Special Economic Zones: South Africa's needs: Eunomix briefing

Economic Development

11 June 2013
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Mr Claude Baissac, Managing Director, Eunomix Baissac, and Secretary of The World economic Processing Zones Association, who acted as consultant, advisor and expert on sub-Saharan Africa economic policies and conditions to various organisations, gave a briefing to the Committee on the proposals for Special Economic Zones (SEZs). He distinguished them from other economic policies, as well as from the Industrial Development Zone (IDZ) model previously applied in South Africa, and set out what he perceived as the necessary conditions for them to be successful. He noted that his comments drew on examples and conditions that he had observed in Africa and other countries. He noted that SEZs essentially started as trade enhancing tools, known as free trade zones, but that between the 1950s and 1990s they had become prevalent tools of economic development. They essentially created special environments for successful conducting of business, and he emphasised that an essential element was that it was not government who should create the benefits directly, but government who needed to create the conditions in which private sector investment could allow benefits to flourish. They had frequently been used to make a successful transition, and the use of the word “Special” in the title implied that in these zones, the normal business and rules would not necessarily apply, in order to create a greater stimulus for trade.  The main problem, as he saw it, in South Africa was that neither labour nor government held a unified view as to why SEZs were being used. The Department of Trade and Industry, cautious not to create dissent, had done little more than add slightly to the existing IDZ model, so the “special” nature was not necessarily present, there was not strong enough emphasis on how investment would be attracted, with a particular emphasis on the strengths that South Africa could offer in the chosen places, and there was no strong rationale either for having two zones per province, irrespective of the special circumstances, or for trying to create ten zones, which he felt was a huge undertaking. Generally, SEZs would be used when governments realised that something in the current economic climate was not working, but he felt that if there was no clear differentiation from the generally-applicable situation, and a close and detailed examination of the needs of the infrastructure, regulation and implementation abilities, they would not be effective. All the constituents – regulatory regime, infrastructure and sound institutions to run the system – had to be in place.

He compared the concept of SEZ with IDZs, commercial free zones, export processing zones and free ports. He noted that, apart from Mauritius and some parts of Kenya, SEZs had not been generally successful in Africa. External factors were the need for a large, preferably international market available to investors, competitiveness in the national economy before the SEZs were created, strong government capacity, and internal factors included strong political and Parliamentary support, buy-in from the private sector and unions, a clear government strategy to grow the economy through SEZs, coherent investment support measures, not only limited to incentives, but including business licensing, access to competitive labour, not too restrictive labour laws and well priced utilities. He felt that in South Africa there had, to date, been over-emphasis on infrastructure, which made it impossible, or a very long-term proposition, to show success, as with Coega. It was vital to assess the economic problem that had to be solved and find a balanced way to address it.  The constraints to investment, economic transformation, exports, and attracting FDI must be taken into account when designing an SEZ to address them. Private sector participation was emphasised. He gave a critical analysis of the South African experience with the IDZ, and said that no proper evaluations had been done, and it was unfortunate that new and different approaches were not being investigated, and that the programme was not built on a clear understanding of South Africa’s comparative advantages and weaknesses. Furthermore the private sector was not adequately consulted.

Members were interested to hear the views but expressed their disagreement on some points. They questioned how Mr Baissac saw the Infrastructure Development Bill, and how the three spheres of government would be involved. They had some reservations whether it was appropriate to try any different labour policies, and said that business had to come to the party. However, one Member agreed with Mr Baissac that it was necessary to move away from “sacred cows” and take a bold stance. They questioned whether it was appropriate to try to draw parallels between the current and proposed structures, asked whether coastal or inland zones were likely to be more viable and suggested that perhaps the point was not whether the studies had been done, but whether there was enough synergy in government, and how other policies could be adapted to cater for South Africa’s unique history. A Member felt that South Africa had no time to experiment and it had to find the best way to create jobs, asked who would be the regulator, and drew a distinction between other countries because of the way they were developing. Members agreed that government needed to give consistent and strong guidance to economic policies.

Meeting report

Chairperson’s opening remarks:
The Chairperson introduced Mr Claude Baissac, Managing Director: Eunomix Baissac, and read out his credentials, noting that his academic background was in economic geography and political science, from France and the USA. He was well knowledgeable about the sub-Saharan states, with over 15 years of experience, and had been a political and economic consultant advising corporations and international organisations on economic policy, political risk, anti-corruption investigation, security and sustainable investment. He was a consultant at the World Bank on investment climate reform and accelerated growth, and was particularly passionate in discovering how best the private sector could establish new partnerships in support of accelerated growth. She noted that he was also an expert on Special Economic Zones and growth polls and was the secretary of the World Economic Processing Zones Association. He had contributed to numerous projects and analysis since 1994 including for the World Bank and the United Nations. He was involved in non-profit organisations, promoting balance and sustainable growth and development. She thanked Mr Baissac for honouring the Portfolio Committee’s invitation to present on Special Economic Zones (SEZs).

Eunomix briefing: Special economic zones for South Africa: Lessons from experience Mr Claude Baissac said he was honoured to have been invited to Parliament and quipped that he had been warned that he would be “grilled” on his presentation, and wanted to note that he tasted better with barbecue sauce.

He said he had been involved in Special Economic Zones (SEZs) he wanted to note that he had been informed that he would be grilled and asked that if that were to happen, he would like it if he were to be served with barbecue sauce, as he tasted much better like that.

He said that he had been involved with SEZs from his school days. In Mauritius, where he was brought up, there had been an industrial zone that looked very different from the usual sugar cane plantations and mountainous landscapes, had asked what it was and had received the response that that was the export processing zone. That difference had immediately sparked his interest, and he noted that the processing zone, as it happened, later became the foundation of a revolution in Mauritius. He had since been involved with SEZs for nearly twenty years and was hoping, today, to share some of his insights from international experience. He had quite definite views about the Industrial Development Zones (IDZ) and SEZ programmes in South Africa. He would contrast what was happening in South Africa with international best practice and experience, which would to some extent be quite theoretical. However, he hoped that his presentation would be a foundation for the Committee to interrogate Government policy and practice, to then contribute critically and usefully to the conversation on SEZs. He offered his services, should they be required, in the future also.

By way of background, he noted that SEZs essentially started as trade enhancing tools, known as free trade zones. In the late 1950s, countries decided to add manufacturing to Export Processing Zones (EPZs), and some consensus on how they should develop was reached more or less at the same time in Mexico, Ireland and South Korea. About thirty years ago, there were a handful of SEZs, compared to more than 3 000 SEZs in the world, and they were now a prevalent tool of economic development and policy. They were not just present in the emerging markets or developing countries, but even countries such as Japan was to deploy SEZs to accelerate economic growth.

SEZs were about creating a special environment for business to be conducted effectively. China, Dubai and Mexico had all agreed upon a common approach. SEZs were not the only tool, and it was not Governments only goal to create socio-economic benefits. SEZs were a manifestation of a policy that intended to create those benefits through the private sector, so the distinction was that with SEZs, government was not creating the benefits directly, but creating the conditions in which benefits would flourish.

In the past forty or fifty years, SEZs had been deployed for very specific types of transitional requirements. He drew a contrast between Russia and China. Russia went violently from state communism to free market enterprise, and the result was chaos and social, economic and political restructuring. On the contrary, China had chosen a progressive route, and for this country, SEZs had been likened to allowing people to cross a river barefoot, feeling for stones, as described by Deng Xiaoping. In countries like Malaysia, which had many similarities with South Africa, SEZs had been deployed in the 1960s and 70s to move 70’s from a structuralist endogenous industrialisation to an open export economy. Malaysia had many problems, for on independence, the Chinese minority had control of 99% of the economy, whilst the Malaysian majority was virtually excluded. While Government deployed policies that where aimed at advancing Malay economic interests, it had also decided to use SEZs where the Chinese population could freely invest in an export-oriented global market economy. That was highly successful, and Malaysia had, over twenty years or so, developed to a full open economy. In oil-rich countries, SEZs were being used as enclaves of economic policy reform, where other policies stopped reforms from happening, so SEZs were seen as pockets of efficiency in otherwise inefficient economic environments.

In South Africa, SEZs were being deployed to target reform of the investment climate, in a market economy that was burdened by regulation and inefficiencies, including allocation of resources. There did not seem to be a consensus, even in government, as to exactly why South Africa was developing SEZs.

However, Mr Baissac pointed out that all three words forming the title of SEZs were important. He explained that the SEZ’s “Special” nature lay in the regulatory framework of the laws, the taxes, the customs, all of which had to function outside the “business as usual” box. The investor locating to an SEZ knew s/he would get special treatment that would result in lower costs and greater efficiency. The “Economic” aspect related to the fact that those zones had to be about processing and creating added value, resulting in investment that created processes that would in turn create jobs, more investments and tax income. Finally the “Zones” aspect related to their location, both bound to and separated from the rest of the economy, with special infrastructure.

Mr Baissac outlined the attributes of SEZs, saying there was consensus that they had three key structural constituents. Governments wanted SEZs because they understood that something was not working in their investment climates, and would bring in finance or trade experts to create something different. Some were fearful of getting something too different from the norm. In South Africa, he felt that perhaps the bias was on a less important aspect. There was a need to create a legal space, where the rules of business would be different, and to superimpose that on the physical space. There was usually a need for one SEZ Act that would guarantee the safety of investments, where the rules were very clear with a strong bias to guarding the safety of investments. In certain countries, BEE rules would be considered when investing anywhere else in the economy but in an SEZ, but there was usually a corollary that those operating within the SEZ must not then compete on the domestic market, but sell directly to international markets. In the SEZ, a business licence would be approved more speedily. The SEZ wanted to attract the best, in order to attract the best investment and create jobs. SEZs in South Africa were essentially saying “Welcome to South Africa, the country is open for business, and we offer better business conditions than other countries”. However, he warned that if the SEZ law was weak and did not clearly differentiate from what was happening elsewhere in the open domestic economy, the less attractive that business proposition would be.

The second element of an SEZ was the physical infrastructure. Whilst it was important, it was not the most important component. Governments who might have spent billions of dollars on infrastructure, but had a flawed regulatory framework and institutional environment, were never going to attract Foreign Direct Investment (FDI). Companies would come into a country and commit because it was cost effective and their goods could be moved in and out quickly, which enabled them to serve their markets and remain competitive.

Implementing a good regulatory framework meant having good institutional capacity, to support the theoretical law and infrastructure. If there was no one to properly enforce the regulation, to accompany the investment or to promote the zone, and no strong licensing authority, the regime would remain dead and the infrastructure empty. When people thought about the institutions of SEZs, they tended to think of “one-stop shops”. Whilst this was important, again it could not be considered in isolation. He stressed that the three constituents were the regulatory regime, the infrastructure, and the institutions that ran those structures and the regime.

Mr Baissac then looked to some of the implications around economic instruments, and described some examples:
- Industrial Development Zones (IDZs) that were initially set up in South Africa had certain similarities with SEZs, but they were not “special”.
-Commercial Free Zones had been used well in Panama for connecting North America to South America.
-Export Processing Zones were about manufacturing for exports. In certain countries with free enterprises, the status of EPZ was allocated to individual companies. In small countries, that made sense, as a company would always be the same distance away from the port.
-Freeports were essentially the Chinese model of SEZs in towns and provinces with residential areas. In these regions, everything was run by a single SEZ authority, that effectively acted as a government, but under different rules of business that applied to, for instance, tourism, trade, retail, banking and real estate development. The whole point was again to stress that things could be done “differently”, with a benefit.

Lessons from 40 years of experience in SEZ deployment in Africa had unearthed some key lessons. Apart from Mauritius and a small part of Kenya, SEZs had mostly failed in Africa, not fulfilling the role that they had played in Latin America and in Asia in turning the economy around.

One exogenous factor was that success tended to be determined by the size of the market accessible to the investors. The bigger the market, the greater the opportunities, the greater the up-scaling of the economy, and the more likely that the SEZ would succeed. If the SEZ market was limited to South Africa alone, or the Southern African Customs Union (SACU), there would be constraints, but expansion to other markets would already carry a cost advantage. This led to the conclusion that SEZs had to be targeted at large, preferably international markets.

The second critical success factor was that the national economy itself had to be very competitive. Countries that were not competitive, but created SEZs hoping to attract investors, found that they did not succeed because their factors of production tended to be uncompetitive. The implication was that the world economy and SEZs only rewarded winners, whilst losers tended to be excluded.

The third condition was that Government capacity had to be strong. Mr Baissac noted that he had worked for five years in the Democratic Republic of Congo (DRC) on an SEZ project, and had found that it would not work because there was a high dysfunctionality and overwhelming levels of corruption there.

Internal, or endogenous factors also played a part. Those SEZs that were successful generally had eight factors supporting them. Firstly, it was essential to have strong political support from Parliament, the unions, the private sector, and from the different branches of Government, to develop a successful SEZ programme. Where there was insufficient Government support, SEZ programmes tended to fail, because the public administration would not be working effectively with Government, the private sector would not invest, and the unions would resist.

The SEZ policy had to be part of a Government’s broad economic policy and strategy to grow its economy. It was essential for relevant administrations to buy into the project, get involved, and be consulted in designing the policy. Consensus was necessary.

A coherent set of investment support measures must be in place, and Mr Baissac emphasised that this did not only mean incentives, but rather a balance of measures that would create a compelling competitive environment. Tax was part of the environment, but it was also important to consider the effects of business licensing, access to competitive labour, well-priced electricity and services, and a good but not overly-restrictive labour legislation environment, that met the market-place demands. He stressed that it was most important to combine incentives with investment support measures, quality infrastructure and a good institutional framework, which would all would create a compelling offering for the investor.

He added that there was no need to have multibillion-dollar infrastructure, to attract investors, but rather an internationally good, cost-effective infrastructure. Quality and fair pricing of utilities were key.

Mr Baissac then made the point that SEZs were “packages of competitiveness enhancement measures turbocharged”. There was no point, however, in rushing to create a package before knowing the economic problem that had to be solved. Zones could do certain things, for certain places, at certain costs. The key issue when deploying an SEZ was to understand what the constraints were, to investment, economic transformation, exports, and attracting FDI, and then designing the SEZ to address those constraints, through a rational analytical process.

Private sector participation was important, and this did not just mean getting investors to set up factories in the SEZ. The private sector often was very well aware of the constraints to business investment, operation, legislation and regulation, and for this reason it was vital that this sector must be consulted.

Mr Baissac described the South African experience to date. He noted that the IDZs were part of the national territory, from the standpoint of customs, business licensing, taxation and incentives. However, they were not SEZs, but were rather in the nature of fancy, well endowed but perhaps not ideally-located big industrial zones that had been receiving support from the Government. The Department of Trade and Industry (dti) had recently acknowledged that there had been problems with the IDZ programme. This was perhaps why it had said that the IDZs would now be incorporated into the SEZ policy. However, he pointed out that usually, the best SEZ policy occurred when a zone authority was given the power to license businesses on behalf of ministries and authorities, so it was essentially delegated to act on behalf of government. There was still lack of consensus between the National Treasury (NT) and the dti over investment incentives. There was also lack of support for simplifying labour rules from both the Department of Labour and from the unions. That meant that currently, South Africa could not do a proper evaluation of the law, because it did not know the investment value proposition.

Surveys done into investment confidence and sentiment about South Africa had highlighted that one of the main problems was perceived to be inflexible labour terms, and that would seemingly not soon be resolved. It was unfortunate that SEZs were not seen, in South Africa, as an opportunity to try something new and different from the cumbersome main business environment, which was known also to lead to job losses.

He said that South Africa often over-designed its infrastructure because of a prevailing sentiment that visibly excellent infrastructure would attract investors. However, SEZs were only good if they brought more benefit than they cost. The problem with IDZs was that they had in fact not done this. Because tax revenue was such a scarce resource in South Africa,  they had to be deployed where they would have the most impact. In South Africa, there was an over emphasis on costly infrastructure, and a lack of balance in the other measures.

He added that it was important to build an SEZ programme on a clear understanding of the country’s comparative advantages and weaknesses. Mr Baissac was not convinced that South Africa’s SEZ programme was indeed based on a thorough and objective analysis of what was constraining growth and investment in South Africa. He said this for two reasons; the first was that there had been not been feasibility studies into specific sectors for specific SEZs, but rather a broad national sector identification, which did not take into account a particular sector’s comparative strengths in a particular location. Secondly, he questioned why Government had identified ten SEZs. Ten was, firstly, a huge figure, and the cost and capacity requirements would be staggering, and there appeared to be no specific rationale behind the division into two for each province.

Private sector associations had further complained that the SEZ policy was delivered as a “done deal”, and they too were questioning the rationale, incentives, the location and the sectoral focus. If these associations were not consulted and were not involved in the design, choice of location and infrastructure investment, the chances were that the offering would not be considered very attractive. In Coega, whilst it was true that there was now at last more investment, with more factories and more jobs available, it was necessary to ask at what cost this had finally happened. He was also concerned that the ten new SEZs might come at an enormous cost.

Mr Z Ntuli (ANC) wanted to know whether Mr Baissac had read the Infrastructure Development Bill that was out for public comment, and had drawn comparisons with the SEZ policy. He asked if Mr Baissac thought that Bill was moving in the correct direction, considering the structure of three spheres of Government, which were understood to be independent of each other.

Mr Baissac responded that he had not read the Bill, and therefore could not comment specifically on it. He agreed that the three spheres of Government would relate even though they were independent of each other. However, he pointed out that the IDZ policy was supposed to be driven by the private sector, but there was only one private sector operator who had taken the lead, in Richards Bay. Even that had not been sufficiently successful. East London was presented as a private sector initiative, but was actually run by the provincial Government, so although there was inter-governmental cooperation, the money came from the fiscus. If one party kept paying the bills, that would be a problem.

Mr S Mohai (ANC) took issue with the point that the SEZs should be ‘liberal from a policy perspective, and more effective from an administrative perspective’. In all the current social or liberal democracies, irrespective of instability, growth prospects were high, with countries like Nigeria projecting 7% growth, whilst South Africa was revising its projections downwards, despite having a strong developmental legal framework and other measures mentioned as prerequisites for a thriving economy. He had some serious reservations on the labour legislation. The National Economic Development and Labour Council (NEDLAC) facilitated discussion between business, labour and government. The recent amendments before Parliament on the labour legislation touched on the issue of labour brokers, but if government were to agree to perpetuate the labour brokers’ position, that would trap South Africans in poor socio-economic conditions for a long time, and labour broking was, by its very nature, not transformative. Business had to come to the party, if the country was to move from one phase to anther. If nobody wanted to compromise on labour issues, then the country’s growth and development would stagnate.

Mr S Ngonyama agreed with Mr Mohai and said he supported the statement, made in the presentation, that it was necessary to do away with the “sacred cows”.

Mr Ngonyama asked what Mr Baissac suggested that the State could do to address past imbalances and ensure that SEZs functioned to serve their beneficiaries, and how he was suggesting that consensus be achieved between Government and the private sector. It was, of course, necessary to factor in the constitutional imperatives, to avoid anything that would lead to court action if, in the attempt to develop “Special” to a greater extent, it ended up by undermining the people’s constitutional rights.

Mr Ngonyama had raised, in his budget speech, a question whether there had been a thorough enough analysis of why the country was moving from IDZs to SEZs, and if there had been an analysis of why it was important for the country to move in that direction. He questioned if the dti had since done that, noting that Mr Baissac had been appointed as a consultant in that venture, and whether his observations had been appreciated by dti.

Mr Ngonyama further asked how Mr Baissac saw South Africa’s role in SEZ development within the BRICS national market economy.

Ms D Tsotesti (ANC) said that she had been expecting to hear more about the latest business developments in the country and on the Nedlac engagement. She had expected constructive critique on the country’s plans, as there had been a lot of progress since the new dispensation. A plan was one thing, but implementation was another, although it did need to be criticised or monitored from time to time. She asked, with reference to the standard of living in South Africa, what Mr Baissac might consider a reasonable living wage.

The Chairperson wanted to know the main difference between an IDZ and an SEZ, pointing out that the former was in existence, and the latter merely mooted for the future, so she was not sure whether it was fair to criticise them both. The IDZs were coastally located, and the SEZs were proposed to be situated inland. She took note of the comment that this could lead to regional development instead of helping the private sector to invest more.

She felt, in relation to China’s current strategy, that this country had also noted the observation about inland development. She questioned which, in his opinion, was more viable; coastal or inland development zones.

She differed with Mr Baissac over the existence of impact assessment studies for IDZ development, saying that Mr Ngonyama knew about those studies as those were prerequisite for such programmes. Perhaps the point was rather whether there was enough coordination and synergy of programmes across the different spheres of government. She also stated that she ideally would have liked Mr Baissac to focus more on the weaknesses he had identified on the SEZ policy. She did, however, want to make the point that South Africa had always approached things differently from other countries, owing to its unique need to address historical imbalances, so it was important to track down the direction of policy development direction since the new dispensation.

Mr Baissac replied that he was aware of the country’s history but his presentation had been specifically geared from the viewpoint of an international independent technical expert on SEZ development and deployment instead.

He wanted to touch on the role of the state in market development, and said that it was generally accepted that the greater the social dislocation, of the effect of war had been in a country, the greater the need for government interventions. To Mr Baissac, SEZs were a tool to strike a particular balance at a specific political time. South Africa had, on the one hand, a very liberal economy, and a dynamic private sector that was largely unregulated, which had led to lack of competition and collusion between players, which was antitrust and anti competitive behaviour that damaged the national interest of consumers and labour. For these reasons, he was not a specific advocate for private sector interests. He did feel that at some point, the private sector must invest, instead of the state, because Government did not have an unlimited technocratic, political and fiscal capacity to attend to everything, whereas the private sector had enormous capital resources that needed mobilisation. The ideal social contract between members of society was that the private sector should invest, in a way that was socially, legally and morally responsible, and competition should be guaranteed, so that prices were kept low and goods were available. He maintained that SEZs were ideally policy tools, so that government would decide who received what and who did what. South Africa  needed real SEZs, as he had defined them.

Location of labour was one of the unresolved problems of South Africa. Labour, business and unions could not agree on the basics of policy direction and commitments. Sometimes perhaps South Africans saw themselves as too exceptional and that stopped them from doing what was right. If the government could not formulate and run SEZs policy properly, it would be a costly exercise.

Issues around labour legislation were of a political nature, but from the point of view of international competitiveness and access to labour, there was a real problem in South Africa, which was not currently being resolved. He pointed to the example of the youth wage subsidy which was, in theory, simple and non-threatening, and would not displace anyone. However, it remained controversial. It therefore stood to reason that there would be a lot of difficulty in legislating for other labour conditions. However, he still proposed that in South Africa, SEZs should be the way to experiment and change matters, in a way that would not apply in the normal situations between social partners. There was a need to find out how the fundamental distrust between the market and labour could be resolved by some way other than parliamentary debates.

He said that if the State could see SEZs as trying out the private sector in a different role, then it would make sense to try to establish a one-stop shop where all the administration and other measures were all in one place, with a simplified hiring and firing system that applied only to those SEZs, perhaps for a five-year trial period, during which the viability of those SEZs should be tested out.

Mr Baissac did not believe that social development and life expectancy were at opposites with economic development. There was no development without economic growth.

In regard to the comment on BRICS, he pointed out that South Africa was the slowest growing member of the BRICS, and this had been the case for the last twenty years. He felt that South Africa needed high growth for the next 20-25 years.

He emphasised that an examination of all the emerging market economies would show that each one of them had used SEZs as a tool for transition from low to fast growth. In Mauritius, from 1977-79, there had been social unrest, and there the government eventually understood that they had to give jobs to people. There was no way of growing a fair and stable society when people were unemployed, and it was understood that continuous welfare allocations would be unproductive and unsustainable. The economists’ stance was that it was better to be exploited for a certain time, than to be “thrown away” in the sense of never being able to work. At the current rate of unemployment, there was a sense of a tremendous waste of social capital, because people were not being gainfully employed, not contributing to their families, not building a sense of their own pride and worth and learning skills that could be passed on to their children. If this situation remained the same for the next four or five years, with the current instability, it would be of huge concern, and that was why he had said that the time to hold with “sacred cows” had passed.

He said that when the dti had done its diagnostics on its SEZ policy, it had been very careful to avoid upsetting certain individuals or co-operations. The resultant “new SEZ policy” was therefore little more than a little on top of the old IDZ policy. It would take huge political will and good administration to get to SEZs that were effective, with everything that was required, with only one trial zone.

Mr Ngonyama said he held different views to those of Mr Baissac, and his argument was that South Africa could not experiment on the feasibility of SEZs. There was a massive need for job creation in South Africa. He said that maybe Mr Baissac was correct in noting the over-emphasis on infrastructure design, but questioned why that would be damaging in the long term.

Mr Ngonyama asked who would be the regulator in the inputs that Mr Baissac was mentioning.

At that juncture the Chairperson told Mr Baissac that as he was responding, that prompted follow up questions from the Committee. It was important for the Committee to get the proper gist from his presentation.

Mr Mohai commented on examples with SEZ successes and said that it appeared that there was unconditional world support for countries that were tourist destinations before SEZ deployment, but then South Africa needed, on its own, to re-evaluate its policies, and whether they yielded positive results. Studies continued to show that there was a difference between factories in, for instance, China and South Africa, because of the way a country was developing. There were areas of potential growth where an SEZ was warranted, like in Free State, but proper articulation in policy and technical feasibility was needed to justify the SEZ.

Mr Baissac said that the National Development Plan (NDP) and the New Growth Path (NGP) were all experiments. The beneficiation strategy was another experiment, which he would argue was not working, as it had been based on the notion that there was abundant electricity, which was not the fact any more.

He likened the SEZs to the country giving itself an insurance policy with the power track of development and growth, which was based on the SEZ having lower regulations and lower taxes, combined with a certain kind of infrastructure and one-stop shop public administrations, so that the balance of evidence could be observed in the future between a state-centric, parastatal-driven economic policy and something that was more responsive to international markets, based on comparative advantage that was changing rapidly.

The current state policies were employment unfriendly and there was a strong bias against labour intensive industries, because they were associated with exploitation, bad working conditions and low wages. The proposition that the minimum wage for textile industries in South Africa should be R750 could not be generalized, for this would not necessarily enable South Africa to compete internationally, for the question was more how effective productivity was than how much was paid as wages. The cost of making the product, not the worker salary, determined the unit cost.

He agreed that South Africa’s government had to come up with policies that put people back to work. He cited the example that during the Second World War, the United States (US) needed a lot of labour because so many of their men were at war, so it had allowed Mexicans to work in the US factories and their fields, only to ask them to leave again after the War ended. However, the US government had, at the time, allowed Mexico to export its goods to America at lower duty costs, to help to boost employment of the Mexican workforce close to the US and Mexico border. Many American companies started investing in factories and industrial zones on the border belt between the two countries, which had in turn initiated EPZs and SEZs, and that led to 1.2 million jobs for Mexicans by 1985-90, which paid well and created trust between Mexico and the US.

He noted that the unfettered working of the market did not solve all society’s’ problems but tapping into those resources could contribute to society’s increased growth, and the remaining problems created by markets were to be solved by Government.

Apartheid had indeed damaged South Africa, through the homeland policies of forcibly moving people away from their jobs and putting them where there were no jobs. Evidence from international experience showed that creating a decentralised economic development was usually very costly, because of lack of social capital, infrastructure and assets. Only a few SEZs had been successful in creating decentralised peripheral development, and only where there was no widely trained educated labour force. Infrastructure had to be subsidised and shipping was very costly. Businesses did not invest in such places, except in the case of Lesotho, where 40 000 people were manufacturing garments for the American market competitively.

South Africa had 48 million people and vast mineral resources, as well as having infrastructure, good connectivity and a potentially very large market in the African continent. The Lesotho example showed that, with the right policies, with support from government, and the right market access, it was possible to employ anyone and create a productive contribution to society.

There were several models for regulating SEZs. There was usually an independent body of administrators, acting autonomously, but on behalf of the government. It was, as he had stressed, vital to have access to large markets. In South Africa, many textile companies were currently closing up and moving to Lesotho, because they found that South Africa had unfriendly regulations, uncooperative public administration, and difficult and fractious labour unions.

The Chairperson reminded Mr Ngonyama that IDZs were pilot experiments and he replied that, primarily, the country’s main priority was job creation to curb unemployment.

She noted her agreement with some of Mr Baissac’s assessments, but would differ on the approaches utilised for SEZ. Mr Baissac had, however, brought a fresh perspective on the issues hampering SEZ development. She agreed that government’s presence was always required to guide the economic policies, and not only when the industries were failing and there were problems that were created by the market.

She noted that this was a first meeting on the topic.

The meeting was adjourned.


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