Can the SADC Free Trade Area create Growth, Development and Wealth?

The Southern African Development Community (SADC) free trade area (FTA) was launched on 17 August 2008 under the theme “SADC FTA for Growth, Development and Wealth Creation”. Eleven of the fourteen countries that comprise the SADC region are set to participate in the FTA. It is claimed that the remaining three SADC countries – Angola, Democratic Republic of Congo and Malawi – will join at a later date when their economies are stronger. South Africa’s despotic northern neighbour Zimbabwe has also been included in the agreement despite the fact that the economy is in absolute chaos with unemployment estimated at 80 per cent, an inflation rate of over 2 million per cent and an economy that has been contracting for several years – officially estimated to have shrunk by a further 6.1 per cent last year.

The main aim of a free trade area (FTA) is to allow goods and services produced within the designated area to flow freely across political borders without artificial constraints and hold-ups. Many large multilateral organisations such as the World Bank and the International Monetary Fund (IMF) have regularly promulgated advice based on the belief that freer trade generates predictable and positive consequences for economic growth and poverty alleviation. This premise is based on the theory of comparative advantage, the basic principle of which is that member countries are able to specialise in goods and services that they can produce relatively more efficiently than their trading partners and hence reap the benefits of mutual exchange. In other words, trade is a positive sum activity; both trading partners gain, and the pursuit of the gain provides the motivation for exchange. The historic signing of the free trade agreement between the SADC member countries moves the region further up the economic integration ladder.

Various forms of economic integration follow on from an FTA. It is envisaged that the SADC FTA is the precursor to a customs union which is planned by 2010, a common market by 2015, a monetary union by 2016 and a single currency by 2018. The commitment by each of the individual countries in the region to this path of economic integration shows willingness to change their economic policies and should be applauded. However, it is important to note that although trade liberalisation is a necessary condition for growth it is not necessarily sufficient. There are complementary conditions, such as macroeconomic stability, credibility of policy, enforcement of contracts and the respect of private property rights, without which the benefits of openness may fail to materialise. Southern African governments have it directly within their power to reform their economies and adopt policies that will increase growth and reduce poverty.

It must be borne in mind that regional trade agreements can be stumbling blocks to eventual multilateralism. Multilateralism manifests itself in the Most Favoured Nation (MFN) principle, meaning that the best terms offered to any one trading partner have to be offered to all. Because of a number of loopholes in the system many countries are bypassing the multilateral mechanism altogether, opting to enter into economically less efficient regional trade agreements. One might ask: If free trade is economically the most efficient policy, how can such a move towards free trade result in reduced economic efficiency?

Not all increases in trade flows within a regional free trade area can be counted as gains. For instance, the regional trade agreement could result in trade diversion – where members of the preferential trading agreement buy goods from higher cost sources within the FTA, as opposed to more efficient producers outside the agreement. Furthermore, the need to observe rules of origin to prevent re-exportation of goods results in a complex web of additional costs. Rules of origin arise because members of the FTA do not have the same policies with respect to non-members. Free trade areas require a substantial proportion of the components of a good to originate in the exporting member country and goods that do not meet the minimum requirement are not entitled to the benefits of the FTA.

However, carefully considered agreements do create new opportunities for gains from trade. FTA’s create trade that would not otherwise have existed. One potential gain from tariff reductions between trading partners is that more efficient producers in partner countries replace inefficient local producers. In most cases trade creation raises a country's national welfare. The most effective way, though, to ensure that trade liberalisation leads to efficiency improvements is if a country removes its trade barriers against all countries.

So can the SADC free trade area live up to its central theme and create growth, development and wealth? It remains to be seen whether the trade creating gains outweigh the trade diverting losses in the newly created regional protectionism. What most of the SADC member states sorely lack are the basic institutions of economic freedom, which include its fundamental foundations: personal choice, voluntary exchange, freedom to compete and security of privately owned property. Economic freedom is strongly related to prosperity and growth. Countries that are economically freer tend to grow faster and be more prosperous. Without increases in these fundamental freedoms it is difficult to envisage how African states will grow and become more prosperous.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 02 September 2008