Zimbabwe’s Economic Failure and South African Diplomacy

Zimbabwe’s Economic Failure and South African Diplomacy

Policy BriefThis week Johannesburg will play host to the African Union (AU) Summit that will be presided over by President Robert Mugabe of Zimbabwe as the current Chair of the organisation. President Mugabe also holds the role of Chair of the Southern African Development Community (SADC) until August 2015 when the President of Botswana will take over. The presence of President Mugabe in South Africa and his high profile role at the AU Summit will no doubt put the spotlight back on relations with Zimbabwe. If the lively exchanges at the Extraordinary SADC Summit held in Harare on 29 April 2015 are anything to go by then we might be in for some interesting discussion between African Heads of State.  It was reported that President Mugabe took the opportunity of the SADC meeting to voice his opinion on the xenophobic attacks in South Africa. This was met by a response from President Khama of Botswana and others implying that the economic situation in South Africa’s neighbours was a contributing factor to xenophobia.

The economy of Zimbabwe continues to suffer with a further reduction expected in factory capacity utilisation to merely 30{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in 2015. There have been numerous business closures and little by way of new or expanded investment in the country in recent years. The government continues to spend the vast majority of its budget on the salaries of officials, while failing to meet the needs of the education and health sectors. There is a growing need for the upgrading and maintenance of critical economic infrastructure, including in the energy, water and sanitation, and transportation areas. Zimbabwe effectively operates as a ‘dollarised’ market even though there is formal recognition of other currencies. This puts significant pressure on the liquidity of both the public and private sectors as well as complicating the operation of any kind of effective monetary policy.

In a policy briefing for the South African Institute of International Affairs, published in February 2015, I argued that South Africa has overlooked the impact of the deteriorating economic situation in Zimbabwe in favour of security and political considerations. The decision to remove Zimbabwe from the SADC watch list also highlights how South Africa’s economic diplomacy has not progressed much beyond the promotion of trade and investment. A key factor hindering its success is the lack of co-operation and communication between the South African government and the private sector.

South Africa’s relationship with Zimbabwe would benefit from a shared approach that involves all stakeholders .The following recommendations are put forward in the policy briefing:

  • South Africa should continue to play the role of regional and international leader in managing the Zimbabwe situation by pursuing a strategy that goes beyond security and political concerns to consider the economic implications of what might happen in the near future.
  • Zimbabwe is a critical country when it comes
to southern Africa’s integration agenda. SADC needs to engage with the deepening economic crisis at the highest level (beyond just discussing delays in the implementation of its Protocol on Trade).
  • Greater co-operation should be fostered between the government and private sector in South Africa to develop a more effective economic diplomacy response to the situation in Zimbabwe.

There will be much talk at the AU Summit in Johannesburg about the regional economic integration agenda of the continent. If this is to become a reality and have a positive impact for traders then regional leaders cannot afford to ignore the economic crises that face their neighbours. In the case of South Africa that is Zimbabwe right now. It is in both our national and regional interests to pursue a policy of active economic diplomacy that attempts to assist Zimbabwe in improving its prospects for growth and development.

AGOA: A look at the US-SA relationship

AGOA: A look at the US-SA relationship

Giraffe in city street [News]For observers of international relations and trade policy issues there was not much to catch the attention in the State of the Nation Address in February 2015. Four months later, however, it is interesting to note that President Zuma may have been in on a secret when it comes to African relations with the United States.  President Zuma said at the time “The renewal of the African Growth and Opportunity Act [AGOA] beyond September 2015 and a pledge to support African-led peace initiatives in the continent are among the significant outcomes of the United States (US)-Africa Leaders’ Summit held in the US last year.”

Back in February this was not an accurate statement. At the US-Africa Leaders’ Summit in 2014 there was an expression of support for the renewal of AGOA from the Obama Administration but no decision was taken. AGOA is enacted through legislation, which must be prepared and adopted by the US Congress, and is out of the direct control of the American President.  This process is well understood by South Africa’s trade officials and diplomats so it is likely that the mistake in the SONA was simply a result of editing as the text passed through many hands on its way to the President.

Nonetheless, since that portentous reference there have been significant developments and the Trade Preferences Extension Act of 2015 has overcome its first major hurdle in being passed by the US Senate. There is still some way to go before the next phase of AGOA is guaranteed but the adoption of this bill should be welcomed by South Africa and viewed as an important victory. South Africa has been included in the 10-year extension of AGOA despite a tense bilateral relationship and ongoing challenges in resolving market access issues. At various times over the last year commentators have predicted that South Africa could be graduated or removed from the list of AGOA eligible countries. Alternatively there was talk of a mere 3-year extension for South Africa. Neither of these damaging scenarios eventuated, in part due to the effective lobbying by South African Trade Minister, Dr. Rob Davies, and his team.

So why then was the reaction of Minister Davies to the Senate decision such an unhappy one? He even went so far as to suggest that the benefits of AGOA to South Africa might soon be outweighed by the costs. At face value the advantages seem clear and the costs less so. South Africa has been able to take advantage of the tariff preferences offered under AGOA to export a range of products, including cars and some processed agriculture goods. These exports have directly attributable employment benefits and contribute to the national development priorities of South Africa. In an assessment of the value of AGOA, the question would be if these exports would take place if the legislation was no longer there or would South African goods remain competitive despite losing the preferential access (which in some cases is lower than 2.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}).

To date there has been no cost for AGOA to beneficiaries. It is a unilateral trade preference arrangement that is offered by the US to some African countries and there is nothing requested in return by way of trade concessions. This has changed for South Africa however and maybe the reason for the frustration expressed by Minister Davies. First was the ‘chicken war’ between the two countries that only saw some level of resolution over the weekend following industry talks in Paris. This was a battle around the anti-dumping duties applied by South Africa on imports of poultry from the US and it was well documented by industry representatives and other commentators. Here South Africa has offered additional market access to the US (reportedly a quota of 65,000 tonnes). This was clearly a price extracted by certain interest groups in the US for South Africa’s ongoing participation in AGOA.

Of broader interest is the second factor, the out-of-cycle review provision that was included in the bill passed by the Senate. This is specific to South Africa and requires an assessment of the openness of our market to US products to be done within 30 days of enactment of the legislation. The review will be broad in scope and is expected to reflect on a number of irritants in the bilateral relationship that have found political interest among US lawmakers who are seeking to use AGOA preferences as leverage to resolve them, such as changes to the black economic empowerment codes and immigration regulations. These include complaints from US companies that are reflected in the 2014/2015 national trade estimate of the US Trade Representative as well as more recent developments, like proposed reform of the security industry and intellectual property rights policy.

Whether the out-of-cycle review clause will survive consideration of the bill by the House of Representatives remains to be seen but South Africa is clearly not impressed by the prospect of having its trade and investment climate subject to scrutiny by the US. This is likely to be a challenging process that will raise some uncomfortable issues for the government. Approaching it defensively and negatively is however likely to make it much worse. The truth is that the economic relationship between the two countries has been tense for a number of years now and there is a certain degree of inevitability that it would reach a tipping point sooner rather than later. Both parties need to embrace the review as an opportunity to clear the air and to reassess their interactions on trade and investment issues. If South Africa is to remain open to business then listening carefully to the concerns raised by the US and responding constructively has the potential to set us on a positive new course with an important economic partner. The reality is that trade preferences (such as AGOA) are meaningless unless South Africa takes the necessary steps to improve its industrial base and increase the competitiveness of its producers.

Tutwa will shortly be publishing a more detailed briefing note on AGOA and other aspects of US-Africa relations.

The Continental Free Trade Ambition

The Continental Free Trade Ambition

Giraffe and cloudsWhen looking at economic cooperation and integration I often find myself thinking about the relationship between the Ottoman Empire and city-state of Venice. These were very different societies yet they proved immensely valuable to each other owing to their mutually beneficial economic ties. Their trade treaties were a natural extension of, and reaction to, their geographical realities and a number of factors ranging from natural resource endowments to human capital and availability of skills. Today we see the value in forging similar economic ties but often don’t consider the opportunity costs associated with pursuing these publically visible agreements.

Africa’s economic integration is a cornerstone of the African Union’s (AU) agenda. Reducing intra-African trade barriers and unifying policy on matters of trade aims to create a predictable and more competitive environment that will benefit producers and consumers alike. Lower trade barriers mean lower prices for intermediate and final goods, arguably better positioning African producers to compete globally as well.

A continent wide free trade area is intended to be the first step towards full economic integration with the end goal being a continental economic and monetary union, an EU of sorts but for Africa, with a common currency and central bank.

The roadmap for establishing the Continental Free Trade Area (CFTA) by 2017 was agreed upon at the 18th ordinary AU session in 2012, but not without its opponents. For one the Intergovernmental Authority on Development (IGAD), an eight-country Regional Economic Community (REC) in East Africa, questioned the feasibility of the proposed deadline and whether resources could be better spent on infrastructure development, the removal of non-tariff barriers, advancing trade facilitation and addressing the challenges of food security. Arguably concerns that better address the reality and immediate needs of the continent.

The CFTA roadmap first calls for the various REC’s to reach the ‘free trade area’ stage of economic integration; for non REC member states to join REC’s; and the establishment of the Tripartite Free Trade Area (TFTA), an intra-REC FTA between the SADC (Southern African Development Community), COMESA (Common Market for Eastern and Southern Africa) and EAC (East African Community). The challenges faced in this phase of the roadmap are the dependence on REC’s to meet their integration deadlines and for states to join FTAs in REC’s.

Currently the AU recognises 8 REC’s, which are at various levels of economic integration and with overlapping member states. Moreover agreeing on the amount and recognition of claimed geographical areas as “states” is a point of controversy. The AU recognises 55 states in Africa, including Morocco and the Sahrawi Arab Democratic Republic (Western Sahara) as separate countries; however due to the AU’s recognition of Western Sahara as a sovereign state Morocco is the only non-AU African state. This is further complicated by the fact that Morocco is a recognised member of the United Nations while Western Sahara is not.

The TFTA and associated RECs on the other hand seems brimming with political will, albeit for a very particular aspect of the trade pact. The launch of the TFTA is scheduled for 10 June 2015 in Sharm El Sheikh, Egypt, during the 3rd Summit of the Tripartite Heads of State and Governments. The launch follows the apparent completion of negotiations on trade in goods for the TFTA with trade in services and trade-related aspects to follow suit. However, a number of member states failed to produce any tariff offers for the private sector to work with. And the thorny issue of rules of origin has yet to be engaged. Without agreement on rules of origin to govern tariff concessions the FTA will not have any meaning, bringing into question the entire project.

Members endorsed the draft agreement, citing the principle of variable geometry, reportedly to save face in meeting the deadline. The question then is what’s being launched? Without a comprehensive trade in goods regime, no trade in services or trade-related aspects and very limited participation it seems like a highly publicized gathering of intent is being celebrated.

Without being overly critical and cynical towards the deadline of the CFTA, the progress made by the TFTA does pave the way for further continental integration, even if it only remains at the shallow end of the integration pool. Reducing tariffs between African states is likely to have the desired effect of promoting economic development, via increasing intra-Africa trade, assuming that barriers to trade in goods continue to decline and are not simply replaced by other protective measures or behind-the-border barriers.

The second phase of the CFTA roadmap is to consolidate the regional FTA’s into the CFTA in 2015-2016. Negotiations on the CFTA are to be launched during the 25th AU summit in South Africa on the 15th of June 2015. The ordinary session is sure to be filled with integration zeal, as it will follow shortly after the launch of the TFTA.  The final phase of the CFTA roadmap is its proposed launch in 2017.

But the CFTA project is likely to remain within the same narrow scope of the TFTA. The continental trade pact will include a substantial amount of negotiating parties, each with their own domestic concerns and agendas that will need to be coordinated during both the negotiation and implementation stages. To add more straw to the already strained camels back, the framework also need to be cognisant of the vast differences between member states’ economic development and related national interests.

During her opening statement to the Meeting of AU Ministers of Trade on 14 May 2015, H.E. Fatima Haram Acyl -Commissioner for Trade and Industry African Union Commission – stated that “Many of the largest countries in the world, and Africa’s most significant trading partners, are moving towards the establishment of Mega-Regional Trade Agreements.” referring to the TTIP, TPP and RECP. She continued this thread, referring to the potential impacts of mega-regionals on Africa, by stating “We will be better positioned and better off if we move to establish the CFTA as quickly as possible.”

The pressure of possibly being left at a weaker global bargaining position seems to play its part in motivating the continental push. Suggestions on strengthening the CFTA were made by UNCTAD at the African Union Trade Experts meeting in Addis Ababa, 8 to 10 May 2015. Among these suggestions was the call for the CFTA to be comprehensive in creating a vibrant and resilient economic space for trade in goods, services and agriculture as well as including aspects such as competition policy, investment policy and dispute settlement.

Which brings me back to my initial thought on Venice and the Ottomans. Is this a natural extension of market forces? Does the push for a CFTA justify the forgoing of the opportunity costs, specifically those mentioned by the IGAD? How will this decision to actively forge economic integration play out in the global context and in the long run?

If the precursor of the CFTA, the TFTA, is any indication of the speed and direction the economic integration efforts are heading in, then the assumption can be made that this will prove to be another rushed political exercise at the expense of more pressing development objectives, in the short run at least.