South Africa’s proposed Special Economic Zone PolicyPosted on Wednesday, June 6th, 2012 in Hot Seat Comments
SEZs could promote employment and economic growth in South Africa, but only if lessons from past failures are heeded
Sean Woolfrey, a tralac Researcher, discusses South Africa’s proposed Special Economic Zone Policy.
In November last year the Centre for Development and Enterprise (CDE) held a Round Table on the role special economic zones (SEZs) could play in promoting employment and economic growth in South Africa. Last week the CDE published edited proceedings of the Round Table, including a review of international experience with SEZs, a review of South Africa’s recent experience with industrial development zones (IDZs) and an analysis of proposed changes in South Africa’s legislation with regard to economic zones. This analysis is timely and the debates and issues raised in the report are particularly important given an increasing focus on the use of SEZs in Africa, changing global trends in the design and implementation of SEZs and recent moves by the South African government to overhaul its largely unsuccessful IDZ programme.
Beginning in 2001, the South African Government established four IDZs, at Coega, East London, Richards Bay and OR Tambo International Airport. These zones have largely failed to induce significant investment, however, and the rate of job creation in the zones has been disappointing. Having reviewed the performance of these IDZs, the government now recognises that due to a number of critical design weaknesses, its IDZ programme has not had the anticipated impact and has not fulfilled its potential for promoting investment and job creation. In light of this, earlier this year the Department of Trade and Industry (DTI) released for public comment a draft Special Economic Zones Policy and Special Economic Zones Bill.
The draft SEZ Bill, which is set to be tabled in Parliament later this year, signals the government’s desire to redesign and expand its IDZ programme by moving away from a narrow focus on IDZs – a particular category of SEZs which in the South African context have amounted to little more than glorified industrial parks – and towards the development of “diverse types of SEZs in accordance with the changing national economic development priorities as well as regional development needs and contexts”.
SEZs – essentially demarcated locations in which some aspect of the business environment differs from the rest of the country – have typically been established to, inter alia, attract foreign direct investment (FDI), alleviate high unemployment, support a wider economic reform strategy, test new policies and approaches or diversify production and exports. Since the late 1970s there has been a global proliferation of SEZs, especially in developing countries. The international experience with the use of SEZs has been somewhat mixed, however. In certain countries, such as Korea, China, Mauritius and a number of Central American nations, SEZs – often in the more specific form of export processing zones (EPZs) – have contributed greatly to export-led growth. In others, however, SEZs have failed to achieve their intended effects. In most African countries, for example, SEZs have largely failed to promote employment and export-led growth
African countries have been late adopters of SEZ programmes, with many, such as South Africa, only launching programmes in the 2000s. This is significant, as the global economic climate today differs in important respects from that of the 1980s and early 1990s, when SEZs played a prominent role in rapidly rising global trade and investment flows and the spread of global production networks. East Asia’s capture of the global manufacturing market, increased international competition for FDI, the expiration of the Multifibre Arrangement for global apparel trade, the consolidation of global value chains and, more recently, weaker demand in traditional export markets all pose challenges for African (and non-African) countries wishing to use SEZs to promote export-led growth. On the other hand, rising labour costs in China and other early adopters of SEZs provides an opportunity for African countries to become viable locations for global manufacturing activity, provided such countries are able to market themselves as attractive investment destinations. Other new opportunities include the emergence of regional markets and closer ‘South-South’ ties, as well as the growth of services offshoring.
SEZs can still play an important role in helping African countries to overcome existing constraints on attracting investment, diversifying production and growing exports. The nature of the design, implementation and management of such SEZs is likely to prove crucial, however, in determining whether African SEZs are able to promote employment and economic growth. South Africa’s recent experience with IDZs provides a good illustration of this.
The CDE report suggests that South Africa’s IDZs have failed to attract investment and therefore to contribute significantly to economic growth and job creation because there is nothing ‘special’ about these zones. Due to an aversion to introducing distortions into the domestic economy, the South African government has been unwilling to offer any special incentives to firms investing in these zones. For example, labour regulations in the IDZs do not deviate from those in the rest of the country. Furthermore, in practice firms investing or operating in IDZs do not receive significantly preferential treatment in terms of tax obligations. Other factors which have negatively affected the performance of IDZs in South Africa include the failure to devise a comprehensive policy framework, which has led to problems in planning, implementation and management of the IDZs, a lack of inter-agency coordination and a failure to adequately involve the private sector in the ownership and management of the zones.
In its draft SEZ Bill, the DTI claims it has learned important lessons from the failure of its IDZ programme and that these lessons will guide the new policy on SEZs. One of the identified failings of the IDZ programme relates to a lack of clarity in relation to governance and planning, and with this in mind, the DTI states that the new “SEZ Policy is being introduced to provide a clear policy framework with respect to the development, operations and management of SEZs”. The draft Bill is criticised in the CDE report, however, precisely for failing to provide clarity on the legal regime and incentives to be provided. In particular, the Bill is criticised for failing to clarify: i) how the establishment of an SEZ Board will improve governance; ii) the precise role envisioned for the private sector in the designation, development and management of zones; iii) the division of labour between zone boards, the Minister of Trade and Industry and the zone operator; and iv) the legal regime and incentives underpinning the zone programme.
Another criticism that could be levelled against the new direction being taken by the DTI concerns the suggestion that SEZs may be used as tools for creating economic opportunities in underdeveloped regions of the country and therefore will not be limited to areas near major ports. This flies in the face of international experience with SEZs, which provides substantial evidence that SEZs are inappropriate regional development tools, as the factors which result in certain regions performing poorly generally also deter investment in SEZs located in those regions. There is also plenty of evidence which suggests that SEZs are most successful when located close to major ports or trade gateway infrastructure.
It may be unfair to be highly critical of the SEZ Bill in its current form, as it is only a draft, and provisions relating to issues of zone designation, governance and the provision of incentives may yet be fleshed out so as to provide an appropriate and clear legal and regulatory framework. There are worrying signs, however, that the government has failed to fully incorporate the lessons from both local and international experience with SEZs. Important lessons that should be heeded in the development of a new SEZ programme include the need to introduce measure which actually incentivise new investment, the importance of infrastructure and infrastructural services provision and trade facilitation measures in order to ensure the global competitiveness of local SEZs and the important role the private sector can play in developing and managing zones.
If these and other lessons are heeded and a sufficiently clear legal and regulatory framework developed SEZs could play a significant role in promoting employment and economic growth in South Africa. If not, then the new SEZ programme is unlikely to prove any more successful than the old IDZ one.
- Centre for Development and Enterprise. 2012. Special Economic Zones: Lessons for South Africa from International Evidence and Local Experience. CDE Round Table Number 19, June 2012. CDE, Johannesburg
- Department of Trade and Industry. 2012. Policy on the Development of Special Economic Zones in South Africa. Government Gazette No. 34968, 23 January 2012. DTI, Pretoria.
- Farole, T. 2011. Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience. World Bank, Washington DC