Economics

Introduction
If we analyze the recent history of trade and relationships between economies and countries there would be a realization that as economies moved towards the 2nd millennium and beyond we saw greater integration of businesses, industries and policies. During this same time frame there was also a shift from the initial buzz of globalization to the importance of regionalization. Although the recent economic downturn and financial meltdown might have put strains on trading relations between economies and within regions as countries tried to keep a check on their national unemployment rates, by protecting industries temporarily to safeguard domestic production, however on an overall level this decline in trade liberalization would be considered as a short-run phenomenon.

What can be deduced here is that world trade will continue to grow as economies come out of this economic recession and the importance of regional trade and bodies would enhance as well. More specifically speaking, regional ties through unions have grown stronger over the years. The prime example is that of the European Union the Euro zone is like a country in itself when it comes to currency, certain aspects of foreign policy, monetary policy and other mutual issues such as national security.

The main goal of this report is to investigate the costs and benefits to countries that have joined the Southern African Development Community (SADC) while using Namibia as a prime example of whether the benefits outweigh the costs or vice-versa. The SADC is like a free trade zone and member states share a special relationship that allows them to trade among themselves more freely.
The following table explains the membership structure of the SADC from its beginnings in the year 1992

Member StatesYear JoinedWithdrawing CountriesAngola1992Botswana1992Congo1997Lesotho1992Malawi1992Mauritius1995Mozambique1992Namibia1992Swaziland1992Tanzania1992Zambia1992Zimbabwe1992South Africa1994Seychelles1997 2008Seychelles (2004)

SADC was formed in 1992 by 9 frontline southern African states with an aim to curtail the power of South Africa. Initially the goal was to become self-dependent and develop member states in terms of trade, development and infrastructure. Most of the member states, in fact 11 states within the SADC, signed the FTA (Free Trade Agreement) in 2000. (Khandelwal, 2004)

Similar kind of bodies have formed elsewhere in the world as well for example the NAFTA in the Northern American Region and OECD and many other organizations formed for either trade purposes or other economic goals. We see such bodies and regional organizations as successful and beneficial to member countries though in certain cases we do see a number of challenges arising for example political tensions within NAFTA and India-Pakistan issues hampering the progress of the SARC organization.

We know that the evolution of the European Union has come out as an impressive story of regional cooperation and it is a powerhouse in favor of such trade blocs though we must investigate the challenges that face the SADC. Specifically, after the withdrawal of Seychelles and other questions raised by experts our purpose in this report would be to evaluate the challenges that SADC faces this evaluation will use Namibia as an example and look at some specific and certain issues and once precise issues are identified a much larger scale study and research would be needed to get to the crux of the problems and challenges that are faced by the SADC.

Literature Review
Background
The idea of reviewing the documents, books and scholarly papers as part of the report was to allow the reader to have understanding of how the report is prepared and what is the flow of data in the report.

Literature
During the writing process a number of sources were consulted and used in the whole paper preparation process. Working papers from IMF were read and an understanding was developed on customs union by consulting the economic theory by John Sloman other popular customs union concepts were considered and researched from Lipsey and Chrystal (2007) the other sources of information came from the SADC portal and working papers and publications from the SADC website. These documents provided the author of the report with in-depth analysis and data on the economy of Namibia and its trade figures with major partners.

Findings
The report has concluded that for the economy of Namibia it is suitable to stay with the SADC and concentrate on developing value-added sector and train and educate a class of potential skilled workers and knowledge workers who could understand the economy of Namibia and strengthen future prospects of development. Overall we see that countries that join SADC are in a beneficial position compared to those countries that have either left SADC or never joined a similar bloc.

Conclusion
The author strongly suggests that Namibia has to have a solid purpose of development based existence within the SADC it is also relevant for all similar developing countries to join integrated economies and benefit their own people in the short-run and come away with a long-term strategic advantage by planning the direction of earned resources in the development of either extensive infrastructure or human capital (preferable) for future growth and development.

Further Research
There is potential and need to research and validate the long-term advantages of customs union this is because the author agrees that in the short-run economies can benefit from integrated economic blocs but once the advantages are complete than there is a risk of smaller economies becoming raw material providers to larger economies. 
   
Methodology
The main method of research throughout this report is based on secondary data on SADC, Namibian economy and economic concepts from books and scholarly reports. The idea was to collect a 10 year data range on Namibian economy from 1999-2009 and see whether the advantages or disadvantages of customs union can be substantiated by factual data. Secondly books and research papers were used to discuss and explain the concepts on customs union and its pros and cons.

Quantitative as well as qualitative data was used to analyze and explain the data that could substantiate the Namibian economys role in the SADC and whether it will be beneficial for the Namibian economy to be a part of the SADC. 

Pretext for Using Namibia as a Case Study
Namibia offers the unique and hopeful face of Africa the country has certain strong macro-economic indicators whereas it faces challenges of a reasonably non-diversified economy and a growing need for higher foreign investments to spur growth. Another importance facet of the Namibian economy is that in its 2030 vision the government has decided to liberalize trade in a bid to encourage economic growth through liberalized trade policies. This is another reason why Namibia is a case example in the analysis of SADCs impact on member economies since the organization largely is a trade promoting body.
Namibias economy is also based mainly on the primary sector one of the major contributors to the GDP (Gross Domestic Product) is the mining sector. This also implies that Namibia must either develop domestic industries in the secondary sector or export these raw materials to other countries to earn foreign revenues and support imports. This again brings us to the point that Namibia is a trade dependent economy in the absence of a strong secondary sector.

Finally we must understand that the Namibian economy employs most of its workforce in the primary sector therefore for its around 2 million population trade is a major source of revenues this analysis would henceforth make much more sense if it is conducted from the perspective of a country that has a lot on stake when it comes to the SADC.

Explanation of Customs Unions
A typical customs union is like a free trade area however members must follow similar or exact external tariffs or quotas on countries which fall outside the customs union. (Sloman, 2003) This seems to be a rigid definition of a customs union though many regional organizations are similar but with slightly different external tariff regimes. In comparison to this definition the SADC is much more than a customs union if we go through the objectives of the SADC we find that the organization not only looks to expand trade between the member states but also further economic growth and prosperity, become more self-reliant and efficient in mobilizing domestic resources, use the cultural affinity to resolve social and other issues that have plagued Southern Africa and amongst many other things promote peace and improve security of the people of Southern Africa.

The list of these objectives explains that SADC is more than just a customs union and its goal is greater than just providing trading support to partners and members.

Impact of a Customs Union Trade Diversification and Creation
Trade creation this occurs when once a country enters a customs union we see that production of goodsservices shifts from the high-cost producer to a country that can produce the same productservice at a low-cost level. So if we use the theory of comparative advantage that states countries specialize in the production of goods and service in which they hold a competitive advantage compared to a different productservice over another country even if the other country has absolute advantage in the production of both the goods. In simpler terms countries would start to specialize under free trade arrangements and people will have to pay less for goods that were previously being produced by high-cost manufacturers.

The way trade is created here is that if for example a country, before entering a customs union, had to pay a tariff to import certain goods from a country now the exporting country in this case had to forgo some demands because of higher prices (tariff rates) though if both the countries join a customs union than the exporting country can export more of that good and the importing countrys consumers have to pay much less to buy the same quantity of the goods. (The assumption here is that the exporting country holds a comparative advantage in the production of the good) So we see the case of trade creation as a result of increased consumption of the good after the removal of tariff.

Trade diversion This occurs when the production of goods and services shifts from low-cost producers to high cost producers for example if France was importing a particular good from New Zealand (assumption New Zealand is the most efficient producer of this good in this world) before entering the European Union and France was also paying a duty on this good which made it expensive artificially. After joining the EU France starting importing the good from UK at a cheaper overall price than New Zealand because of the absence of the duty though New Zealand still is the most efficient producer of the good.

So once countries enter customs union they must import also from the member state no matter whether the member state has a comparative advantage in the production of that good or not. If we further expand our analysis we will see that customs unions will face greater trade diversion than trade creation if they were to have high tariffs imposed on goods produced outside the customs unions. Secondly if the cost difference between the production of goods in countries within the union and outside the union is not much than again we will see trade diversion.

Long-Term Economic Advantages of Customs Union
For small countries like Namibia customs union present a great opportunity to exploit the internal economies of scale this is because the market size for products and services would increase given that no or few tariffs exist between member states. The increased market share or total number of potential customers gives the chance for businesses in different states to increase sales revenues by selling more volume and reduce unit fixed costs.

Businesses will also benefit from external economies of scale because as trade and business increases across the region rail, road and communication infrastructure will grow and improve allowing even bigger scale economies in the long-run as handling and transportation processes will become more efficient and cost effective.

Another longer term advantage could stem from a push by member states to look for better terms of trade. Drawing a parallel between a single laborer and a whole union we see that the union has the greater negotiation power similarly if member states join together and use political clout to get better terms of trade than we can see better economic returns for the member states.

We also expect that as competition breeds and increases among member states there would be an overall improvement in the efficiency of production, encouragement to investment between members and reduction in monopoly or oligopoly power. Competition among businesses will also ensure higher standing of living and better quality products. Another aspect to the integration of regional economies is that there can be an effective and quick spread of technology and platforms that can be replicated.

Long-Term Economic Disadvantages of Customs Union
A country might be sidelined in accustoms union if it has inefficient producers or infrastructural issues what will happen is that resources will start to flow out of this country to other regional hubs or geographically central states within the customs union. This is one of the major negative points of singular markets that have free movement of goods and labor. The country that becomes isolated might suffer from adverse regional multipliers effects as it will fail to attract investments from foreign and regional countries.

We already have discussed the advantages of integration but what we also need to consider is that businesses in member countries might also collaborate and we might see increased oligopolistic behavior and thus higher prices in the region. Relaxation of mergers and takeover laws will also increase the possibility of more monopolies being formed and mergers taking place that would ultimately impact competition and productivity in a negative way within the union.

Another disadvantage of customs union is that if large businesses combine successfully than a very large company within the union will become bureaucratic and inefficient hence causing higher prices and below average products for customers such large companies are also likely to face other kinds of diseconomies of scale as well. For instance red tape will cause management diseconomies of scale.
High costs could also be in shape of administering the customs union in cases where there is greater intervention in the affairs and policy making of individual members the costs of administering the union would be proportionately higher. This will again bring in inefficiencies in the customs union and its workings.

It is extremely difficult to gauge the benefits and costs to a country of entering a customs union because firstly all the countries are unique in some way or the other countries have differing landscape, resources, infrastructure, culture, political systems and other areas therefore it becomes very difficult to decide which economies will benefit from entering and which will not.

Another issue is that most of these advantages and costs are long-term therefore unless a country joins a union it can not decide with complete certainty whether the benefits will outweigh costs. Moreover certain advantages or disadvantages are politically driven in that case it becomes difficult for economists to decide the overall result of the union for a particular state.

Challenges Faced by SADC Regarding Tariff Regime
A major issue that has been highlighted by researchers from IMF (International Monetary Fund) is that there is a lack of political will from some member states of SADC when it comes to tariffs and trade liberalization experts say that it has taken a long time for countries to come closer to actual free trade in almost all sectors. 

In a typical customs union we see that certain states become dependent on trade taxes the case of SADC is no different, for the year 2000 the tax data shows that apart from South Africa the rest of the nations in SADC had 10 percent or more share of trade related taxes in fiscal revenues. This shows that the countries that are a part of the SADC are dependent on tariffs for public revenues to meet public expenditure now these trade tariffs act as barriers to market forces and cause productive and allocative inefficiencies. The dependence on trade tariffs of countries for fiscal revenues is a disadvantage of a customs union because even if trade is free of taxes within the union though by definition the union countries would have to adapt similar tax regimes against non-union countries. This would also mean that governments of states that are part of the union will become inefficient with the raising of public funds as they have an easy source of funds in the shape of trade taxes. Namibias trade tax to total revenue percentage was 38 in 2000. This shows that the dependence of countries within the SADC was too much on trade taxes. 

The Level of Trade Restrictiveness as a Measure of International Trade within Customs Unions
There are certain countries in the southern region of Africa that are open in trading practices while there are other which are not so open when it comes to trade and imports and exports. For example countries like Seychelles, Burundi, and Comoros are some of the most closed economies in the world in terms of trade whereas countries like Djibouti, Uganda, Malawai are some of the most open economies in the world. The core issue faced by the economies is that because of such vast differences in the tariff structures of countries coming to a common external tariff structure has become difficult. Moreover the more developed economies such as Kenya, South Africa have failed to take the lead role in harmonizing the policies of the region causing welfare and economic losses to the region.

Challenge of Keeping External Tariffs Low in the Region
In a region where economies are so diverse and their structure have such wide differences we see that keeping external tariffs low and uniform is a challenge and a difficult thing to achieve. Firstly it is important to have a common and low external tariff plan because that will increase trade diversion not within the region but across the globe. Secondly by decreasing external tariffs the customs union countries can promote their export sectors which in turn can bring in greater foreign exchange.
One way of achieving the tax regime is by starting of by putting lower tariffs on raw materials or semi-processed and goods and increasing tariffs on finished products though eventually the idea must be to reduce the common external tariffs to a minimal regime in the long-run. This will not only benefit societies across the globe but it will also create export related jobs across the southern African region. One of the major preconditions for such a move is to have political will since slashing duties will reduce government revenues and therefore government would have to generate tax revenues from other sources.

Namibias Trade and Integration Outlook
For the period 2000-2007, the Namibian economy saw an average of 45 of exports as GDP and 60 of GDP as imports. This means that trade is an integral part of the Namibian economy and it makes absolute sense to analyze Namibia within the context of SADC and look at what are the benefits and costs of a customs union to a country like Namibia. The African Development Bank expects Namibia to play a critical role in the SADC and continue to be a strong partner in the customs union. According to statistics, 51 of Namibias all exports come under the duty free head and another exciting fact is that 82.7 of exports from Namibia fall under either a free trade agreement (FTA) or customs union partner. (African Development Bank, 2009)

The real growth in trade of goods and services has been growing at a strong rate of 5.7 during 2005-06 from 4.2 in the early 2000s. All of these facts are discussed to emphasize the importance of trade and regional integration to the Namibian economy because Namibia is a small country in terms of population and one of the biggest advantages to the country of a regional customs union is that it has access to such a large market in terms of population the SADC provides a potential market of 350 million consumers. This is a huge market for a country like Namibia which is looking to strengthen its fundamentals and gain sustainable economic growth. (African Development Bank, 2009)

Under the SADC guidelines as of 2008 Namibia had successfully accomplished all of the targets but one which requires member states to have single digit inflation. This again shows that being part of a regional economic body helps countries maintain certain macro-economic indicators such as public debt to GDP, foreign reserves and so on. What this leads to is sustainable economic growth with the right kind of macroeconomic indicators.

Benefits to Namibia of Being a Member of a Customs Union such as SADC
One of the major benefits that Namibia has by being part of a larger customs union is that the country earns significant tax revenues through common external tariff programs. What this means is that when member states trade among themselves they put up a similar tariff regime for non-member states therefore they form a huge market potential for non-member states and earn significant tax revenues to further the cause of infrastructure and other development work within the member state countries.
The second critical advantage that we already have touched upon is based on the demand-side base for Namibia. To overcome the limited market size being part of a larger customs union helps Namibia market its product to a large customer base hence it overcomes the issues of a limited consumer market.

If we analyze import and export data of Namibia and its trading partners we see that during the late 90s and early 2000s Namibias exports to SADC countries rose quite significantly compared to imports from the SADC countries. The increase in exports to SADC countries was averaged at 61 during the time period (1999-2003). On the other hand during the same time frame we saw that the increase in imports from SADC countries grew only by about 19.6. Although in absolute terms imports from the SADC countries were far greater than the exports to SADC countries yet we saw that the growth in exports was far greater than the growth in imports which shows signs of favorable trade patterns for Namibia in the years ahead. (SADC Trade, Trade Database)

We also must understand another important aspect of the Namibian economy like most growing developing world economies Namibia needs to diversify its economy and strengthen its export related industries and its manufacturing base. This is evident from the fact that Namibia is a primary goods exporter in the region with mining (diamond) as one of its major exporting product not only to the SADC countries but also to the European Union and other parts of the world. Secondly the economy is heavily dependent on the South African economy and exports a major chunk of its goods and services to the South African market.

Here again by increasing the integration of the markets through the SADC, Namibia has an opportunity to redress the balance and develop its manufacturing sector so that it can compete with economies such as the South African economy. This would be an important step since the value-added sector has the greatest potential to fetch the highest amount of value and revenues as compared to raw materials.
What is important here to note is that diversification of not only sector and products is needed but in the long-run markets should also be diversified so that sustainable economic growth rate is experienced. The present strategy is to follow an export-led growth strategy that can then be translated into a trickle down effect for the poor quarters of the economy. In my opinion having higher imports and lower exports in absolute terms is not a bad thing for an economy like Namibia which is looking to strengthen its manufacturing base. This is because generally imports are higher because equipment, machinery and other capital goods are imported to strengthen the manufacturing sector. This scenario will only be sustainable if Namibia is able to reverse this scenario by firstly strengthening the manufacturing sector and secondly by ensuring that technology and skill is transferred into the economy from regional players so that in the medium to long-term Namibia is able to fulfill its own capital products need and look to export value added products in the long-term.

So from a regional integration perspective it is an ideal scenario for Namibia to import value added technology and capital intensive equipment from South Africa and other developed economies of the region and strengthen its manufacturing base. This represents a huge benefit to the economy of Namibia.

Another advantage from Namibias point of view is that because of regional integration Namibia is protected against competition from other manufacturers and cheaper exporters such as India and China therefore the Namibian economy has a breathing space before it is ready to face cheaper manufacturers of similar products that Namibia trades in with its partners. This is a short-term benefit and Namibia should look to understand that it is imperative to develop competitive advantages in key industries because as we move forward economic integration would increase elsewhere in the world as well and then efficient production and low costs would be an important requirement of successful export oriented countries.

Finally in my opinion the challenge for Namibia is to expand its horizons and look beyond traditional markets such as South Africa and Angola and other European countries this is because through diversification of markets not only Namibia will strengthen its GDP growth but the economy will also ensure sustainable growth. Secondly it is of utmost importance for countries like Namibia to shift to knowledge based exports because primary goods and commodities will either run out or will always fail to provide competitive margins because not much value addition is done in these sectors. It should also be realized that smaller trading partners within the SADC represent crucial long-term partnerships and they should form the back-bone of all trade from Namibia because ultimately that is where the Namibian economy will have the highest benefit.

Potential Disadvantages or Threats of Customs Union to Namibian Economy
There are potential disadvantages or threats that the Namibian economy or any other similar economy would face being a part of a customs union. The tax revenues although will provide funds for development and infrastructure build up but the problem with tariff revenues is that they inherently create misallocation of economic resources and the quality of these revenues for the government is poor because they are not sustainable in the long-run therefore rather than looking for alternative and more sustainable sources of funds governments in developing African countries look to earn major revenues from tariffs. The other disadvantage is that no foreign country or regions businesses would continue paying undue taxes or tariffs just because its manufacturers are not part of the importing countrys customs union. Such businesses would look for less expensive and competitive markets and as soon as they find them they will switch and tax revenues would be lost subsequently.

Another disadvantage from a growing economy is that if a particular sector of the economy requires to trade with a particular set of companies in a country that is not part of the union than considerable hurdles will be faced to form some kind of favorable trading arrangement between the two countries. For example for Namibia if a particular country like India has better diamond manufacturing technology to offer than being stuck in the SADC might not be such a great thing for Namibia.

From the perspective of a developing economy it is critical to have diversified markets and diversified business to sell to these various buyers and market by staying in integrated economic area, countries like Namibia can put them at a difficult position of not being able to expand into non-traditional markets. For example Namibias greatest trade partner is still South Africa and it will continue to be so unless the country can form favorable trade treaties with other countries and regions.

In recent years as we have already discussed Namibia still largely sells primary commodities and raw materials to its trading partners this also poses a danger to Namibia as it might be singled out as a raw material providing country to other regional players who benefit by producing value added products at a lower cost and than selling them to non-member states at high margins. The danger here is that of being singled out as a raw material provider and part of a chain that does not shift to other or similar businesses that the bigger trading partners within the bloc are already exporting to the other regions.

As the Namibian economy is a producer of raw material and commodities it must look to trade with partners that are willing to trade machinery and technology in exchange of primary resources because that is the only way for Namibia to redress the balance and plan prosperity for future generations when value-added products are produced within Namibia.

Another potential disadvantage of being part of a customs union is that risks are shared and contagions can exist in the financial markets of the integrated region or economic bloc. From our recent experience of the Euro meltdown we see that economic unionscustoms unions face the risk of being engulfed by a spiraling financial crisis which might have roots in one country but because of the integration of the markets it might impact all countries by some varying degree. This is a particularly new phenomenon though in an increasingly integrated financial environment markets in different countries within the region are expected to react to financial difficulties in another part of the region.

There is also considerable discussion on the political front of an economic integration political tensions or varying mindsets of governments can hurt prospects of comparatively smaller players in the region. For example the recent victory of the conservative party in UK shows that if an anti-economic integration government comes to power in an important regional player than policies could be distorted and the spirit to really benefit each other and create win-win scenarios for all partners might take a back seat. This also has the potential of practically having negative impacts on smaller players and countries like Namibia.

In a region like Southern Africa where labor laws and other business laws are rarely put in practice we see that if companies and large businesses come together in the SADC than they might form monopolies or large companies that set prices and charge premium and higher prices from customers. This can adversely impact the competition practices within the region and hurt the chances of free market practices to take root and strengthen economies in the region.

Finally another disadvantage that we see is that dependence of smaller players within the region on stable and bigger economies can overshadow the progress of smaller markets and economies like Namibia this is because they will act like raw material providers and primary commodities providing countries will only have a trickle down effect of the economic prosperity. Benefits to the region in terms of higher trade would not be equitable and probably not in favor of smaller economies if they do not diversify quickly and establish value-added industries.

 Discussion Point on Benefits versus Costs of Customs Union
What we can deduce from the discussion on the benefit and costs of customs union is that in the particular case of Namibia it is vital to have a large market so that its businesses can grow and achieve economies of scale so that investments could be made in technology and research of new products and services. Secondly in light of the performance of the Namibian economy in recent years it is evident that staying in an economic region is beneficial for Namibia and such developing countries because they must fulfill the core objectives of the government of providing employment opportunities and fulfilling basic food and fuel needs.

It is crucial to note that countries and economies that have sustainable and long-term trade partners ultimately benefit from their existence because economies run in cycles and during a recession or difficult economic time period it is important to have a strong trading ally because that country would be able to understand the absolute necessities of the exporting or smaller trade partner and subsequently will look to ensure that mutual benefit is guaranteed.

 Contested Viewpoints on the Benefits and Threats of Customs Union
From the economic viewpoint we see a huge debate on the free trade between world countries and the WTO forum. The free market economists or those who believe markets know best maintain that ultimately countries and societies will benefit from free trade because if a particular region is able to produce goods at a cheaper rate than the benefits should be available to all possible because that is the ultimate goal of markets to provide maximum benefit to its customers. (Lipsey, R  Chrystal, K, 2007)

On the other side of the fence, conservative or protectionists believe that economies must have the right to protect their industries and strategic resources to not only safe guard national interests but also look after the interests of the economys people and their economic interests as well. For example the Europeans protect their farmers from Indian and Chinese exporters because the Europeans think the jobs and incomes of their farmers are vital for societal balance.

These varying arguments result in the discussions and debates at forums and across parliaments and what we can conclude from such discussions is that no particular state is permanent and countries and economies must look to fulfill their objectives with a plan. This might not be as simple as it sounds but that has to be the crux of all governments mindset since they have elected on a particular mandate and it is their duty to fulfill it.

Conclusion
It is vital to understand that economic progress depends on the competitive advantage and the skill set that the people of a particular economy possess and develop over a period of time. Economic managers must understand that as economies grow and develop they have various options and opportunities and it is their job to undertake extensive cost and benefit analysis to see whether a particular option is worth trying or not.

Secondly it is critical to note that cultural and social factors play a major role in the development of long-term economic patterns therefore economists and strategists of each developing country must understand their own societies and look at unique and distinguishing factors factors that can create that competitive advantage in the world market. For example certain cultures have entrepreneurial background as the strength of its people other segments of the society have traders and so on.

I end by saying that Namibia and other African countries have to strengthen their domestic markets and alleviate poverty if they must develop and prosper in the near future. Secondly the human resource of these countries must be developed at a rapid pace because skilled workers and knowledge workers are an essential pre-requisite for economies that must develop in the future.