Increased financial openness in SADC – an invitation for trouble?

Zulaikha Brey


Recent and dramatic changes in global financial markets have had disastrous effects on some less developed countries in Africa. Although these countries may not have strong and direct financial sector linkages with the rest of the world, their dependency on a limited number of primary sector goods has exposed them to changes in world demand, resulting in a slowing of growth. There is some risk that a prolonged global slowdown might reverse the successes attained in overcoming the food and fuel crises of the 1990s and bring social and economic development to a halt. These challenges raise questions about the rationale (or at least the timing) of global and regional efforts to deepen economic integration.

The vision of the African Union (AU) is that all 54 African countries should come together as a single economic bloc, the ‘United States of Africa’, to enable the continent to fulfil its potential as a global force. Recognising the scale of the task, a detailed but step-wise timeframe has been proposed. In the first instance, the AU is looking to facilitate the establishment of eight independent African bodies, with six supporting institutions, which could eventually be merged to form the greater African Economic Community.

The Southern African Development Community (SADC), as one of the eight endorsed bodies of the AU, has set in motion a plan to deepen integration amongst its member states. Specifically, SADC has the goals of attaining a free trade area (FTA) in 2008, a custom’s union (CU) by 2012, a common market (CM) by 2015 and a monetary union (MU) together with a common currency by 2018.

Monetary integration, as is being pursued by SADC, cannot be achieved without sufficient financial development and integration. SADC has thus incorporated these concepts into its work programme and targets and has established measures to improve and enhance financial coordination. These include the revitalisation of the banking sector, the establishment of a common payments system, the integration of stock markets, the establishment of a SADC central bank, and the pursuance of macroeconomic convergence.

Much of these integration efforts within SADC are built on the successful European Monetary Union (EMU) model, which in turn, revolved around the adoption of the EU “Maastricht criteria”. All prospective EMU member states were required to meet these strict economic thresholds before they could join the monetary area, following which all members were subjected to a common currency and the laws and decisions of a central monetary authority. Despite the high level of economic and social development in the independent EU countries before the union, this integration process still took almost 50 years to complete.

To date, the SADC integration progress has fallen well short in the attainment of its goals. The FTA of 2008 is not yet fully functional; the CU of 2012 is a distant dream and the lack of movement towards macroeconomic convergence proves that there are serious constraints to integration in the region. These include:

  • A lack of political will, due to the unwillingness of authorities to cede decision-making power;
  • The overlapping membership of some SADC countries with other regional blocs is a source for confusion, most notably when the policy objectives of these bodies conflict;
  • Less-developed economies in the region are heavily dependent on trade taxes as a much-needed source of fiscal revenue and are less willing to remove tariff barriers;
  • The diverse status of economies in terms of size, openness, and diversification of production. There is some risk (or fear) that smaller or weaker countries might lose out to the region’s dominant economies; and
  • A lack of capacity and knowledge across many of the technical areas that must be tackled in the achievement of deeper integration.

Thus, regardless of the rationale for deeper financial integration within SADC, ten years was always going to be an insufficient amount of time to overcome these many technical, economic and political constraints. Trying to force together 15 vastly differing economies, following centuries of economic and political strife, without the effective implementation of supportive programmes and adjustment periods, could be a recipe for disaster. Missing agreed targets could irrevocably damage the credibility of the region in the eyes of investors; and getting the process wrong could contribute to increased disparity and heighten the risk of contagion.

SADC should instead take some further lessons from the more recent experience of the EMU. At the time of its launch, the EU region was in good financial health, and global and European economies prospered. With the recent crisis Spain, Greece and Portugal have seen their debt levels skyrocket, and the credit ratings of their institutions downgraded, resulting in the near collapse of their economies and financial systems. To ensure that financial contagion does not spread to other EU members, the EU Central Bank had to step in and bail them out, at significant cost to all other members. Should Spain and Greece continue to flounder, they may have to be expelled from the Union.

If such dramatic events can occur in the EMU, the most developed and integrated of regions, what chance does SADC have in achieving a longstanding, stable and successful monetary union? Rather than agreeing to a fixed outcome and an unrealistic end date, SADC should be encouraged to pursue a careful and staggered approach, with reasonable milestones and adjustment periods, to ensure that unforeseen risks can be identified and effectively diversified or mitigated. These milestones may include the completion of trade reforms, including in the services sector, to improve regional and international competitiveness; increased investment in regional economic infrastructure to facilitate the movement of goods, services and people; and enhanced cooperation in the development of regional skills, knowledge and information in areas relevant to the integration process.

When it comes to regional integration in SADC, there might be some truth in the old saying: “haste makes waste”.