Feature Article: What makes Special Economic Zones special


Special Economic Zones (SEZs), if properly constituted, can help many to escape from the dire socio-economic circumstances in which they find themselves. The South African government’s decision to establish a number of SEZs is highly commendable.  This policy initiative is long overdue. A word of caution though. Those tasked with the design and implementation of the SEZs must be guided by empirical evidence, not only from the SEZs that have proved successful but also from those that have failed.  Unfortunately there are many more that have failed than succeeded.

An SEZ that is held to be the most successful in the world was once the small town of Shenzhen, in the Guangdong province of China. In the 1970s, Shenzhen had 30,000 residents.  It became an SEZ in 1979.  By 2010, its population had grown to 10.4 million and it recorded a per capita GDP of US$14, 615. The following year, 2011, per capita GDP in Shenzhen soared to US$20,000. The national average per capita GDP for China as a whole, at that time, was only US$5,414 (China Daily 09/24/2012). 

More than US$30 billion of foreign investment has flowed into Shenzhen since it became an SEZ. The defining characteristic of the SEZ is economic freedom which engendered an explosion of entrepreneurial spirit. The resultant economic growth that automatically lead to the creation of jobs and increased wealth, has catapulted the city’s economy and society to unprecedented heights.

For South Africa, or any other country to establish globally competitive SEZs, bold, ambitious policies need to be adopted. South Africa is a late starter as far as SEZs are concerned and therefore faces stiff competition from those already successfully established around the world.

The empirical evidence relating to successful SEZs tells us the following. Generally accepted is that there is a correlation between economic growth and economic freedom: the higher the degree of economic freedom in a given jurisdiction, the higher the growth rate.  But it is up to policymakers to decide how high they dare to raise the bar.  

It also tells us that there has to be a guarantee of security against adverse changes in policy as investors need to know that the promised benefits will be enduring, sustainable, transparent and therefore predictable or calculable.  (The FMF idea of how to provide such security has been adopted and successfully implemented by Lloyds of London, namely, the provision of international offshore insurance against harmful changes of policy).

In a successful SEZ, there has to be a total abolition of exchange controls. Exchange controls suggest that things are amiss in the country concerned and send out a negative signal to potential investors.

There has to be a flexible labour market.  SEZs must be exempted from onerous labour laws which discourage businesses from employing the people they need and the number they require. The labour dispensation should allow prospective employees to negotiate voluntary and individual employment terms with employers.  Exemption from having to comply with onerous labour laws will attract labour-intensive investments which are sorely needed to counteract our unhealthy unemployment rate. Such a scenario is informed by the economicdimension of labour law, rather than the socialdimensions such as safety and “decent” treatment which can be addressed in terms of existing common law.

Similarly required, is the removal of unnecessary red tape which raises the costs of doing business. Thousands of statutes, regulations, ordinances, by-laws, proclamations, directives, guidelines, and the like, are inappropriate in an SEZ. Identifying deterrents to investment found in laws governing insurance, banking, companies, immigration, customs, transport, energy, skills and communications requires a dedicated commitment to leave no stone unturned. This may seem quite daunting but it is a relatively straightforward administrative process if some decisive questions are posed, such as, Are these measures necessary? From an investor’s perspective, are they business-friendly? Do they render the potential investment attractive to investors?

The Maha Mumbai SEZ is one of several successful SEZs in India. Rajendra Singh, Executive Chairman of SKIL, writes that an SEZ is a “specifically delineated duty-free enclave ... deemed to be a foreign territory for the purposes of trade operations, and duties and tariffs.”  He further states that it should have  access to cheaper global capital (meaning no exchange controls or foreign exchange levies); exemption from income and capital gains tax; speedier labour dispute resolution; no customs duties on imported raw materials or capital goods; 25 year tax exemptions from state and regional taxes (turnover tax, sales tax, value added tax, entertainment tax, excise tax and property taxes); Offshore Banking Units (OBUs) in an SEZ should enjoy 100 per cent exemption from income tax; External Commercial Borrowings (ECBs) should be allowed and there should be freedom to retain or trade foreign exchange earnings; 100 per cent FDI should be allowed through an automatic approval route. There should be a one-stop shop regulatory system; Public Utility status, thus preventing flash-strikes, and there should be freedom to trade power without going through state electricity boards.

While this list is not comprehensive, the points highlighted by Rajendra Singh are the most crucial in ensuring the successful implementation of SEZs.

Policymakers who are contemplating such a bold and ambitious initiative, must take care to ensure that an SEZ is conceived from the perspective of potential investors.  Foreign investors are seldom concerned with the particular circumstances, historical or otherwise, of the countries in which they contemplate making an investment. Investor-friendliness should therefore be the primary litmus test for all aspects of the policy package.

Policymakers tasked with conceptualising SEZ’s and formulating appropriate policies and practical measures will have to be on their guard. Their proposals are likely to be challenged by other government departments and subjected to political interference that originates from vested interests within the ranks of business and labour. And they will be assaulted by yet other business-unfriendly, extra-parliamentary forces just as determined to serve their own narrow agendas. Such pressure groups, if they succeed in muddying the waters, will compromise the final product and the envisaged SEZ will result in an adulterated, wishy-washy muddle, requiring substantial injections of state (that is taxpayer) funds and fall among the world’s majority of failed SEZs.

Faced by South Africa’s powerful vested interests, the task of conceptualising SEZs properly is a tall order and politically hazardous. Those charged with the responsibility must be allowed the latitude to apply their minds to the problem without interference. They should be empowered, where necessary, to prescribe policy that they consider crucial and non-negotiable to relevant and involved government departments. The chosen team will need to have great political will and moral courage and the rest of government should be prepared (ordered) to listen and be guided by them.

The task team and everyone involved in government should be most encouraged by what has been unfolding in China and India, and elsewhere, in recent times with the establishment of successful, viable SEZs.

The South China Morning Post (29 September 2013) reported the recent establishment of a free trade zone in Shanghai that, according to official government sources “can also realise market-oriented financial institutions based on market needs.” Liu Ligang, chief economist at ANZ Hong Kong, said, “We believe Shanghai plans to replicate another Hong Kong through the free trade zone.”

How amazing that the Communist Party of China (CPC) has embarked so resolutely and irreversibly on the capitalist road by implementing such incredibly radical reforms. In China today, the wisdom of Deng Xiaoping reigns supreme. His catchphrase was “It does not matter if the colour of the cat is black or white, so long as it catches the mice.”

Source: 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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