ANN BERNSTEIN: SA has nothing to lose by trying something different

SA’s economic stagnation is a crisis that cannot be ignored. Over the past decade GDP growth has barely exceeded 0.8% annually, while the number of unemployed South Africans has skyrocketed from about 8-million in 2014 to more than 12-million now.

The idea that business-as-usual approaches to policy will turn this around is thoroughly discredited by this catastrophic history. It is astonishing that a government that purports to represent the poor and the marginalised has failed to register the need for fundamental change, much less act on it.

Or perhaps that misstates the problem. Perhaps the reality is that the government knows how badly it is failing its largest and most deprived constituencies, but cannot muster the intellectual and political courage needed to change tack.

If that is the case there is a potential solution. Instead of implementing deep, far-reaching reforms to policies that affect the entire economy, what might be needed is a mechanism for testing whether changes to the way in which the economy is regulated would result in faster employment growth.

Instead of tackling the admittedly complex and contentious task of reforming the whole labour market, for example, might it be possible to test what a few well-chosen changes might do for the employment prospects of young, inexperienced work-seekers in a controlled environment from which appropriate lessons might be drawn? 

Happily, such a mechanism can be created reasonably easily through legislation that governs the creation and regulation of special economic zones (SEZs), spatially defined areas designated in law within whose boundaries business conditions differ from the rest of the economy — hence the term “special”. For example, the different circumstances in such zones could include differences in trade rules or corporate tax rates, in employment rules or in eligibility for targeted subsidies.

In many countries SEZs focus on labour-intensive, export-driven, manufacturing activities. The extent to which SEZs are able to attract foreign capital, technology and skills — managerial, operational or entrepreneurial — contributes enormously to their success (or lack thereof). The aim is to integrate zone-based firms more efficiently into global value chains, and proximity to a port is therefore essential for an SEZ’s success. 

Across the globe many zones have failed, but there are several instances where SEZs have played a catalytic role in driving economic success. In China, for example, after decades of hostility towards the private sector SEZs were used to create environments in which foreign companies could invest with confidence, in the expectation of support rather than hostility and interference.

Deng Xiaoping’s motto that a river should be crossed by feeling for stones justified an experimental approach to policy in the zones, enabling him to overcome entrenched opposition to reform by demonstrating the enormous developmental gains generated by their success — investment by foreign companies, rapid employment growth and rising wages.

In Mauritius, businesses that benefited from high tariffs that protected them from foreign competition resisted greater integration into global supply chains since this would require a reduction in import tariffs. When Mauritius gained preferential access to world markets through global trade agreements such as the Multi-Fibre Arrangement, the government passed legislation establishing industrial zones in the early 1970s.

In these zones, qualifying businesses could import materials at a far lower tariff, making it possible for the garment industry to take off. Apart from lower tariffs, zone-located firms were also permitted to pay below minimum wage levels and they were allowed greater flexibility in terminating employment contracts.

The result was an increase in the country’s growth rate and a dramatic reduction of national unemployment. In the early years of the new, export-orientated policy, unemployment was more than 20%. By 1987, the economy had reached full employment.

These experiences are relevant for SA, because they show how SEZs could provide a plausible pathway for change designed to test how policy reform might affect employment growth. Unfortunately, that is not how our SEZs work. 

SEZs were initially introduced by legislation creating Industrial Development Zones (IDZs), amendments to which created SEZs in 2014. The legislation was premised on the idea that SEZs would facilitate foreign investment, creating jobs and bolstering industrialisation. Two decades later, though, they remain largely ineffective. Billions of rand have been poured into these zones, but their economic impact has been marginal at best, and may actually be negative given their costs.

Our SEZ programme has failed largely because the zones are insufficiently “special”, providing few, if any, improvements on the wider business environment. As a result, they attract little investment that would not have taken place anyway, with many companies relocating operations from outside to inside the zone. Having business environments that are little different from the rest of SA, the SEZs have also been unable to compete with their global counterparts.

For SEZs to become catalysts for growth a new approach is needed. This is especially true if SEZs were to be used to facilitate the emergence of labour-intensive, export-orientated manufacturing firms that could create many commercially sustainable jobs.

This is possible, but only if firms in the zones receive some critical concessions. To test this, the Centre for Development & Enterprise (CDE) is proposing that Coega, the largest and oldest SEZ — still mainly empty — be designated for labour-intensive, export-orientated manufacturing firms and that these are attracted on the basis of a package of critical policy differences from the rest of the country.

These concessions would include exemption from agreements reached in sectoral bargaining chambers, so that wages and other conditions of employment (piecework, productivity bonuses, shift hours) would be negotiated at factory level (with the national minimum wage serving as a wage floor). Firms in the zone should have access to a more generous employment tax incentive, one that would not be time-bound and would not be limited to young workers only.

These concessions would make firms’ employment costs competitive with those of other countries where labour-intensive, export-orientated manufacturing occurs. Basic health and safety rules would continue.

These concessions would give zone-located firms advantages over companies in the rest of the economy. It would, therefore, be a requirement that firms in the zone export 100% of their production. This would also justify an exemption from all duties and tariffs on imported inputs.

The high level of competition faced by, and the low margins of, firms competing in global markets for low-skill manufactured products (T-shirts, toy and electronics assembly) would justify one further concession: companies in these zones should be allowed to import skilled managers who know and understand global markets. The skills and know-how needed to succeed in these markets is absent in SA, so expecting firms to locate here without permitting them to import the needed skills is unrealistic.

How many people might be employed in Coega if a policy experiment of the kind proposed here were conducted? The answer is unknowable. What we do know is that our approaches to creating employment for unskilled, inexperienced work-seekers are failing dismally.

The time has come to establish an SEZ that is truly “special”, where we can test whether a different approach would yield better results. What do we have to lose?

• Bernstein is executive director of the CDE. This article is based on the centre’s latest report, “Action Nine: Use the private sector to turbocharge the SEZ programme”, part of the Agenda 2024 series.