In a new research report, the Centre for Development and Enterprise (CDE) is calling on government to change or adapt special economic zones (SEZs) into areas that are “actually and truly special”, offering a modified labour market regime to attract companies and investment.

CDE executive director Ann Bernstein points out that, although there are 11 SEZs in South Africa, none offer tenants a business environment that is meaningfully different from that of the surrounding economy.

Essentially, she says, current SEZs are nothing more than industrial and office parks in which the infrastructure is partially subsidised. “They do very little to address any of the constraints on business, especially businesses that wish to produce the kinds of goods that create lots of low-skill jobs.”

She adds that successful SEZs are those that serve as platforms for accelerated integration into global trade, combining foreign technology and know-how with local labour.

Referring to the proposed model in the report, CDE outlines that such a labour-intensive zone should be trialled at Coega, in the Eastern Cape, with the intention of making and selling goods for export.

Coega, says Bernstein, offers access to a port, has an existing industrial base and amenities and has infrastructure suited to attracting international investors. The area also has a large potential workforce from the Motherwell area, as well as access to people with exposure to industrial-type work.

PROPOSAL

She says international experience with SEZs shows that most fail, and in terms of such zones in South Africa, they have limited impact, come at a high cost and are not “sufficiently special”.

Bernstein adds that SEZs can play a critical role in helping to overcome political resistance to reforms that are needed to stimulate growth. “Using an SEZ to experiment with reforms helps demonstrate that those reforms can have a positive impact.”

This is what  Chinese market reformer Deng Xiaoping meant when he said that “you cross a river by feeling for stones”, notes Bernstein.

As such, the CDE points out that SEZs, which have been used by various countries around the world to kickstart development, are specially designated areas in which host countries seek to create a business environment that will attract investment.

The organisation further notes that SEZs have been critical to the developmental successes of East Asia, where zones have been established to attract foreign firms with access to technology and business know-how, and to build large export-oriented industries.

SEZs can be successful because they help put industrial development on an accelerated track, says Bernstein, adding that successful SEZs enable firms to become more competitive, more quickly than they would have otherwise.

“But many zones fail because policy-makers do not ensure that they address the real constraints businesses face.”

She says South Africa’s unemployment crisis means the country needs to focus its reform energies on jobs, and that a zone that offers employers greater flexibility could demonstrate the extent to which those reforms might unlock rapid employment creation.

“Coega is ideal for this experiment. The infrastructure already exists and is grossly underused.”

REFORMS

CDE suggests that the reforms needed for the experiment are not deep and involve the minimum wage still applying, as well as general health and safety rules. But beyond that, the organisation suggests factories would negotiate conditions of service at factory, not sectoral, level.

“Because everything that is produced in the zone would have to be exported, the businesses there would not be competing against local firms in the domestic market. This should reduce resistance from unions and business,” says Bernstein.

Labour-intensive manufacturing jobs have been the “lynchpin of industrialisation” throughout the world since the nineteenth century, she says, adding that historical experience shows they have been the key stepping stones for hundreds of millions of people to get out of poverty.