SACU's Great Moral Hazard

SACU’s Great Moral Hazard

Economists love talking about moral hazards. This is when an action has unintended consequence like insurance causing people to drive recklessly. Namibia and the other three small states Botswana Lesotho and Swaziland (BLNS states) which together with South Africa make up the membership of SACU live under a scheme of sharing customs revenue that create an exception moral hazard. The moral hazard stems from the fact that the smaller countries get customs revenue from South Africa that bears no relationship to what they actually import from outside the Customs Union. That means that these countries have no interest in collecting customs duties. I frequently complain to Customs Officers in the BLNS states that that they could collect millions of dollars more money if they just policed the importing of  second hand motor vehicles properly and forced people to declare proper prices. But several weeks ago a Customs official said something that clarified the SACU situation. His response was blunt and simple enough- ‘What do I care?’, he blurted’ If I collect all the money that is owed to us it all goes to Pretoria and what I get back from Pretoria has no relationship to what I collected.’

This position is absolutely correct and it is a classic definition of  what economists call a moral hazard. What the customs official gets back from Pretoria bears no relationship to what he collects. What is collected into the SACU pool is largely determined by how much South Africa imports from the rest of the world because SA is by far the biggest member of SACU and what each SACU member gets back is based,  bizarrely,  on what each SACU imports from other SACU members. But that is just as true of all the members of SACU, even South Africa. If some 80% of customs revenue goes to the four BLNS states as they are called then what possible incentive does South Africa have to tighten up on Customs collection.In effect it creates an incentive to turn a blind eye to the sort of tax evasion that is so pervasive in international trade today.

But there are worse and yet more expensive moral hazards imbedded in the SACU customs rebate system. The  most expensive for countries like the four small  BLNS states which gets most of the SACU  customs revenue,  is the duty rebates which eats a huge part of the total SACU revenue. The country that use duty rebates the most is South Africa and the sector that employs them most extensively is the automobile export industry. How does this work.  Under the terms of the South African Automotive Production and Development program firms that produce cars in South Africa get all sorts of financial incentives. The most important are the duty remissions and rebates. The first is the so-called Vehicle Assembly Allowance whereby manufacturers with a minimumplant volume of 50 000 vehicles per annum are allowed to import a percentage of their components duty free (20%- decreasing to 18% over 3 years). The second is the ‘production incentive’ which is  an allowance for duty free import of vehicles or components, calculated at 55% of value added in the SA supply chain; reducing to 50% over 5 years. The cost of both all comes from SACU revenues. And how much? In 2015 the South African Department of Trade and Industry reported to its parliament that the ‘hypothetical’ loss of customs duty from these two parts of the program were a staggering ZAR 10 billion.

Why do the South Africans refer to the losses as ‘hypothetical’? It is because the South African government knows that most of those losses would have gone to the citizens of the BLNS, and not to South Africans, who would have otherwise received some 80% of this loss in customs duty. In short Botswana and Namibia would be about ZAR3-4 billion richer if they were not paying  forPretoria’s subsidies to the automobile manufacturers.

South Africa benefits by the 110,000 jobs that this industry createsand  represents some 7.2% of South Africa’s GDP. The South African government knows that  the industry would be as dead as its now defunct Australian counterpart, if these SACU subsidies were removed. But for South Africa, this is mana from heaven. It is virtually free money, there is no political pressure from South Africans and there is no incentive to contain the cost of these programs as it is the citizens of the BLNS that pay!

 This is a perfect example of a moral hazard. But like the entire SACU customs revenue sharing formula, the rebate scheme is based on the BLNS subsidizing South African, jobs production and exports. But because the BLNS states get more in subsidies under the revenue sharing formula than they pay out for rebates everyone just keeps quiet and accepts the continuation of this economic absurdity. And so it goes on until one day someone will pull the plug.

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.