ndola, Livingstone and Mfuwe, as well as secondary airfields inChipata, Kitwe, Kasama, Mongu and Solwezi.

Zambia has vast water resources and coal reserves for hydroelectric power gen-eration. This renders electricity relatively inexpensive in Zambia. Although mostof the electricity is supplied from major hydro stations, there are also small

232 Richard Hess


diesel power stations in rural areas. The distribution of electricity is howevermainly concentrated to Lusaka and the Copperbelt.

Over 97 per cent of the telephone exchanges are automatic, and the countryenjoys direct dialling facilities, fax, e-mail and television links with the restof the world. In the main urban centres public telephones and independentlyoperated cellular telephone networks are in place. The government is currentlyreviewing the process of privatising the Zambia Telecommunications Company.

A2.11.3 Production

Over 85 per cent of the people are involved in agriculture. Most of these aresubsistence farmers as agriculture accounts for a mere 12 per cent of GDP.Zambia’s main exports are copper, zinc, cobalt, lead and tobacco, although cop-per dominates the export picture.


See Chapter 2.


See Appendix A3.


The capital market in Zambia is currently developing and can best be describedas emerging.

The introduction of the Lusaka Stock Exchange has marked a step forward,but to date only seven companies have sought listing on the stock exchange.The moneys raised through the stock exchange so far amount to K664.7 billion.The performance of the shares on the stock exchange has bettered returns oftreasury bills, government bonds and bank deposits and, should this continue,the Stock Exchange should prove to be a valuable contributor to the raising oflong-term capital.

Corporate income tax for companies on the Lusaka Stock Exchange is reducedto 30 per cent, against the norm of 35 per cent. There are no restrictionswith regard to foreign ownership and share holding levels. There is no capitalgains tax.


� The political turmoil since Mr Chiluba was democratically elected to powerhas included an attempted coup,

� international aid to the country has been stopped on a number of occasionsfor prolonged periods of time as donors have protested about political devel-opments,

� the extensive liberalisation of the economy has meant that domestic indus-try has little protection from imported products,

� the road and rail networks are old and in a poor state of repair,� the economy’s heavy reliance on copper has meant that the impact from the

drop in the price of copper has been significant.



A2.12 Zimbabwe


Zimbabwe has had a stable political environment by regional and internationalstandards. Though multi-party elections are held every five years, the rulingparty ZANU PF has been in power since independence in 1980, with very littlechallenge from the opposition parties. However there have been recent nation-wide strikes that have been supported by the majority of the working populationagainst decisions made by the Government regarding the increase of taxes andprices of basic commodities. The Government has responded aggressively tothese protests with a number of people being shot and tear-gas being widelyused. The designation of 1,500 commercial farms to be removed from the own-ers for nominal sums of money has led to a withdrawal of foreign aid and lossof investor confidence. With Zimbabwe being an agriculturally based economy,the economy as a whole has also been affected, with the farmers holding backon capital investments and the ripple effects on agro-industry have beentremendous. It is still to be seen whether this move will effect the ability of thecountry to feed itself. At the time of writing most of the owners of the desig-nated farms are in the process of appealing against the Government’s ruling.

Zimbabwe has always had a strong private sector, which has continued inspite of attempts since independence to move to a socialist-type economicstructure. Government has now committed itself to a mixed economy, but stillhas certain socialist principles.

The State is viewed as not yet keen to privatise, despite pressure from thedonor community, rather it prefers commercialisation of parastatals. TheGovernment has also been accused of lacking transparency in some of its deal-ings with the private sector, for example in the Hwange Power Station deal andin the development of cellular phone systems.

Whilst there is good legislation which supports foreign investment, and theapproval process has been simplified considerably in recent times, politicalstatements are disconcerting and show less than whole-hearted commitment toforeign investment.


Generation and distribution of electricity is undertaken by the ZimbabweElectricity Supply Authority. Hydroelectric power is generated from the Zambeziriver at Kariba, and there are four thermal power stations. Zimbabwe is onthe regional power grid linking it to sources in Zambia, D.R. Congo and SouthAfrica.

Zimbabwe has an extensive rail and road transport network linking it to prin-cipal ports in Mozambique and South Africa, and to all neighbouring countries.The rail network, supplemented by the National Railways of Zimbabwe’s RoadMotor Services and a thriving privately run trucking industry, handles the bulkof imports and exports. The railway company is administered as a parastatal.

There are 18,435 km of designated state roads, of which 8,710 are surfacedand 9,725 gravelled. Another 61,630 km in rural areas are maintained by localand district authorities.

234 Richard Hess


The national airline, Air Zimbabwe, is a commercial body administered by theGovernment. It provides regular internal connections to Bulawayo and the prin-cipal tourist destinations of Victoria Falls, Hwange and Lake Kariba. It also pro-vides direct services to various African destinations, Australia and the UnitedKingdom. Several established regional and international carriers have scheduledflights to Harare. Affretair, the national cargo airline, handles specialised cargofor destinations worldwide. Facilities include a 200-tonne cold room at HarareAirport.

Zimbabwe is in the process of introducing a modern digital telephone systemto replace the aged electro-mechanical exchanges. A fibre-optic cable network isbeing laid throughout the country. For international traffic there are two earthsatellite stations serving the Atlantic and Indian Oceans. Cellular telephoneshave been introduced.

A2.12.3 Production

Zimbabwe is a primary product exporter. The economy is primarily agriculturalin that three-quarters of the labour force is employed in agriculture which alsosupplies 35 per cent of the commodity exports (30 per cent tobacco, 5 per centother). The manufacturing sector is based on the processing of primary prod-ucts, and contributes approximately 30 per cent to GDP. Though mining onlyaccounts for 5 per cent of GDP and employment, it accounts for 40 per cent ofexports.


See Chapter 2.


See Appendix A3.


The present stock exchange opened in 1946, and the Zimbabwean StockExchange (ZSE) now has a market capitalisation of some Z$65.7 billion (US$4.4billion). Although small by international standards, the ZSE is one of the mostdeveloped and active markets in Africa. There are two indices, mining andindustrial. Of the 64 listed companies, seven fall under the mining index.Private investors account for approximately 15 per cent of equity trading and anincreasing foreign involvement is evident with foreigners accounting for about70 per cent of turnover since June 1993. The opening of the market to foreigninvestors has also increased liquidity, which historically has been low.

In addition to the equity counters, government stocks, municipal stocks andZimbabwe Electricity Supply Authority (ZESA) stocks with approximately anaggregate face value of Z$10 billion are in issue. The bond market is underdevel-oped and most stocks are held to maturity. Foreign investors’ participation in thebond market is limited to 40 per cent of primary bond issues (5 per cent per indi-vidual investor) and to an amount not exceeding 15 per cent of the total fundsthey invest in Zimbabwe. Unit trusts are also in existence, but these are not pro-tected by specific legislation and foreign investment is not permitted at present.



The performance of the ZSE has been characterised, overall, by growth butwith droughts causing major adjustments.

Government finances have remained problematic despite the progressachieved in reforming key areas of the economy. A notable problem of thereform programme has been the failure to bring down the budget deficit from10 to 5 per cent of GDP as envisaged under ESAP. Government has failed to sub-stantially reduce expenditure with falling revenues and the deficit was financedby expensive domestic borrowing.

The budget reliance on domestic bank sources of finance has increased theinterest burden on the budget. Interest payments on domestic debt accountedfor 24 per cent or Z$2.8 billion of total central government expenditure in thefirst half of the 1995/6 fiscal year. Unbudgeted expenditures have to be con-tained if high domestic borrowing and the associated high debt servicing are tobe brought under control. Details of government measures to address the cur-rent budget deficit problem are awaited. These, it is hoped, will include revenueenhancement and accelerated privatisation and sale of state assets.

A2.12.7 Investment constraints

� recent industrial unrest has had a significant impact on the country, withlarge numbers of workers not reporting for work and some shops and facto-ries being damaged by the riots,

� lack of transparency regarding Government decisions,� political instability,� at the time of writing, the exchange rate is volatile, making it very difficult

to predict costs and profit.

236 Richard Hess


Appendix A3Export and InvestmentIncentives by CountryNora Hill

237

This appendix describes the export and investment incentive frameworks ofSADC members. It is based on policies and related information as at June 1998.

A3.1 Angola


Foreign investment is considered crucial to Angola’s reconstruction process andthe promotion of foreign investment is considered a priority. The following area few of the current investment incentives:

� Foreign companies are guaranteed equal treatment.� Nearly all sectors of the economy are now open to foreign investment.� Special fiscal incentives are offered to foreign investors who employ a high

proportion of Angolans and provide them with professional training andbenefits equal to foreign employees.

� Foreign investors may transfer profits, dividends and the proceeds from thesale of investment abroad.

� Investments less than US$5 million no longer need prior governmentapproval.

� An industrial tax exemption is available for a limited period if the income isrelated to new industries whose products are not produced in the country orgoods that already exist but whose business dimension, investment, techno-logical procedures, quality of the products, value of local resources, localemployment are larger than those already in existence.

� Fifty per cent of the tax rate to companies who establish in specified regionsor who use local raw materials.

A3.1.2 Export incentives

Angola has one of the highest volumes of exports in the SADC region, largelydue to exports of oil. There is much underutilised potential in other areas how-ever, such as diamond mining, coffee and fishing. The promotion and diversifi-cation of exports have been recognised by the Government as ways to facilitate


production and growth. Any company developing a project in Angola whichfulfils any of the investment criteria, or which increases export activity in thecountry, may apply for tax exemptions or benefits. As a member of the WTO,Angola may not support exports with incentives which contravene WTO rulings.

A3.2 Botswana


The Financial Assistance Policy (FAP) is a system of tax-free grants available tobusinesses engaged in import substitution, export promotion, employment cre-ation, selected ‘linking’ services (those which provide a marketing or collectionfunction for their productive activities, including associated repair and mainte-nance facilities) and tourism. Applications are considered on a case-by-casebasis. The value of the grants will differ according to whether the business isclassified as a small, medium or large-scale enterprise. In the case of a mediumor large-scale project, three different grants are available:

Capital grant: This is intended for the purchase of plant and machinery. Itassists with the initial project investment through the purchase of fixed assets.If the project is 100 per cent citizen-owned, P1,500 (US$420) is granted for eachjob created. If the project is owned by non-citizens or is a joint venture, theamount of P1,000 (US$295) is granted per job created.

Training grant: This covers 50 per cent of citizens’ off-the-job training costsincurred over the first five years of the project (including the costs of tuition,board and lodging, travel, materials and wages). The value of the grant is tied toimprovements in productivity. Reimbursements are made at three-monthlyintervals.

Unskilled labour grant: This is a partial reimbursement of the wages paid tounskilled employees over the first five years of the project where those wagesare close to the statutory minimum. Eighty per cent of wages paid during thefirst two years are reimbursed, declining to 20 per cent in the fifth year.Reimbursements are made at three-monthly intervals.

Brewing or distilling operations are not eligible. New projects and expandingproductive businesses can apply for assistance but only those which raise thenational income and have a reasonable chance of becoming financially viablewill receive assistance.

Small-scale projects (fixed scale capital investment of less than P25,000): FAPassistance in this category is restricted to citizens. Assistance is in the formof grants, with amounts determined by location, ownership by women andnumber of jobs created. Industrial projects which qualify are administered bythe Department of Industrial Affairs in the Ministry of Commerce and Industry.

Medium-scale projects (fixed capital investment of between P75,000 and P2million): Non-refundable grants are awarded to expanding and some new pro-ductive businesses. As the emphasis of FAP is on job creation, labour-intensiveenterprises are favoured. Projects must also have a minimum economic rate ofreturn of 6 per cent. Industrial projects which qualify are administered by theDepartment of Industrial Affairs in the Ministry of Commerce and Industry.

238 Nora Hill


Large-scale projects (fixed capital investment in excess of P2 million): TheMinistry of Finance and Development Planning administers large scale projects.

In addition to the FAP incentives, investors located in the Priority DevelopmentCentre (Selebi-Phikwe) receive a nominal corporate tax of 15 per cent for thefirst five years of project life and exemption from withholding tax on dividendspaid for the first ten years of project life on the share of profits derived fromexports.


Production for the export market is encouraged, with the following exportincentives in place:

� Duty drawback facility in the procurement of raw materials needed for theproduction of exportable merchandise.

� In some cases rebates are available on import duties on raw materials and/orcapital goods, as an incentive to manufacturers to produce for the exportmarket.

� No surcharge on the importation of machinery and equipment required inthe production for exports.

� A Bureau of Standards has been established to help facilitate exportersobtaining quality and standards certificates and also the receiving of adviceon maintaining high quality.

� The Botswana Export Credit Guarantee Company has been established withassistance from the Botswana Development Corporation to address the pre-and post-shipment credit problems faced by exporters.

A3.3 Lesotho


Lesotho offers incentives packages specifically designed to minimise start-upcosts, increase operating profits, which in turn will boost return on investment,and increase shareholders’ value. Incentives are:

� free repatriation of profits,� a non-repayable skills training grant which covers 75 per cent of the wage

bill during the initial training period for a newly-established manufacturingcompany,

� unimpeded access to foreign exchange,� loan guarantees for loan finance provided to clients of the LNDC by other

financial institutions,� equity participation (in selected cases) by the LNDC, in the absence of a pri-

vate investor,� provision of serviced industrial plots, customised factories, commercial and

residential properties for lease,� no withholding tax on dividends distributed by manufacturing companies

to local or foreign shareholders,

Export and Investment Incentives by Country 239


� General sales tax (GST) exemption on capital machinery and equipment formanufacturing industries,

� a permanent maximum tax rate of 15 per cent on profits earned by manu-facturing companies,

� Double Tax Avoidance treaties with South Africa, Mauritius, the USA andthe UK.


� manufacturers receive a full rebate on imported raw materials or compo-nents for use solely in the processing or manufacturing of goods for theexport market,

� a comprehensive export finance facility to support exporters with workingcapital on concessionary credit.

Lesotho developed its Export Finance Scheme in 1987 to: (i) encourage andassist Lesotho exporters to execute their export orders with greater ease by pro-viding pre-shipment and post-shipment export credit; (ii) strengthen the com-petitive ability of Lesotho exporters in international markets; and (iii) enableLesotho exporters to penetrate new markets at a comparative advantage. Themain components of the scheme are:

Credit guarantee scheme: The exporter’s bank applies for export finance onbehalf of its client to obtain an export credit from the LNDC. This guaranteemay be used to provide pre- and/or post-shipment finance to an exporter.

Pre-shipment credit scheme: The scheme is designed to assist exporters to exe-cute their production for external markets by financing their working capitalneeds on the basis of confirmed export orders.

Post-shipment credit scheme: This is a loan which enables an exporter to starta new manufacturing cycle and covers working capital requirements from theday of shipment until payment from the foreign buyer is received. This enablescompanies to offer favourable credit terms to their customers without strainingtheir working capital requirements.

Refinance arrangement: A special re-lending facility is granted by the CentralBank of Lesotho to commercial banks to provide concessionary export financeto exporters. It encourages commercial banks to assist exporters timeously, thuscontributing to improved export performance.

Counter-guarantee arrangement: LNDC is also supported by a counter-guaranteeissued by the Central Bank to assume 95 per cent of the risk associated withguarantees.

Central Export Development Fund: The refinance operations and counter-guarantee activities get financial backing from the CEDF which is organised ona revolving basis. The fund is managed by the Central Bank of Lesotho.

A3.4 Malawi


Investment opportunities in Malawi have been put in place to catalyse incre-mental investments in productive sectors such as manufacturing, agriculture,

240 Nora Hill


tourism and mining. The Investors Guide outlines a range of incentives designedto attract productive investments:

� corporate tax rate of 35 per cent,� an additional 15 per cent allowance for investments in designated areas of

the country,� an allowance up to 20 per cent for used buildings and machinery,� 40 per cent allowance on new buildings and machinery,� 50 per cent allowance for certain training costs,� allowance for manufacturing companies to deduct all operating expenses

incurred up to 24 months prior to the start of operations,� zero duty on raw materials used in manufacturing,� 100 per cent deduction for manufacturing company operating expenses in

the first 18 months,� indefinite loss carry-forward to allow companies to take full advantage of tax

allowances,� Duty-free importation of heavy commercial vehicles with payloads of at

least 10 tonnes,� agreement for the reduction of withholding taxes on remittances and pay-

ments,� a five-year tax holiday or 15 per cent corporate tax rate for new investments

of US$5–10 million, and up to ten years’ tax holiday for new investments inexcess of US$10 million.

Investors have free access to foreign exchange in Malawi, both for paying forimports and transferring financial payments abroad. This free access includes:

� no licensing requirements for importing foreign exchange,� full repatriation of profits, dividends, investment capital and interest and

principal payments for international loans,� local and foreign investors have unrestricted access to local financing facilities,� interest rates are market-based and there are no direct government controls

on credit.


An important aspect of the Investment Promotion Act was the establishmentof procedures for setting up Export Processing Zones (EPZ) in 1995. Incentivesfor establishing operations in an EPZ or manufacturing in bond for exportinclude:

� corporate tax rate of 15 per cent for EPZs,� no withholding tax on dividends,� no duty or capital requirements on capital equipment and raw materials,� no excise taxes on purchases of raw materials and packaging materials made

in Malawi,� no surtaxes (VAT),� transport tax allowances equal to 25 per cent of international transport

costs.



Incentives for manufacturing in bond include:

� export tax allowance of 12 per cent of export revenues for non-traditionalexports,

� transport tax allowance equal to 25 per cent of international transport costs,excluding traditional exports,

� no duties on imports on capital equipment used in the manufacture ofexports,

� no surtaxes,� no excise taxes or duties on purchases of raw material and packaging

materials,� timely refund of all duties (duty drawback) on imports of raw materials and

packaging materials used in the production of exports.

Incentives for horticultural producers:

� For those exclusively engaged in horticultural production for export: 100 percent duty-free importation of equipment and raw materials.

A3.5 Mauritius

A3.5.1 Manufacturing incentives

Export Processing Zone: Available to those involved in the production of man-ufactured goods for export or deep sea fishing (including fresh or frozen fish) forexport. Benefits are:

� corporate tax rate: 15 per cent for life,� dividends: tax-free for 20 years,� no customs duty, import levy or sales tax on raw materials, machinery,

equipment and spare parts, except for motor vehicles,� remission of 60 per cent of the duty payable on the purchase of vans with a

seating capacity between 15 to 25,� free repatriation of profits, dividends and capital without the payment of

capital transfer tax,� electric power at preferential rates,� finance available at preferential rates from the Development Bank of

Mauritius.

Strategic local enterprise: Local industry manufacturing for the local marketand engaged in an activity likely to promote the economic, industrial and tech-nological development of Mauritius. Benefits are:

� corporate tax rate: 15 per cent for life,� dividends tax-free for 20 years.

Modernisation and expansion enterprise: There are two broad categories:(i) investment in production machinery and equipment, such as automation

242 Nora Hill


equipment and processes, and computer applications to industrial design, man-ufacture and maintenance (CAD/CAM); and (ii) investment in antipollutionand environment protection technology to be made within two years of date ofissue of certificate. Benefits are:

� no customs duty on scheduled production equipment,� income tax credit of 10 per cent (spread over three years) of investment in

new plant and machinery, provided at least Rs10 million (about US$550,000)is spent and this occurs within two years of the date of issue of the certificate(this is in addition to existing capital allowances which amount to 125 percent of capital expenditures),

� enterprises in Category 2 benefit from a further incentive, i.e. an initialallowance of 80 per cent for expenditure incurred on antipollution machin-ery or plant (against 50 per cent in most other cases).

Industrial building enterprise: Construction for renting of industrial buildingsor levels thereof, provided floor space is at least 1,000 sq. metres. The applicantneeds to be a company intending to build for leasing to the holder of a certifi-cate (other than an industrial building enterprise certificate) issued under theAct or to an enterprise engaged in the manufacture or processing of goods ormaterials except the milling of sugar. Benefits are:

� corporate tax rate: 15 per cent for life,� dividends: tax-free for ten years,� registration dues for land purchase: 50 per cent exemption,� Landlord and Tenant Act: rent control is not applicable.

Pioneer status enterprise: Activities involving technology and skills whichare likely to enhance industrial and technological development. Applicant com-panies may come under one of three broad categories: (i) new technology;(ii) support industries; and (iii) service industries. The applicant will not be con-sidered if the qualifying activity was already operational before 1 July 1993.Benefits are:

� corporate tax rate: 15 per cent for ten years, 35 per cent thereafter,� dividends: tax-free for ten years,� no customs duty, import levy or sales tax on scheduled equipment or

materials.

Small and medium-scale enterprises: Any manufacturing activity, includingrepair, packing and assembly of inputs into finished or semi-finished goods,provided the aggregate c.i.f. value of production equipment does not exceedRs5 million. Benefits are:

� no customs duty and no import levy on production equipment,� corporate tax rate: 15 per cent for life.

Offshore business: Conducting of business with non-residents and in currenciesother than the Mauritian rupee. Activities include: offshore banking, offshore



insurance, offshore funds management, international financial services, opera-tion headquarters, international consultancy services, shipping and ship man-agement, aircraft financing and leasing, international licensing and franchising,international data processing and other information technology services, off-shore pension, international trading and asset management and internationalemployment services. Benefits are:

� no tax on profits and free repatriation,� complete freedom from exchange control,� concessionary personal income tax for expatriate staff,� complete exemption of taxes on imported office equipment,� complete exemption from import duty on cars and household equipment

for two expatriate staff per company,� no withholding tax on interest payable on deposits raised from non-

residents by offshore banks,� no withholding tax on dividends and benefits payable by offshore entities;

no estate duty or inheritance tax is payable on the inheritance of shares inan offshore entity; no capital gains tax.

Export service zones (at least 70 per cent local participation is required): Export-oriented service companies such as accountancy, law, medicine, internationalmarketing, quality testing, pre-shipment services, civil engineering, managementconsultancy, reinsurance, entry port trade and transshipment. Benefits are:

� corporate tax rate: 15 per cent for life,� dividends: tax-free for 20 years,� free repatriation of capital, profits and dividends,� no import levy or customs duty on machinery, equipment, spare parts and

goods destined for re-export.

Free port: Transhipment and re-export trade, e.g. warehousing and storage,breaking bulk, sorting, grading, cleaning, mixing, labelling, packing and repack-ing, minor processing and simple assembly. Benefits are:

� complete exemption from payment of customs duty, import levy and sales taxon all machinery, equipment and materials imported into a free port zone forexclusive use in the free port, as well as on all goods destined for re-export,

� access to offshore banking facilities,� warehousing and storage fees at preferential rates.

A3.5.2 Agriculture incentives

Agriculture Development Scheme:

� Payment of a nominal rate of 15 per cent corporate tax throughout the life-time of the company,

� Exemption from payment of income tax on dividends for the first 20 years,� Free repatriation of capital, profits and dividends,

244 Nora Hill


� Complete exemption from payment of customs duty on machinery, equip-ment and spare parts,

� Exemption from payment of 50 per cent of the normal registration fee onland and buildings purchased by the new enterprise.

A3.6 Mozambique


Investors are offered exemption from customs duties and consumption and cir-culation tax on:

� equipment needed for the implementation of project feasibility studies,� building materials and equipment necessary to carry out an approved invest-

ment project,� light passenger cars for company representation, provided that the relevant

value does not exceed 1 per cent of the value of the total project investment,� raw materials, intermediate products and packaging materials for production

of export goods, medicines, educational materials and foodstuffs,� raw materials, intermediate products and packaging materials for producing

other articles (exempted only for the first production cycle),� 50 per cent reduction of the normal customs handling fees,� foreign investors’ and expatriate technical staffs’ personal belongings.

Tax incentives are offered for new or paralysed undertakings.

� During the period of recovery of investment expenditures (ten years maxi-mum), the Industrial Contribution Tax (corporate tax) and SupplementaryTax rates are reduced by: (i) 80 per cent for investments in Niassa, Tete andCabo Delgado; (ii) 65 per cent for investments located in other provinces,outside the respective capitals; (iii) 50 per cent for investments located inother provinces, within the provincial capitals.

� For investments in operating ventures, a deduction from taxable income of100 per cent of investments made in new equipment and construction ofplant and infrastructure is provided for up to five years.

� Additional incentives for investments located in less-developed provincesare provided through an extension of the reduction of Industrial Contribu-tion Tax by: (i) 50 per cent for six more years in cases of investments madein Niassa, Tete and Cabo Delgado; (ii) 40 per cent for three more yearsfor investments made in Sofala, Manica, Zambezia and Nampula (exclud-ing provincial capitals); (iii) 25 per cent for three more years in cases ofinvestments made in Inhambane, Gaza and Maputo (excluding provincialcapitals).

The expenditures accountable as losses for taxation purposes are those made in:(i) construction or rehabilitation of public infrastructure; (ii) the purchase ofworks of art for private property ownership or other actions undertaken whichcontribute to the development of Mozambican culture; (iii) training ofMozambican workers (up to 5 per cent of taxable profits).




The cornerstone of Mozambique’s push to expand its export markets are theIndustrial Free Zones (IFZs). If an export industry is located in an IFZ, it willenjoy full exemption of customs duties, import or export taxes on constructionmaterial, machinery and equipment. IFZ enterprises will also be exempted fromtax on dividends for ten years. The proposed sites for the development of IFZsare at the Industria Ceramica de Moçambique site in Maputo Province, SofalaProvince near to the port of Beira, Nampula Province and the port of Nacala.

A3.7 Namibia


To encourage investment into Namibia, the Government offers tax and non-tax incentives to foreign investors, with an emphasis on export-oriented manu-facturing:

General incentive regime:

� Corporate income tax: 35 per cent,� Mining companies tax: 25–55 per cent (diamond companies 55 per cent),� Petroleum producing companies tax: 42 per cent plus additional profits tax,� Manufacturing companies tax: 17.5 per cent with additional deductions (i.e.

50 per cent abatement for five years),� Exporters tax (manufactured exports except meat and fish): 7 per cent on

export profits (i.e. 80 per cent exemption),� Export Processing Zones: zero tax regime,� Personal income tax: 35 per cent maximum marginal rate,� Non-resident shareholders tax: 10 per cent.

Certificate of status investment: Investors may obtain a Certificate providedthey fulfil certain criteria regarding the size and nature of the investment. Theholder of a Certificate is entitled, inter alia, to buy foreign currency to serviceforeign loans, transfer net profits, dividends, proceeds of sales and remittances,and retain currency gained from exports. They are also granted exemption fromrestrictions regarding categories of business reserved for Namibia residents.

Special incentives for manufacturing enterprises: These incentives introducedin 1993 apply equally to local and foreign manufacturing companies:

� 50 per cent tax abatement for five years – phased out over ten years,� new investment relocation package – further negotiated tax rates,� accelerated depreciation on buildings – ten years,� exporters’ deduction (promotion costs) – 125–75 per cent tax deductible,� training cost deduction – 125 per cent tax deductible,� direct production wages deduction – 125 per cent tax deductible,� concessional loans for industrial studies – 50 per cent of real cost,� exporter’s grants/loans – 50 per cent of approved promotional expenses.

246 Nora Hill



Export Processing Zones: In order further to boost the local manufacturing andthe export industry, the Namibian Government announced an EPZ in WalvisBay, Arandis, near Swakopmund, a special incentive zone in 1991. Act 9, of 18April 1995, provides for an EPZ in Walvis Bay and any other ‘zone’ or ‘enterprise’appointed by the Minister. Eligible activities include all export-manufacturingactivities, value added processing in agro-industry and mineral beneficiation,storage and warehousing, break-bulk activities and business services. The incen-tives include:

� exemption from corporate income tax, general sales tax, additional salesduty, stamp duties, transfer duties and import duties (for exports out ofSACU),

� guaranteed currency conversion (offshore banking legislation to follow),� liberal labour and customs regulations,� conditional reimbursement of up to 75 per cent of EPZ personnel training

costs.

The institutional structure of the EPZ is: (i) Offshore Development Company(ODC) Pty Ltd (minority government shareholding); (ii) EPZ management com-panies (for each EPZ zone); and (iii) EPZ enterprises – under jurisdiction of EPZmanagement companies, or as single-factory enterprises.

A3.8 South Africa


Tax incentives – Research and development: Scientific research operatingexpenditure and approved scientific research capital expenditure:

� 25 per cent of the cost of capital expenditure for scientific research approvedon a yearly basis by the Council for Scientific Industrial Research may bededucted annually. The research, if discontinued, will be liable for thedeductions allowed.

Employee housing:

� erecting a house for an employee – 50 per cent of expenditure limited toR6,000,

� amount donated or advanced to an employee to build a house – 50 per centof the expenditure/advance/donation, with a limit of R6,000,

� erection of at least five residential units to house full-time employees or tolet to a tenant. Allowances initial 10 per cent of cost and annual 2 per centof cost limited to cost.

Accelerated depreciation: To encourage investment in manufacturing andexpansion of existing plants. Available countrywide to local and foreign firmsestablishing new manufacturing plants or expanding existing plants.



Plant and machinery:

� manufacturing or similar process – 20 per cent p.a.,� hotel equipment – 2 per cent,� farming – 50 per cent, 30 per cent, 20 per cent over three years.

Buildings:

� industrial (manufacturing or similar process) – 5 per cent,� hotels – 5 per cent,� hotel refurbishments – 20 per cent.

Non-manufacturing fixed assets – various (normally 10–20 per cent)

Double tax agreements: No double tax payments with the following countriesBotswana, Denmark, Finland, France, Germany, Hungary, Israel, Korea, Lesotho,Malawi, Namibia, Netherlands, Norway, Poland, Repub. of China, Romania,Swaziland, Sweden, Switzerland, Tanzania, Thailand, United Kingdom (Grenada,Mauritius, Seychelles, Sierra Leone), Zambia and Zimbabwe.

A3.8.2 Industrial financing incentives

Multi-shift scheme: For the expansion of production capacity and creation ofemployment. It provides low interest rate finance to independent industrialistsand groups with total assets of R1 million or more for projects which add atleast one eight-hour shift leading to greater employment. Total assets �R1million; no application <R150,000.

Finance to improve international competitiveness: For manufacturers whosetotal nominal ad valorem import tariff will decrease by at least 10 per cent overthe period 1995–9 (WTO ruling). This scheme is for manufacturers who need toimprove their international competitiveness through the acquisition of fixedassets (following the change in tariff protection policy). Finance is available at alow interest rate for three years after which prevailing normal IDC variable ratewill apply.

Bank indemnity scheme: Small or medium enterprises where contribution andcollateral must total at least 50 per cent of facility granted. The scheme providesindemnity to banks against 60 per cent of loss. There is a maximum of R400,000per client.

Eco-tourism scheme: Institutions which provide additional accommodation inconservation areas under control of conservation authorities and in nationalgame reserves of 10,000 ha or larger. The owner must finance at least 40 percent of the value of total assets. Loans are at IDC rates or by risk participation

General tourism scheme: Institutions which are developing tourist accommo-dation suitable for foreign tourist or upgrading or improving existing facilities;also selected new developments. Turnover from accommodation (includingmeals) should be at least 70 per cent of total turnover. Owners’ equity mustfinance at least 40 per cent of total assets. Facility must be suitable for accom-modating foreign tourists. Loans at IDC rates; maximum funding at R10 millionper project; full range of support services.

Low interest rate scheme for employment creation job scheme: Creationof additional production capacity which in turn will result in the creation ofadditional employment opportunities. The scheme provides low interest loans

248 Nora Hill



to any company creating at least ten new jobs. Employment must be created ata capital cost not exceeding R100,000 per job with total assets less thanR100 million. Loans are granted at low interest rates for the first three years,then at the normal prevailing interest rate for the following years.

Standard leased factory building scheme: To make it possible for industrialiststo utilise capital for more productive purposes and to increase their borrowingpowers and cash flow. The IDC makes general purpose factory building availablefor lease.

Accelerated depreciation: To encourage investment in manufacturing andexpansion of existing plant. Available countrywide to local and foreign firmsestablishing new manufacturing plants or expanding existing plants. Providesfor the depreciation of plant and machinery over three years, and land andbuilding over five years.

A3.8.3 Incentives for the small, medium andmicro-enterprises (SMMEs) business sector

Seed loans for retail financial intermediaries (RFIs): To provide capacity-building support and initial capital to new organisations to initiate a loan port-folio to fund operational expenses over a predetermined period. Less experiencedRFIs must demonstrate credible plans for operations, management, credit policyguidelines and operational sustainability within 60 months. Experienced RFIsmust be in position to self-fund the envisaged programme for a minimum ofthe first two months of implementation and must indicate operational sustain-ability within five years. To qualify, an RFI must: be legally constituted; haveclearly defined SMME target markets; have sound accounting and financial sys-tems; have sound internal organisational guidelines, policies and procedures;have capacity to carry out current and proposed projects; have clear and achiev-able short and medium term objectives; have matching funds of at least 15 percent of envisaged operating expenses.

Loan amounts for less experienced RFIs range from R1 million to R10 million.Loan amounts for experienced RFIs range from R5 million to R100 million. Seedloans are converted to grants once mutually agreed upon performance criteriaare met.

Small business development loans: Limited to entrepreneurs with enterpriseswhose gross assets are less than R10 million. Provision of finance, premises andtraining.

Competitiveness fund: To encourage South African firms to be competitive,both as exporters and in defence of their local marketplace. The fund is particu-larly designed to assist small, medium and micro-enterprises (SMMEs) inimproving their competitiveness since 60 per cent of the available funds will beallocated to these firms. SMMEs will also receive limited free consulting servicesfrom highly skilled professionals employed at technikons, universities and pri-vate consulting firms. Available to all South African private firms of all sizes.Funds allocated on a first come, first served basis. Firms should submit a realisticplan for the development of its business activities. The Fund will support theintroduction of technical and marketing know-how and expertise to firms. Thescheme will insist on a 50 per cent contribution by the firm itself and grantswill be paid on a reimbursement basis.


250 Nora Hill

Venture capital finance: To stimulate the development of various products orthe establishment of new ventures for products with good growth potentialthrough small and medium-sized industrialists. For entrepreneurs starting abusiness or high technology industry or requiring further permanent capital tofinance growth or the commercialisation of new technology. Low interest rateson loans from IDC.

Standard credit guarantee scheme: To increase access to finance for SMMEsthrough banks. Accessible to SMMEs that are independently owned, with assetsof less than R2 million before financing. SMMEs must meet the bank’s normallending criteria. To enable an entrepreneur to access funding from his/herbankers for the establishment, expansion or acquisition of a new or existingbusiness. The maximum facility is R600,000.

Emerging entrepreneur scheme: All criteria are the same as above but themaximum indemnity is 60–70 per cent and the maximum facility is R75,000.

Economic empowerment scheme: To assist entrepreneurs from the historicallydisadvantaged communities. Manufacturing businesses usually require owners’funding of at least 33–40 per cent of the total funding to ensure long-term via-bility. The scheme provides for a reduced contribution with the IDC providing alarger than normal contribution of the project funding.


Export marketing and investment assistance (EMIA): To compensateexporters registered with the Department of Trade and Industry for certain costsincurred in respect of activities aimed at developing export markets under thefollowing schemes:

� Primary Export Market Research,� Outward Selling Trade Missions,� Inward Buying Trade Missions,� Exhibition Assistance,� Assistance to Industry Specific Sectors,� Outward Investment Recruitment Missions,� Inward Investment Missions,� Foreign Direct Investment Research.

Benefits:

� A portion of specified costs relating to travel, daily subsistence, exhibitioncosts, and market research is refunded on trips and trade exhibitions andfairs. Matching grants up to a maximum of R400,000 in the first yearand R200,000 in the second for the establishment of an export council forspecific industries.

� Available to all exporters, but with special terms for SMMEs.

A3.8.5 Sector-related export incentives

Sector partnership fund: To form linkages and promote competitiveness andproductivity. Available to any partnership of five or more organisations withinSouth African manufacturing that puts forward a qualifying programme. To support sub-sector partnerships in preparation of technical and marketing


programmes with the aim of improving competitiveness and productivity offirms. Up to 65 per cent of costs of projects up to R1.5 million are covered.

Steel rebates and steel concessions: Exporters of fabricated steel productswhere 25 per cent value has been added may claim a rebate of R94 per ton onthe purchased raw material based on the value of exports.

Motor industry development programme (MIPD): To increase competitive-ness and productivity. Available to motor vehicle assemblers, component manu-facturers and exporters. MIDP enables local vehicle and component manufacturersto increase production runs and encourages rationalisation of the number ofmodels manufactured by way of exports and complementing imports of vehi-cles and components. Benefits:

� reduced import duty (now 54 per cent) on fully built up vehicles to reach40 per cent by 2002,

� duty-free allowance of 27 per cent of wholesale turnover of vehicles sales forCKD manufacturers,

� duty-free imports based on the equal value of local content of vehicles and75 per cent for exported components,

� small vehicle incentive, additional duty-free allowance for vehicles <R40,000net ex-factory selling price (nsp) based on a formula of 0.3 per cent ofex-factory selling price x R40,000 – (nsp),

� excise duty on completely built-up vehicles.

Duty credit certificate scheme for exporters of textiles and clothing (DCCS):To exporters of certain prescribed textile and clothing products. To improve theexport awareness, productivity and training with a view to achieving interna-tional competitiveness. Benefits:

� exported prescribed textile and clothing can earn duty credit certificatesbased on the local or full duty paid on raw material used in the exportedproducts,

� benefits of 30 per cent on clothing, 20 per cent on textiles, 15 per cent ontextiles, and 10 per cent on yarn are offered.

World player scheme: For improvement of international competitiveness. Thescheme is made available to textile, clothing and footwear manufacturers andmotor vehicle component manufacturers whose import tariff on competitiveproducts will fall by at least ten percentage points. Finance available to manu-facturers for the acquisition and modernisation of fixed assets or establishmentand expansion of existing industry.

Export credit and foreign investment reinsurance scheme: To promote tradewith countries by making provision for reinsurance for insurance contractsfor export transactions and export credit loans for undertakings registered withthe Department of Trade and Industry. Facilities and policies available throughprivate sector Credit Guarantee Corporation of Africa Ltd are:

� short-term insurance – pre-shipment cover, post-shipment cover and con-signment stock cover,

� medium/long-term insurance – contractors cover, cover against unfair call-ing of bonds, financial credit cover, foreign exchange risk cover, investmentguarantees,



� export finance for capital goods or projects. To cover tenders for capital pro-jects requiring offers of export credit facilities at fixed interest rates over theamortisation period of the contract, repayable over ten years,

� foreign investment guarantees. To provide South African investors in foreigncountries cover against political risk such as expropriation, confiscation andnationalisation,

� export finance guarantees for SMMEs – 90 per cent of the value of the exportorder not exceeding R1 million and not less than R50,000 may be advancedto exporters for transactions not exceeding six months for pre-shipmentloans and 12 months for post-shipment loans,

� export credit loans denominated in US dollars – for export credit loans up toand including seven years, 7.0 per cent fixed. For export credit loans overseven years, 7.25 per cent fixed. The above rates include a foreign exchangepremium of 0.5 per cent,

� export credit loans denominated in rand, 16 per cent floating. Provides for-eign exchange risk cover. Financial institutions may offer loans to exportersof capital goods at a range of forward exchange rates instead of a single pre-determined export exchange rate as previously.

A3.8.6 Financing

Medium-term loan financing: To encourage establishment and/or expansionof existing industries. Available to all independent industrialists or groups withassets not exceeding R120 million. The scheme is available for the establish-ment of new industries or the expansion of existing industries at interest basedon medium-term capital market rates.

Normal finance: To promote growth. Available to small and medium-sizedindustrialists. Designed to assist the smaller and medium-sized industrialist inthe growth phase of their development.

Import finance: To promote growth. Available to small and medium-sizedindustrialists. Provides credit and guarantee facilities to local industrialists forthe importation of capital goods and services.

Finance for export of capital goods and services: Promotion of exports of acapital nature. Facilitation of extended repayment terms at world market relatedinterest rates denominated in US dollars. Available to industrialists/exporterswho are able to execute the particular project of a capital nature. Credit facilitiesfor capital goods and services exported from South Africa enable exporters tooffer competitive terms to foreign purchasers.

Low interest rate finance for export promotion: Industrialists with total assetsof at least R1 million expanding capacity to serve export markets. This expan-sion should also create employment opportunities. Maximum of R40 million.Low interest rate loan for the first three years if 60 per cent of expected sales areintended for export. If less than 60 per cent of sales are exported, only half theloan will be at the low rate, with the balance being advanced at the current rateon ordinary IDC loans.

Rebate provisions: Promotion of manufacturing and exportation of goods.Available to all manufacturing industries. Provision exists for rebate or drawbackof certain duties applicable to imported goods, raw material and componentsused in manufacturing, processing or for export.

252 Nora Hill


A3.8.8 Research and development incentives

Support programme for industrial innovation (SPII): For all private sector com-panies in the manufacturing industry. 50 per cent subsidy on the expenditureincurred in developing new products and technology. Maximum of R1 million.

A3.8.9 Regional industrial development finance

Tax holiday scheme (replaces the Regional Industrial Development Programme):To encourage investment in manufacturing, assist local manufacturers in improv-ing their international competitiveness and facilitate a higher degree of labourabsorption. Available to entities incorporated after 1 October 1996, with assetsgreater than R3 million. Approval must be given for the tax holiday between 1October 1996 and 30 September 1999. The entity must be a manufacturing con-cern in terms of Major Division 3 of the Standard Industrial Classification.

Tax levied at 0 per cent on taxable income for a maximum of six consecutiveyears. The tax holiday must be utilised within ten years of approval. A two-yeartax holiday is awarded for each criterion met: (i) the product being manufac-tured is on the approval list; (ii) the plant is situated in one of the designatedlocations; (iii) the human resource remuneration to value added ratio exceeds55 per cent.

A3.8.10 Small/Medium manufacturing developmentprogramme (SMMDP)

To encourage investment in manufacturing, encourage small and medium-sizedmanufacturing and facilitate a higher degree of labour absorption. Available coun-trywide to local and foreign firms investing not more than R3 million in land,buildings, plant and equipment. Legal entities as well as sole proprietors and part-nerships (excluding trusts), incorporated after 1 October 1996 and engaged innew, secondary manufacturing processing. Same applicability as for the tax holi-day scheme, except that it is for enterprises with assets of less than R3 million.

A tax-free grant from government for a maximum of six years in all areas ofSouth Africa. The grant is divided into three components:

1. Establishment grant: first three years calculated at 10.5 per cent of qualify-ing assets with a maximum of R315,000 (about US$70,800). The equitypercentage has to be greater than 10 per cent.

2. Profit/output incentive: the next three years are based on 25 per cent ofprofit before tax but is limited to the establishment grant. To qualify for thefifth and sixth year, the labour remuneration as a percentage of value addedhas to be maintained at 55 per cent.

3. Foreign investment grant: there will be a grant for companies with a foreignshareholding greater than 50 per cent which will reimburse the local com-pany for costs incurred for importing new machinery. The grant is limited toUS$50,000.

A3.8.11 Work place challengeLaunched by NEDLAC as a capacity-building programme to enhance co-operation between workers and management in order to improve the country’s



competitiveness and employment creation by improving industrial performanceand productivity. The programme is being implemented in three phases region-ally. The first has incorporated informative workshops highlighting: productiv-ity and competitiveness; the development of sectoral strategy; an exchange ofviews, problems and solutions; and to deal with specific workplace issues (skillsformation and training, world class manufacturing, services and workplaceorganisation). Phase two will follow the outcome of the workshop in theregions along broad sectoral industry divisions. Phase three includes trainersand facilitators to implement the programme. It is proposed to introduce theprogramme through the identified clusters in the regions.

A3.8.12 Technology and human resources forindustry programme (THRIP)

THRIP is aimed at enhancing the competitiveness of South Africa through thedevelopment of appropriate skilled people and of technology and encourageslong-term strategic partnerships between industry, research and educationalinstitutions and government. Research groups in the natural sciences, engineer-ing and technology within educational institutions can participate in collabora-tion with any private company or consortium of companies. Contributionsprovided by industry and government to finance the research efforts of acade-mic partners provided that such research projects involve the training of stu-dents. R1 for every R2 from industry, and if certain criteria are met, R1 for everyR1 from industry could be granted.

A3.9 Swaziland


Swaziland has an extensive investment incentive package, with an importantrole played by the Swaziland Industrial Development Company Limited (SIDC),the principal development finance agency. SIDC finances private sector projectsin manufacturing, mining, tourism, commerce and service sectors and also pro-vides assistance on business requirements and procedures. Highlights of theincentives include:

� a trading licence is required and obtained from the Ministry of Commerceand Industry,

� business sites for industrial operations are available from the Ministry ofCommerce and Industry and SIDC. Ongoing expansion of the MatsaphaIndustrial and other sites is being carried out, along with the upgrading ofthe country’s infrastructure,

� corporate tax rate is 37.5 per cent. Further tax incentives are presently beingconsidered. Swaziland guarantees against nationalisation of private enterprise,

� dividends, interest and profits are freely repatriated from Swaziland,� an employee training programme allows for expenses incurred in training

personnel to be deducted for tax purposes,� assessed losses may be carried forward and offset against future profits,� an initial depreciation allowance of up to 50 per cent on plant and machin-

ery may be claimed in the first year or spread over several years,

254 Nora Hill


� a 10 per cent local preference on public tenders is allowed,� an allowance is granted for the cost of building houses for employees,� double taxation agreements exist with South Africa, Mauritius and the

United Kingdom.


� the Central Bank operates an export credit guarantee scheme establishedin 1991. The scheme includes pre- and post-shipment loans granted by com-mercial banks, which receive guarantee bonds from the scheme as riskcover.

� there is an export finance guarantee scheme,� five-year tax exemption for new manufacturing companies involved in

exports. Further tax incentives are presently being considered.

A3.10 Tanzania


Investment is treated favourably under Tanzania’s corporate tax system. Manytax incentives relate directly to capital outlays, from full write-off for clearingand planting of agricultural land in the year of investment, to extensive depreci-ation allowances. The National Investment (Promotion and Protection) Act1992 offers the following incentives:

� first-time investors receive a five-year tax holiday, followed by a reduction intax rate up to five percentage points below the standard rate,

� exemption from import duties on all capital equipment and raw materials,� exemption from sales tax on imports of capital equipment, materials etc.,� a five-year tax exemption applies to withholding tax on dividends, royalties,

and interest payments, followed by reduced rates,� depreciation allowed for in profit calculations.

A3.10.2 Exchange controlThe Foreign Exchange Act (1992) and Foreign Exchange (Bureau de Change)Order 1992 have been removed. People can now hold and transact in foreignexchange freely, which should serve as an incentive to local and foreignprospective investors.

A3.10.3 Repatriation of capital and earningsInvestors are allowed to retain up to 50 per cent of their net foreign exchangeearnings for purposes of remittance of dividends, profits and settlement ofexternal obligations.


� liberalisation of export licensing,� export guarantee run by the Central Bank,� duty drawback scheme,� a ‘one stop shop’ is to be established for customers, central bank services, etc.



A feasibility study for the establishment of EPZs in Tanzania was carried out dur-ing 1996, and the draft regulations and organisation of EPZs are under prepara-tion. An EPZ is however already in place in Zanzibar. Companies established inthe EPZ are offered ten years corporate tax holiday and duty exemption onimports of raw materials and capital equipment.

A3.10.5 Guarantees

Extensive guarantees are provided to investors under the Investment PromotionCentre’s Certificate of Approval, such as guarantees regarding ownership ofproperties, dispensation of assets, repatriation of income of others.

A3.11 Zambia


Zambia has been implementing package incentives aimed specifically at estab-lishing a profitable environment for increased domestic industrial growth,export promotion, the development of market-oriented production manage-ment and private sector development. The Investment Act of 1993 offers arange of incentives. Investors who qualify for special incentives under the Actare entitled to:

� exemption from customs duty and sales tax on all machinery and equipmentrequired for establishment, rehabilitation or expansion of that enterprise,

� duty-free exemption for agriculture and mining machinery,� 5 per cent customs duty on other capital machinery,� duty exemptions on: raw material imports of goods of organic and inorganic

chemicals, iron and steel, rubber and plastics,� 5 per cent duty on other raw materials,� 15 per cent duty on intermediate goods,� 25 per cent duty on final products,� 15 per cent income tax on non-traditional exports,� tax on companies listed on the Lusaka Stock Exchange is 30 per cent, com-

pared with the normal 35 per cent corporate tax,� deductible allowances of between 5 and 50 per cent,� 100 per cent profit repatriation,� no foreign exchange controls,� guarantee against compulsory acquisition of property,� expenditures on research, on technical education, or any further training

related to a company’s specific business activity.

Additional incentives for agricultural enterprises include:

� dividends payable to farmers are tax exempt for the first five years of operation,� 15 per cent income tax on farming profits,� full tax allowance for outlay on land development, conservation and other

costs,

256 Nora Hill


� capital expenditure on farm improvements qualify for an allowance of20 per cent per annum for each of the five first years,

� substantial rate of depreciation allowing farm machinery to be rapidly writ-ten off against tax,

� special development allowances for growing certain crops: tea, coffee,banana plants, citrus fruit trees or other similar plants or trees,

� repatriation of a proportion of after-tax profits.

General incentives are offered to investment certificates holders including:

� In a rural area, the enterprise pays one-seventh of the normal 35 per centcorporate income tax rate in its first five years of operation.

Incentives relating to investments on the LuSE include:

� no restrictions on foreign ownership and shareholding levels; and� no capital gains tax.

Miscellaneous:

� Where a double taxation agreement exists between Zambia and anothercountry, the foreign tax payable by the investor to the other country, inrespect of any foreign income, shall be allowed as a credit for that investoragainst Zambian tax in respect of the foreign income.


Special incentives, which are additional to general incentives are offered toinvestors who specialise in: rural enterprises; export of non-traditional goodsand agricultural products; and import substitution activities.

Special incentives are offered to exporters of non-traditional products, such as:

� reduced corporate tax to 15 per cent,� special exemption from duty and sales tax on imports,� machinery is offered to exporters of non-traditional products with net for-

eign exchange earnings,� tourism investment with foreign exchange earnings in excess of 25 per cent

of the gross annual earnings,� agro-related products for export.

A3.12 Zimbabwe

A3.12.1 Investment guarantees

The Zimbabwe Government offers investors the following guarantees:

� repatriation of original capital investment in case of divestment,� no restrictions on local borrowing for working capital,� repatriation of foreign currency,� imports and import licences.



Incentives for investors include:

� 25 per cent special initial investment allowance in the year of purchase ofindustrial and commercial buildings and machinery is granted as a rebate forthe first four years,

� special mining lease entitles the holder to specific incentive packages, to benegotiated with the Ministry of Mines with income tax of 35 per cent,

� dividend remittance threshold for companies established prior to 1979 hasbeen increased from 25 to 50 per cent of net after-tax profits, through theinter bank market,

� dividend remittance for companies set up after 1 May 1993 is now 100 percent and payment is effected through the inter-bank market,

� foreign investors may hold up to 100 per cent equity in companies operatingin preferred sectors of the economy, i.e. those sectors other than specified inS1108 of 1994,

� foreign investors may hold up to 25 per cent equity in companies which arein reserved areas as specified in S1 108 of 1994,

� in construction and specialised services, foreign investors may hold up to70 per cent equity,

� individuals are entitled to retain 100 per cent of overseas proceeds withauthorised dealers in Foreign Currency Accounts (FCAs),

� investment inflows and capital transfers are eligible for 100 per cent depositsinto FCAs,

� surtax has been reduced from 15 to 10 per cent,� for foreign-owned companies, local borrowing is permissible on a 1:1 ratio to

the shareholder’s funds,� flexibility in recruitment and engagement of expatriate personnel with max-

imum contract periods of up to five years,� investors investing significant sums in projects approved by the Zimbabwe

Investment Centre (ZIC) are eligible to acquire permanent residency,depending on amounts involved,

� exemptions from import tax (sales tax), surtax and customs duty on equip-ment and machinery imported for Zimbabwe Investment Centre (ZIC)approved projects.

Incentives for setting up in Growth Point Areas:

� new manufacturing operations located in a growth point qualify for a con-cessionary rate of 10 per cent income tax,

� infrastructural projects qualify for 15 per cent income tax for the first fiveyears of operation.


The Export Processing Zones Act passed in 1994 allows for the establishment ofEPZs in specifically designated towns, areas or companies. Incentives for EPZs:

� exemption from withholding taxes on dividends, royaltie, fees, etc.,� exemption of duty for goods imported into EPZs,

258 Nora Hill


� exemption from capital gains tax, surtax and sales tax on goods and services,� exemption from fringe benefits tax for employees of EPZ companies,� five-year tax holiday and 15 per cent corporate tax thereafter,� permission for foreign companies to borrow locally.

In addition to these incentives, exporters may benefit from a duty drawback sys-tem whereby import dues will be reimbursed upon exportation of the qualifyinggoods in an unused state or as inputs in export goods.



Index

260

African Development Bank, 112, 113report on air transport, 122, 123

African Economic Commnnity, 129Agriculture, 112, 114

and taxation, 76Aid dependence, 44Air transport, 8, 122–3

joint ventures, 122Angola, 27–8, 44, 178–9, 210–13,

237–8capacity building and direct

taxation, 66capital gains tax, 176closed economy, 43constraints on foreign direct

investment, 210–13consumption taxes, 70corporate tax, 168, 176, 178customs revenue, 62deficit, monetisation of, 28direct taxation in, 65employment and FTA, 105employment effects, 107estimated assessments in, 77export incentives, 237–8external debt, 28fiscal adjustment, need for, 61–71fiscal deficit, 27growth rate, 27individual taxation, 176, 178inflation, 28inheritance and donations tax, 176investment in, 91investment incentives, 237key indicators, 27land ownership, 101monetary policy, 28oil production, 27production tax, 178sales tax, recommendation for, 14tariffs, 179tax base, 66tax policy, 14, 66–7, 70

tax system, 178–9taxation of small businesses, 77withholding taxes, 176, 178

ASEAN, 11Australia, 134–5

Bilateral trade agreements, 129Bilateral trade imbalance, 84Botswana, 28–9, 147, 179–82, 213–14,

238–9budget and current account

surpluses, 29capital gains tax, 181corporate tax, 168, 176, 180diamond market, 29, 100double taxation agreements, 181exchange rates, 50, 53export incentives, 239external debt, 29fiscal adjustment, need for, 61–71foreign direct investment

constraints, 213–14government revenue, 181–2indirect taxes, 65individual taxes, 179–80inheritance and donations, 176,

181investment incentives, 238–9key indicators, 28labour costs in, 115productivity centres, 101sales tax, 69tax system, 179–82transaction taxes, 181withholding taxes, 181

Budget deficits, 25, 26and openness, 12see also fiscal deficit

Build, Operate, Transfer concept, 96Bureaucracy

bureaucratic inertia, 72effects on investment, 16and inefficiency, 93–4

JEN-IND.QXD 4/1/00 10:07 AM Page 260

Business associations, 112Business licence fees, 77–8; see also

company taxBusiness management training, 110Business transactions documentation,

14, 74, 76Business, record-keeping, 76Businesses, small-scale, lump-sum

levies on, 76–7

Capital controls, 98; see also exchangecontrols

Capital export and import neutrality,84–5

Capital flight, 152Capital formation, 8

and private foreign investment,15

see also investmentCapital gains tax, 168, 174; and see

under individual countriesCapital import neutrality, 85Capital investment, 108; see also

investmentCapital markets, 98

Angola, 212Botswana, 214Lesotho, 215–16Malawi, 217–18Mauritius, 220Mozambique, 223Namibia, 224–5South Africa, 227Swaziland, 229Tanzania, 231Zambia, 233Zimbabwe, 235

Cash budgets, 15, 80–2Catch-up, economic, 10Cellular telephone networks, 18, 123,

124Chambers of commerce, 112, 138Civil servants, 113

retraining programmes, 110, 113training for, 94

Civil service, 72, 109role in tax enforcement, 72salary bills, 72

Co-financing, private sector, 155–6

COMESA, 129and preferential trade relations, 100

Common external tariff, 141Common Monetary Area (rand)

(CMA), 2, 52Communications, 17, 117Company tax, 67, 76–8, 84; see also

corporate tax; tax; and see underindividual countries

Compensation, 9, 19, chapter 7passim

alternatives to, 150–7arrangements, 143case for, 140–2transitional, 153

Compensatory mechanisms, 19–20,chapter 7 passim

Competition, 9, 17policy, 111, 113, 114

Compliance, with taxation regime,71–6

Consumption taxes, 15, 65broadening base of, 78–80and fiscal adjustment, 65–71multiple tax rates, 78–9revenue productivity of, 79–80single uniform rate, 78and see under individual countries

Convergence clubs, 9, 10Corporate tax, 168, 169–70; and see

under individual countries; andunder tax

Corruption, and public service, 72Crime, violent, 92Cross-Border Initiative, 63, 129Cross-border investment, 3, 15, 84,

85, 88, 91, 98transactions, 3, 4see also investment

Cross-border trade, 13, 60: and seeunder trade

distortions, 15Cross-border transport, 118Currency depreciation, and trade

restriction removal, 12, 48–9Currency inconvertibility, effects

of, 24Currency overvaluation, 12, 24, 25,

44, 45

Index 261


Current accountconvertibility, 54deficits, and openness, 12and government dissaving, 47

Curse of resources, 18, 129Customs departments, 93Customs duty rates, 164Customs revenue, 3, 165, 166

dependence on, 13, 59, 62effect of FTA on, 7losses, and tariff reductions, 3, 13,

58, 103as percentage of government

revenue, 164from SADC imports, 166and see under individual countries

Customs union, 2, 141

Debt, 26, 47costs of and inflation, 48

Deficit monetisation, 25Democratic Republic of Congo, 29–30

external debt, 30hyperinflation, 30key indicators, 29membership of SADC, 5

Development Bank of SouthernAfrica, 112, 113, 156

Development Corridors, 124–7Development funds, 144, 155Direct taxation, 58–61, 65–8

broadening base of, 76–8rates, of, 14; and falling revenue, 76harmonisation of, 84–5lowering, 164and see under individual countries

Displaced workers, 111retraining of, 113

Dissaving, government, 15, 45–7Distortions, tax-induced, 71Documentation, harmonisation of, 18Domestic markets, 100Domestic policies, and trade reform, 2,

chapter 2 passimDonations tax, 174, 175Donor funds, 20, 157Donor support, 20, 157Double taxation, 79, 84

double taxation agreements, 178

Duty credit schemes, 136Duty drawbacks, 133, 137Duty-free importation, 133

Economic convergence, and growth,9–11

Economic growth, 1, 10, 102and openness to trade, 7–9rates of, 7and rates of investment, 8

Economic instability, effect ongrowth, 10

Economies of scale, 8, 9Education, 17, 109, 115

expenditure on, 154–5Effective tax rates, 87Electricity, 96

generation and distribution, 154Electronic mail, 18, 123, 124Employment, 106

creation, 17, 18, 105, 111impact of SADC FTA on, 103–5loss, 17, 105, 109; mitigating effects

of, 110–14Estate duty, 174; see also inheritance

tax under individual countriesEuropean Commission, 145European Regional Development

Fund, 145European Union, 22, 145–6

Community Support Framework,156

FTA with South Africa, 10, 11, 129non-reciprocal trade preference

with SADC, 20–1preferential access to, 10and subsidiarity, 86and tax harmonisation, 85, 87–8and VAT, 87

Evans’s Regional Trade Model, 62–4,103–5

Exchange controls, 3, 26, 48liberalising, 16, 44, 151–2removal of, 20restrictions, 98see also capital controls

Exchange ratebilateral, 49, 55depreciating, 55

262 Index


Exchange rate – continuedmisalignment, 49nominal, 504overvaluation, 25; effects of, 24policy, 3, 12, 48–54, 138real, 50–2, 54stability, 93trade-weighted, 49

Excise taxes, 65, 66Expenditure, controls on, 14, 80–2Expenditure frameworks, 15Expenditure taxes, 25Export base, diversification, 12, 45Export credit guarantee schemes, 19,

137Export drive, and external debt, 25Export incentive measures, 18,

128–39, 237–59Angola, 237Botswana, 239, 240incompatibility with WTO, 18Malawi, 241–2Mauritius, 242–4Mozambique, 246Namibia, 247South Africa, 250–2Swaziland, 255Tanzania, 255–6Zambia, 257Zimbabwe, 258–9

Export industries, 68Export marketing, 137

grants, 130programmes, harmonisation of,

19Export processing zones, 133, 164,

168Export promotion, 18, chapter 6

passimmatching grants, 133rationalisation, 136

Export sector, 18Exports

agricultural, 41demand for, 3, 7diversification of, 12grants for, 19, chapter 6 passim; see

also export marketingintra-SADC, 11

minerals, 41non-traditional, 45primary, 9

External debt, 25, 28, 44servicing and current account

surpluses, 47

Finance and Investment CoordinatingUnit, see SADC: FISCU

Fiscal adjustment, 3, 80–2alternative measures for, 60–1measures, broadening the tax base,

71–80; controlling expenditure,80–2; tax rate increases,65–71

need for, 61–5and taxation, 13–15, chapter 3

passimtiming of 13

Fiscal compensation, alternatives to,150–7

Fiscal deficit, 15, 25monetisation of, 13see also budget deficit

Fiscal policies, 2, 4, 45–7harmonisation of, 9

Fiscal reform, 58Fiscal transfers, 146FISCU, see SADC: FISCUForeign currency accounts, access to,

75Foreign debt and current account

surplus, 26Foreign direct investment, 4, 15–16,

71, 111, chapter 4 passimconstraints on, 15, 89ff, 210–36inflows to SADC countries,

90see also investment

Foreign exchange reserves, 26Free Trade Area (FTA), 1, 2, 58,

chapter 7 passimcore economies, 19and employment effects, 17,103,

104, 105and government revenue, 64import substitution, effects on, 7peripheral economies, 19and welfare, 20

Index 263


Generalised Systems of Preference, 129Government borrowing, and public

sector deficit, 12; and see budgetdeficit; fiscal deficit

Government revenue, 163–211 passimand GDP, 167impact of SADC FTA, 64by type of tax, 165

Graduated business licence fees, 77–8;see also company tax

Growth, 13performance, 1rates, 61see also economic growth

Hard-to-tax sector, 76; see also directtaxation

Harmonisation of taxes, see taxharmonisation

Human capital, 8Human resource development, 108,

115–17

Illiteracy, 116and tax compliance, 76

IMF (International Monetary Fund),and structural adjustmentprogrammes, 44

Import controls, 25Import substitution, effects of FTA

on, 7Import-substituting industries, 13, 59,

60Indirect taxation, 58–71, 78–80, 96

broadening base of, 78–80dependence on, 164and fall in revenue, 14harmonisation of, 83and see under individual countries

Individual tax, 76–8, 168, 171–3; andsee under individual countries

Industrial development zones, 133Industrial free trade zones, 133Industrial polarisation, 20Industrial policy, 111Industrial training boards, 108Industrialisation, 135Inflation, 13, 21, 25, 26, 43, 48–57,

81–2, 93

/depreciation cycle, 54, 55see also macroeconomic policies

Informal sector, 76, 114and loss in tax revenue, 72

Infrastructure, 16, 95–6Angola, 211Botswana, 213development of, 20effects of foreign investment on, 16Lesotho, 215Malawi, 217Mauritius, 219Mozambique, 222Namibia, 223–4South Africa, 26Swaziland, 228Tanzania, 230Zambia, 232–3Zimbabwe, 234–5

Inheritance tax, 174, 175; and seeunder individual countries

Instability, contagion effect, 92Institution-building, 3, 4, 14, 17

and investment, 16International Civil Aviation

Organisation, 123Interest rates, 12, 45International trade fairs, 136Intra-regional trade, see under tradeInvestment, 8 16, 25, 58, chapter 4

passimapproval, 93centres, 4, 6, 16, 19, 93, 94certificates, 94cross-border, 3, 15, 84, 88, 91domestic, 90fixed, 25flows, 89gross domestic, 90impediments to: Angola, 212,

Botswana, 214, Lesotho, 216,Malawi, 218, Mauritius, 220,Mozambique, 223, Namibia,225, Swaziland, 229, Tanzania,231, Zambia, 233, Zimbabwe,236

incentives, 20, 153–7, 237–59;Angola, 237–8, Botswana,238, Lesotho, 239–40,

264 Index


Investment – continuedMalawi, 240–1, Mauritius,244–5, Mozambique, 245,Namibia, 246, South Africa,247–50, Swaziland, 254–5;Tanzania, 255, Zambia, 256–7,Zimbabwe, 257–8

missions, 92private, 45ratios, 44tax effects on, 84–8and trade, 8

Investment transactions, 98–9Investors, non-resident, taxation of,

84

Job creation, 105Job losses

attempts to mitigate, 108, 110–15

Labour, 100costs of, 101free movement of, 20, 152productivity of, 101unskilled, 20

Labour marketconditions, 114–15flexibility, 17regionalisation, 17

Land ownership, 101and tenure legislation, 16

Latin America, 20, 49Legislative reforms, 101Lesotho, 30–1, 147, 182–4, 214–16,

239–40capital gains tax, 183constraints on foreign direct

investment, 214–16corporate taxes, 176customs revenue, dependence on,

62direct taxation in, 65estimated tax assessments, 77exchange rates, 50export incentives, 240external debt, 31fiscal adjustment, need for, 61–71fiscal policy, 31foreign exchange reserves, 30

government revenue, 165, 184individual taxes, 182–3inheritance and donations tax, 176,

183investment incentives, 239–40key indicators, 30licence fees, 78membership of SADC, 5monetary policy, 31, 48sales tax, 69structural adjustment programme,

31tax system, 182–4taxation of farmers, 77transaction taxes, 183

Literacy, 116and tax compliance, 76

Lomé Convention, 10, 11, 22, 129Lubumbo Spatial Development

Initiative, 126–7Lump-sum levies, 76

Macroeconomic environment andtrade, 24

Macroeconomic policies, 1, 2, 3, 24,chapter 2 passim

and FTA, 11–13, chapter 2 passimstability indicators, 42–3

Macroeconomic regimes, 1Malawi, 31–2, 70, 184–6, 216–18,

240–2and FTA, 64, 107capital gains tax, 176, 184cash budget, 81constraints on foreign direct

investment, 216–18corporate taxes, 176, 185currency depreciation, 32, 53current account deficit, 32direct taxation in, 65effect of FTA on, 64exchange rates, 50, 53export incentives, 241–2external debt, 32fiscal adjustment, need for, 61–71fiscal deficit, 31government revenue, 186imports and aid, 32individual taxes, 176, 184

Index 265


Malawi – continuedinheritance and donations tax, 176,

185inflation, 31investment incentives, 240–1key indicators, 31membership of SADC, 5sales tax, 69self-employed, taxation of, 77sensitive industries, 107tariffs, 186tax system, 184–6transaction taxes, 176, 185

Manufacturingconstraints on, 108–9and education, 109

Maputo Corridor, 124, 154Marginal tax rates, 68, 75; and see

under taxMarginalisation, 11, 129Market development, 17, 108Market distortions, 9Mauritius, 32, 70, 187–90, 218–20,

242–5agricultural incentives, 244–5capital gains tax, 176, 189corporate taxes, 176, 187–8currency depreciation, 53and customs revenue, 165;

dependence on, 62economic growth, 32effect of FTA on, 64exchange control regime, 32exchange rates, 50, 53export processing zones, 133export promotion, 32export-processing zones, 32external debt, 32fiscal adjustment, need for, 61–71foreign direct investment

constraints, 218–20government revenue, 189–90individual taxes, 176, 187inheritance and donations tax, 176,

189introduction of VAT, 70investment incentives, 242–4job gains and FTA, 105key indicators, 33

membership of SADC, 5money supply, 32sales tax, 70special incentive schemes, 164tariffs, 190tax system, 187–90transaction taxes, 176, 189VAT, 70withholding tax, 176, 187–8

Medium-Term ExpenditureFramework, 82

MERCOSUR, 11 compensation policy, 143intra-MERCOSUR trade, 143and tax harmonisation, 87

Microeconomic policies, 16–18,chapter 5 passim

Minimum wage rates, 114–15Monetary policy, 47–8

harmonisation, 9and inflation, 48

Money markets, 98, 99development of, 16

Money supply, growth in, 44–5Mozambique, 33–4, 191–3, 220–3,

245–6and job creation, 105capital gains tax, 176, 191constraints on foreign direct

investment, 220–3corporate tax, 168, 176currency depreciation, 53customs service, 73direct taxation, 65, 67employment, and FTA, 105employment effects, 107exchange rates, 34, 51, 53, 54export incentives, 246external debt, 34fiscal adjustment, need for, 61–71foreign aid, 34foreign direct investment, 35FTA, effect of, 105government revenue, 192–3indirect and direct taxation in, 65individual taxes, 176, 191inflation, 34inheritance and donations tax, 176,

192

266 Index


Mozambique – continuedinvestment incentives, 245key indicators, 33land ownership, 101membership of SADC, 5privatisation of customs

department, 94sales tax, recommendation for, 14standard assessments, 77structural adjustment programme,

34tariffs, 193tax system, 191–3taxation of small farmers, 77taxation policy, 14transaction taxes, 176, 192withholding taxes, 176, 191–2

MSMEs, 110–11access to credit, 110and NGOs, 111

NAFTA, 11, 143Namibia, 34–5, 193–5, 223–5, 246–7

and small business sector, 110capital gains tax, 177, 194Common Monetary Area,

membership of, 34, 35constraints on foreign direct

investment, 223–5corporate tax, 168, 177, 194current account balance, 35exchange rates, 51export incentives, 247export promotion, 35export promotion grants, 35, 133fiscal adjustment, need for, 61–71fiscal deficits, 35government revenue, 195income tax, 177, 193–4indirect taxation, 67inheritance and donations tax, 177,

194investment incentives, 246key indicators, 35monetary policy, 34, 48sales tax, 69tax policy, 65tax system, 193–5transaction taxes, 194–5

National Standard Bureaux, 99–100Neutral tax structures, 71New Zealand, 134–5Non-tariff barriers, within SADC, 2Numeracy, 116

and tax compliance, 76

Ocean shipping, 118Offshore business activities, 164One-stop border posts, 124Openness to trade, 1, 4, 8, 41–3Operation Tax Net (Zimbabwe), 74,

163Operation Bhadharai (Zimbabwe), 74,

164Organisation of African Unity, 129Overseas marketing, 137

Pakistan, 74Permits and licences, 4, 16Personal income tax, 67; and see under

country names and under directtaxation

Pioneer industry status, 164Policy coordination, 3, 14Policy credibility, 25–6Political instability, 91–2

contagion effect, 92effects on foreign direct investment,

16Political stability, 8, 9, 16, 91Preferential trade relations, 100Presumptive minimum taxes, 77Presumptive taxation, 14, 76–7;

see also direct taxationPrice controls, 25Price inflation, 25; see also inflationPrimary commodities, 12

diversification from, 45Primary exports, diversification away

from and growth, 9Private foreign investment, 15; see

also foreign direct investment;investment

Private investors, behaviour of, 24,45

Private savings, and investment, 15,45–6

Index 267


Private sector, 16, 97assistance to, 111–14investment, 16, 26organisations, 16

Privatisation, 97, 111Product standards, 99–100

in South Africa, 226Production

Angolo, 211–12Botswana, 213Lesotho, 215Malawi, 217Mauritius, 219–20Mozambique, 220–2Namibia, 224Swaziland, 228Tanzania, 231Zambia, 233Zimbabwe, 235

Productivity centres, 16, 101Protectionism, 108, 130Public expenditure and cash budget,

81Public ownership, 97Public sector

costs and tax enforcement, 72dissaving, 45–7and job losses, 109deficits, 12; see also budget deficit;

fiscal deficitPublic services, provision of, 9Public spending, decentralised, 82

Quality standards harmonisation, 16

R&D incentives, 109, 253Rail networks and infrastructure, 18,

118Railways, cross-border operations,

119–20Raw materials, 18

duty drawback, 137exports, 134rebates, 137

Real exchange rate, overvaluation,12–13, 48–57

Real lending rates, 44Regional aid, 132Regional disparities, 20

Regional fund, for investmentpromotion, 20

Regional industrial location studies,112

Regional integration, 4, 5and growth, 9–11see also trade

Regional investment incentives anddevelopment, 153–7

Regional trade, 11bilateral agreements, 129liberalisation, 1; and growth, 7see also trade

Regulatory environment, 16Research grants, 137Residence permits, 97Revenue authorities, independence of,

14, 73Revenue personnel, training of, 73Revenue productivity, 79–80Road blocks, 121Road haulage, 118Road traffic, 120

accident costs, 121axle loads, 120gross vehicle mass, 120

Road–rail competition, 120Rules of origin, 19, 21, 129, 138

SACU, 1, 2, 19, 59, 142, 208–9agreement, renegotiation of,

149–50member countries, 41revenue-sharing arrangements,

146–9tariffs, 209

SADC, xi, 1, 3, 4, 5, 122–3, 129differential wage rates, 115domestic markets, 100economic indicators, 6, 42establishment of FTA, 1, 6and EU, 11exchange rate indices, 49–52FISCU, 85, 87, 154, 156, 157FTA, 2; and government revenue, 64and international competitiveness,

89intra-SADC exports, 11membership of, 5, 41

268 Index


SADC – continuedpreferential trade relations, 100stability indicators, 42Standardisation, Quality Assurance

and Metrology programme, 99Trade Negotiating Forum, ixtrade protocol, ix, 5, 6, 100, 113Trade Protocol Study, 102

Safety and quality standards, 99harmonisation of, 16

Sales tax, 65, 66as offsetting customs revenue

losses, 14, 68, 69and see under individual countries;

and indirect taxationSavings rates, 44Schooling, 117

primary, 17, 116Sea transport, 121Sensitive industries, 102–9, 130, 134Sensitive products, 7, 102–3Service sector, 76Seychelles, membership of SADC, 5Shipping, 17, 121Skilled labour, 100

shortages of, 20, 116Skills

development, 108management, 116managerial, 100

SITCD, xiSouth Africa, 36–7, 44, 55, 196–7,

225–7, 247–54benefits of FTA to, 7business sector incentives, 249–50capital gains tax, 177, 196and competitiveness, 89constraints on foreign direct

investment, 225–7corporate taxes, 177, 196currency depreciation, 35, 49customs revenue, 62, 165direct taxation, 65double taxation agreements, 197duty credits, 133effect of FTA on, 65export incentives, 250–2export promotion grants, 133and EU, 10

external debt, 35–6financing, 252fiscal adjustment, need for, 61–71foreign capital, access to, 46foreign exchange reserves, 36income tax, 177, 196industrial financing incentive, 248–9inflation, 35inheritance and donations tax, 177,

197integration into world economy, 36investment in, 91investment incentives, 247–8labour costs, 115labour market rigidities, 92and medium-term expenditure

framework, 82monetary policy, 35private sector, 36productivity centres, 101R&D incentives, 253regional industrial development, 253Revenue Service, 73sales tax, 69savings in, 45, 46tax compliance measures, 74tax system, 196–7technology and human resources

for industry programme, 254trade union militancy, 92VAT, 197and violence, 92withholding taxes, 177, 197workplace challenge, 253–4

South Africa General Export IncentiveScheme, 134

South African Bureau of Standards, 99South African Reserve Bank, 34, 98,

147South African Revenue Service, 73Southern African Customs Union,

see SACUSouthern African Development

Community, see SADCSouthern African Development

Coordination Conference(SADCC), 4–5

Southern African Rail Corporation,118–19

Index 269


Southern African RailwaysAssociation, 119

Southern African Railways ChiefExecutives Conference, 119

Southern African Transport andCommunications Commission,120

Spatial Development Initiatives, 124Special incentive schemes, 164–7Special sector incentives, 134Spoornet, 117, 119Stability indicators, 26, 41–5Standard assessments, 76Statutes of limitations, 94Stock exchanges, 98

cross-listings, 98–9see also capital markets

Structural adjustment programmes,109

donor-supported, 1, 48, 53and employment, 105, 106–7voluntary, 48World Bank/IMF-financed, 44

Structural and development funds,and compensation, 144–6

Sub-Saharan Africaannual growth rate, 7investment in, 91

Subsidiarity, 86Subsidies, 17, 85

permitted, under WTO, 132prohibited, under WTO, 130–2

Supply-side constraints, 17, 108Swaziland, 37, 147, 197–9, 227–9,

254–5budget deficit, 37capital gains tax, 198constraints on foreign direct

investment, 227–9dependence on customs revenue, 62estimated tax assessments, 77exchange rates, 51export incentives, 255fiscal adjustment, need for, 61–71government revenue, 199income tax, 177, 197–8inheritance and donations tax, 177,

198investment incentives, 254–5

member of SACU and CommonMonetary Area, 37

membership of SADC, 5monetary policy, 48tax system, 197–9taxation of farmers, 77withholding taxes, 177, 198

Tanzania, 38, 70, 199–202, 229–32,255–6

aid, dependence on, 38budget deficit, 38capital, repatriation of, 255capital gains tax, 177, 201cash budget, 81constraints on foreign direct

investment, 229–31corporate tax, 177, 200currency depreciation, 53deficit, monetisation of, 38estimated tax assessments, 77exchange control, 255exchange rates, 52, 53, 54export incentives, 255–6external debt, 38fiscal adjustment, need for,

61–71government revenue, 201–2individual tax, 168, 177, 199–200inflation, 38inheritance and donations tax, 177,

201investment incentives, 255Investment Promotion Centre’s

Certificate of Approval, 256key indicators, 38land ownership, 101money supply, 38revenue authorities, 73revenue collection efficiency, 94sales tax, 69tariffs, 202tax evasion, 164tax system, 199–202taxation of farmers, 77transactions taxes, 177, 201VAT, 70visa requirements, 97withholding taxes, 177, 200–1

270 Index


Tariffs, 102elimination of within SADC, 2effects of removing, 17phase-down, 6–7reductions, 47, 59; asymmetric

phasing, 13, 59, 113, 152–3;and lost customs revenue, 103;phase-in period, 59; schedule,103, 113

and see under individual countriesTax, taxation, 13–15, 58–88, 163–209

administration, capacity-building, 77base, 61, 163; broadening of, 14,

71–80, 164; direct tax, 72–8;indirect tax, 78–80, size of, 163

collection efficiency, 96competition, 86complexity of, 75compliance, 4, 71, 72–6; and

illiteracy and innumeracy, 76coordination, 61, 83–8direct, see direct taxationdiversity, 15, 86–8enforcement, 4, 14, 72, 73estimated assessments, 77evasion, 68, 72, 163–4; campaigns

against, 74exemptions to, 14false declarations, 75and fiscal adjustment, chapter 3

passimharmonisation, 4, 15; costs of, 15;

efficiency gains, 83holiday scheme, 253indirect, see indirect taxationlaws, 14; reform, 75multiple rates, 14policies, 58–88, 163–209presumptive, 14, 76–8rates, 96–7; adjustment

requirements, 69; ‘bands’, 15;increases, 61, 65–70; marginal,68, 75

reform, 16; administrative costs of,58

revenue: authorities, 14, 73; andGDP, 167; productivity, 79–80;by type of tax, 166

self-certification, 75

standard assessments, 76, 77tax-induced distortions, 83

Taxpayer identification numbers, 14,75

Teacher training, 117Technology

access to, 9and human resources for industry

programme, 254information transfer, 17transfer, 8, 108

Telecommunications, 16, 95, 117–18,123–4

deregulation, 124privatisation, 124

Textiles and clothing industries, joblosses in, 105

Tradeagreements, bilateral and regional,

129balance, effect of trade liberalisation

on, 26creation, 13, 61cross-border, 13diversion, 13, 20, 58, 61, 62; effects

of, 13fairs, 137flows, 52intra-African, 24intra-regional, 3, 59and investment flows, 4liberalisation, asymmetric, 7; and

cross-border investment, 7;effects of macroeconomicpolicy on, 24

missions, 136policy, 3, 8promotion, 17reform, 3, 59restrictions on, 12, 25, 26, 48

Training, 115levies, 108on-the-job, 117programmes, 17schemes, skills-based, 16, 100,

110Transaction charges, 175, 178Transparency, 82, 94–5

effects on investment, 16

Index 271


Transport, 17–18, 95–6, 117–24air, 8, 122–3cross-border, 118inter-modalism, 121sea, 121subsidies, 122surface, 118–21telecommunications, 154

Trade-related investment measures,132

UEMOA, 144, 153, 154Underemployment, 107Undocumented work, 76Unemployment, 20, 92, 107, 114, 197Unskilled labour, 20User costs, 17Utilities, privatisation of, 16, 96

Value-added tax, 14, 65, 79multiple rates, 78and see under individual countries;

see also indirect taxationVisa requirements, 16, 97

Wage rates, differential, 115Water supplies, 96West African Economic Community,

143–4Windhoek Treaty (1992), 5Withholding schemes, 77Withholding tax, 84, 168, 174; and

see under individual countriesWork permits, 97Work place challenge, 253World Bank, structural adjustment

programmes, 44World Trade Organisation, 18, 129

agreement on subsidies andcountervailing duties, 130–2

Dispute Settlement Procedures 131and SACU, 1

Zambia, 39, 70, 202–4, 232–3, 256–7aid, dependence on, 39capital gains tax, 177, 203cash budget, 39, 81constraints on foreign direct

investment, 232–3corporate tax, 177, 203

customs revenue, as percentage ofgovernment revenue, 62

debt servicing, 48exchange rates, 52, 53export environment, 137export incentives, 257fiscal adjustment, need for, 61–71and FTA, 64government revenue, 165income tax, 177, 202–3indirect taxation, 78inflation, 39inheritance and donations tax, 177,

203investment incentives, 256–7and job creation, 105real interest rates, 39revenue authorities, 73revenue collection efficiency, 94self-employed, taxation of, 77tariffs, 204–5tax reductions, 96tax system, 202–5taxation of farmers, 77taxation reform, 78transactions taxes, 177, 203visa requirements, 97

Zimbabwe, 40–1, 70, 205–9, 234–6,257–9

capital gains tax, 177, 206–7competitiveness, 89constraints on foreign direct

investment, 234–6corporate tax, 168credit squeeze, 40currency depreciation, 40Department of Taxes and Customs

and Excise, 74direct taxation in, 65dissaving, public sector, 46effect of FTA on, 64, 105exchange rates, 52, 53, 54export incentives, 258–9export processing zone permits, 93fiscal adjustment, need for, 61–71fiscal deficit, 40government revenue, 207–8income tax, 177, 205–6indirect taxation, 67

272 Index


Zimbabwe – continuedindividual tax, 168inheritance and donations tax, 207instability in, 92investment, disincentives to, 92investment incentives, 257–8and job creation, 105key indicators, 40membership of SADC, 5money creation, to finance deficit,

40Operation Bhandharai!, 74, 164

Operation Tax Net, 74, 163private savings, 45, 46Reserve Bank of Zimbabwe, 40sales tax, 69savings in, 45, 46structural adjustment programme, 40tariffs, 208tax system, 205–8transaction taxes, 177, 207and transparency, 94withholding taxes, 177, 206

Zimbabwe Investment Centre, 92

Index 273


gaining from trade in south africa

Documents