After a decade of sub 1% growth, maybe it’s time to rethink special economic zones

After a decade of 0.8% average annual growth, maybe it’s time to rethink some sacred cows – one of them being the Special Economic Zones (SEZs), of which there are 12 in South Arica.

Unemployment numbers have doubled since 2010, so the existing policy prescriptions are clearly not working. Looking abroad at how other countries tackled economic recovery, SEZs feature rather prominently.

There is an abiding suspicion among trade unions that these SEZs are Trojan horses for the slaughter of hard-won labour rights. That’s a battle that will have to be fought at some point because the existing SEZ model is a bust.

Some new research by the Centre for Development and Enterprise (CDE) explains why this is. Of the 12 SEZs, only four – Coega, East London Industrial Development Zone, Dube TradePort, and Tshwane Automotive SEZ – have attracted any meaningful investment since launch in 2014. Government has invested R25 billion in these 12 zones which attracted a total investment of R31 billion and created 27 000 jobs.

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SEZs elsewhere in the world

If you’re impressed with that, take a look at SEZs elsewhere in the world. Two of the most successful SEZ programmes were initiated in China and Mauritius. China’s SEZ programme kicked off in five zones in the 1980s, allowing foreign businesses to invest with confidence.

The Chinese Communist Party was understandably concerned that this would build pressure for market reforms across the whole country, but was prepared to test SEZs on a limited basis where foreign businesses were assumed they could repatriate profits.

It was a massive success that did indeed lead to broader reforms across the country, helping turn China into the manufacturing behemoth it is today.

Mauritius faced problems of a slightly different kind. Entrenched business interests were opposed to the removal of tariffs that protected them from foreign competition, particularly in the garment industry.

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The government set up the first industrial zone in the early 1970s, allowing qualifying firms to import materials at much lower tariffs. This was the start of the Mauritian garment industry boom. Unemployment went from 21% to zero by 1987.

SEZs are special geographic zones, usually close to a port, where regulations differ from the rest of the economy, with the idea of attracting investment and creating jobs. Most SEZs focus on labour-intensive, export-focused manufacturing.

“South Africa’s SEZ programme has done very little to revitalise the manufacturing sector, to promote export-oriented industries, or to generate sufficient jobs to make even a small dent in the country’s unemployment crisis,” says Ann Bernstein, executive director of CDE.

“For an SEZ to be successful, it needs to truly be special. It needs to offer investors different rules from the rest of the economy. What if, in South Africa, we permitted lower wages and more flexible employment arrangements in a single experimental zone to see how investors responded to these changes?”

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‘Test SEZ’ pilot

The CDE proposes a pilot SEZ specifically aimed at testing whether SA can create labour-intensive manufacturing capable of absorbing unskilled workers from the area.

The existing Coega SEZ is the ideal site for such a pilot, in part because most of the needed infrastructure is already in place. It also has access to the Ngqura port. It claims to have 63 operational companies and to have created 10 527 jobs, though it appears most of these simply relocated from elsewhere in SA, with some companies barely functioning.

For the new SEZ programme to work, the CDE proposes the following changes to the existing regime:

• Allow firms to set their own working conditions. Wages, working conditions, piecework, productivity bonuses, and shift hours should be negotiated at factory level. This includes exempting firms from collective bargaining agreements and some provisions of the Labour Relations Act, but not the national minimum wage. Government would subsidise wages of all workers through an expanded version of the employment tax incentive (EIT).
• All goods must be for export, and firms must be engaged in new activities – this prevents firms from relocating from other parts of the country to take advantage of the SEZ benefits.
• Make all imports duty-free rather than subject to rebates – simplifying the administrative burden for both companies and the South African Revenue Service (Sars).
• Relax rules governing the movement and employment of skilled foreign entrepreneurs and managers. The existing visa rules are simply too prohibitive to attract the necessary skills.
• Allow the SEZ to be operated as a commercial entity by the private sector – not by government. That also places the onus on attracting firms and investment on the private SEZ manager, with government playing a subsidiary role.

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Laboratories for new ideas

Speaking at the launch of the latest CDE research on Wednesday, EY partner and former deputy director-general at the Department of Trade Industry and Competition (dtic) Tumelo Chipfupa said the government of national unity should take these proposals seriously.

“We don’t have a strong process to test whether SEZ programmes have a decent chance of success,” he said.

“Unlike China in late 1980s, SA does have a private sector. It makes more sense for SA to allow private sector to manage these. The SEZs are like laboratories for testing new ideas.”

Saki Macozoma, chair of Vodacom and Safika Holdings, said after four decades of serious unemployment in the Coega area, it is time for some fresh ideas. If the SEZ proposal is not tested on an urgent basis, there is a danger that Port Elizabeth’s relative advantage (in terms of a skilled workforce and port access) will erode.

The proposal is likely to face stiff opposition from established interests but these will have to be confronted.

The consequences of letting this opportunity slip are further violence and deepening urban decay.

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It is perplexing that the ANC government has not pushed harder for a more imaginative SEZ programme given the numerous endorsements from its own Economic Transformation Committee in 2020 urging “massive expansion of the SEZ and industrial park programmes”.

Similar sentiments have been expressed by former deputy minister of finance Mcebisi Jonas, and Joel Netshitenzhe, executive director of the Mapungubwe Institute for Strategic Reflection.

“The dissatisfaction with the existing SEZ programme inside the state has, predictably, led to calls by some for more centralised control. But the better solution is to open the programme to market forces and private sector expertise,” says Bernstein.

“South Africa’s greatest challenge is creating jobs for millions of unskilled, inexperienced work seekers. A new experimental SEZ would be a kind of laboratory. If it works, the lessons learned could be applied to the overarching SEZ programme and, eventually, to the economy as a whole.”

This article was republished from Moneyweb. Read the original here.