Feature Article: Special Economic Zones: Lessons for South Africa

Why, after more than two decades of research and lessons to be learned from successful Special Economic Zones (SEZs) in China, Mauritius and other countries, does South Africa insist on starting from scratch?

Trade has become globally integrated. For SEZs to be economically successful countries need to be competitive and able to differentiate their SEZs from those in other countries. SEZs have been used to attract foreign investment, promote export manufacture, increase foreign exchange earnings and create employment. Enterprises in the zones are subject to varying degrees of preferential economic regulations and incentives designed to lower their operating costs. Zones are designed to insulate businesses within them from costs faced by firms operating in the local economy.The zones themselves need to be seen as business enterprises that attract investors by offering them competitive advantages. Each zone competes with all of the others based in the home country as well as in other countries.

In 2000, government established the Industrial Development Zone (IDZ) programme to attract foreign direct investment (FDI) to our shores and promote the export of value-added goods. So far IDZs at Coega, East London, Richards Bay and OR Tambo International Airport have been designed and registered, with another, very recently, at Saldanha Bay. General consensus is that, so far, those that have been operating longest, have not been successful.

South African policymakers are in the process of planning, developing and managing the zones. It seems that no heed has been paid to thoroughly researched findings that outside of East Asia, privately owned, developed and operated zones have been less costly to establish and run, prove more profitable than their state-owned counterparts, and yield better economic results. By the end of the 1980s, about 25 per cent of all SEZs were privately operated, and by 2008, 62 per cent were privately managed. Private sector operators have been found to be more dynamic in implementing zones and to have access to extensive financial resources. Of especial importance is that when SEZs are privately developed and owned, the risk is carried by the shareholders. It is not a task of government to risk taxpayer funds trying to develop special economic zones.

Investors choose the zones that offer them the best commercial opportunities. It may be due to the zone’s location, the superior business environment, the quality of infrastructure and services, or the employment regime and productivity of the labour force. Numerous research documents describe how ten years ago, comparative advantage was achieved in successful zones through provision of duty-free imports and exports, fiscal incentives, facilitation of licensing and other regulatory processes, and the absence of exchange controls or trade barriers. It is widely accepted that these comparative advantages are reaching their limits, and, rather than being special benefits, they are considered pre-requisite. Modern zones now need to offer more sophisticated comparative advantages to attract investors.

South African zones, today do not yet offer what successful zones were offering twenty years ago. With all the statutes, regulations, by-laws and directives that have to be complied with, the time and cost needed to deal with all of the cumbersome regulations stifle this country’s chance to compete. When compared to what is available elsewhere, the incentives and benefits offered by the Department of Trade and Industry (DTI) in developments such as Coega provide very little tax relief, no regulatory relief, and inefficient and time-consuming administrative processes. Where most successful zones have set up “one-stop-shops”, operating 24/7 to facilitate effective, rapid and simple approval, customs and licensing procedures, none of the zones in SA do so.

Furthermore, our restrictive and inflexible labour regimes and employment equity requirements deter business. The high cost of employing people reduces the incentive for entrepreneurs to take on staff and forces them instead to favour enterprises that use machinery or other forms of technology, or prefer high skilled workers at the expense of labour intensive methods of production or service rendering. SA’s labour laws promote outsourcing rather than employing, yet, in the IDZs this clear obstacle has not been altered to encourage investment.

Government does have a very important role to play and that is to provide appropriate, clear and transparent policy, regulatory and incentive frameworks that encourage business rather than deter it. It must also provide the necessary infrastructure for businesses to operate competitively, and uphold the rule of law. The key for government policy is to ensure that whatever constraints limit the growth of industry elsewhere in the economy are addressed, e.g. if unskilled workers are the problem, enable training programmes, if administrative and licensing inefficiencies are the problem, set up one-stop shop administration functions, if onerous labour laws are the problem, liberalise them, and if rules and regulations hamper business, eliminate them. There should be no restrictions for businesses entering a SEZ so that competition is intensified and everyone is free to take advantage of the privileges and to contribute to the growth of the economy.

The focus of a SEZ should be to be globally competitive to attract investment. If SEZs are successful in attracting businesses, it goes without saying that exports and foreign exchange earnings will increase and employment opportunities will be created, not only in the zone, but indirectly through spin-offs into the local economy. Conversely, where objectives such as high levels of job security, social upliftment, urban renewal, and rural development take precedence over the provision of a business-conducive environment, SEZs stand little chance of success. The benefits of increased economic growth are all directly dependent on the SEZ being financially viable and profitable.

SEZs in South Africa have the potential to become forerunners of economic development, or they could join the ever growing and expensive national “White Elephant” list. Policymakers need to let go of their protectionist, “one-size-fits-all”, bureaucratic and “rent-seeking” mind sets. They need to pragmatically address the barriers to business. A good starting point would be to apply these in the SEZs.

Does it not seem sensible to learn from the experience of others if we are to successfully catch up on three decades of zone development?

Author  Lisa Harraway is a researcher 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.


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