Radical changes needed to fix unemployment in South Africa

South Africa’s special economic zones (SEZs) have failed to address the country’s unemployment crisis.

Now, radical reforms, including private sector involvement and regulatory flexibility, are needed to create jobs for millions of unskilled workers.

This was explained in the Centre for Development and Enterprise’s (CDE) latest report in its Agenda 2024 series, which comprises a set of catalytic actions to get the country back on track after 15 years of stagnation and decline.

The latest report, Action Nine, highlighted the need for bold reforms to transform South Africa’s SEZs into powerful instruments of new investment and job creation.

This report explained that South Africa is stuck in a low-growth, high-unemployment permacrisis.

A meagre average annual growth rate of 0.8% over the past decade means that a staggering 12.3 million South Africans want to work but cannot find a job.

SEZs are geographic zones where regulations differ from the rest of the economy, hence the term “special”.

Most successful SEZs focus on labour-intensive, export-driven manufacturing activities.

Bringing in foreign capital, technology, and skills – managerial, operational, or entrepreneurial – contributes enormously to the success of SEZs.

However, in South Africa, despite the government spending some R25 billion on SEZs since their inception in 2014, only four of the 12 designated zones have attracted meaningful commercial activity.

These four are Coega, East London Industrial Development Zone, Dube TradePort, and Tshwane Automotive SEZ.

Some R31 billion in investment has taken place, resulting in 27,000 jobs.

“South Africa’s SEZ programme has done very little to revitalise the manufacturing sector, to promote export-oriented industries, or to generate sufficient jobs to make even a small dent in the country’s unemployment crisis,” said CDE executive director Ann Bernstein.

According to the report, South Africa needs to draw inspiration from places like China and Mauritius that used their SEZs to enable localised reforms at a time when country-wide changes were ideologically unpalatable and politically unfeasible.

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Coega SEZ

“For an SEZ to be successful, it needs to truly be special,” Bernstein said. “It needs to offer investors different rules from the rest of the economy.”

She said the existing Coega SEZ is ideally situated for a pilot project to test whether and to what extent South Africa could create labour-intensive manufacturing that might absorb unskilled workers.

CDE made several proposals to establish a more experimental SEZ at Coega.

First, CDE suggested that wages, working conditions, piecework, productivity bonuses, and shift hours could be negotiated at the factory level in this SEZ.

This would reduce the impact of high sectoral minimum wages, particularly for smaller firms in the Coega SEZ, while still requiring compliance with the national minimum wage and adherence to health and safety regulations.

CDE also suggested that all goods made in the zone must be for export, and firms must be engaged in new activities.

Bernstein emphasised that, to prevent existing firms from simply relocating, all firms in the Coega SEZ must be new investments.

To prevent disadvantaging other firms in South Africa, zone-based firms will be required to export 100% of their output.

In addition, CDE explained that all imports should be made duty-free rather than subject to rebates.

Eliminating the time-consuming rebate process for firms in the SEZ would simplify processes, lower costs, and improve competitiveness.

CDE explained that the rules governing the movement and employment of skilled foreign entrepreneurs and managers should also be relaxed.

By easing the restrictions on skilled foreign managers, firms in the SEZ would be able to bring in expertise to help manage factories and insert South African exports into global markets.

Much of the know-how needed to navigate these highly competitive markets is not available in SA, so immigrant managers might be necessary to make these businesses competitive.

Finally, the SEZ should be operated as a commercial entity by the private sector.

Allowing an entrepreneur or private firm to manage the Coega SEZ would create a more effective environment for investors, with potential revenue for the government and efficient operation.

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Leveraging the private sector for SEZ success

“CDE is not calling for sweeping national labour law reform, nor are we pushing for the establishment of unsafe sweatshops exempt from health and safety laws,” Bernstein said.

“The national minimum wage will prevail while the Employment Tax Incentive – hopefully expanded – will lower employers’ wage costs.”

“If our proposals are implemented, we believe that globally competitive low-skill manufacturing in Coega is possible.”

She said the GNU has committed to prioritising faster economic growth, and now is a good time for the government to experiment and test the potential for labour-intensive manufacturing in South Africa.

To inject new vigour into the national SEZ programme as a whole, CDE proposed that South Africa follow global trends by giving the private sector a much more prominent role.

This reform has produced positive results in many countries, including Colombia, Turkey, and the Dominican Republic.

“International research suggests that private zones are less expensive to develop and operate than public zones and yield better economic results,” Bernstein said.

To unleash private sector energy, know-how, and risk appetite, the following steps must be taken:

• Reconstitute the SEZ Advisory Board – The board should be restructured to include mostly independent experts and private sector entrepreneurs, with some government officials, to ensure a fair and balanced decision-making process.
• Open up to a variety of privately run SEZs – Private companies should be allowed to propose and run SEZs on both public and private land, assuming financial risks while attracting new investments focused on export production and job creation.
• Adopt new, more flexible criteria for approval – New zones should be approved solely based on their potential to increase investment and create jobs rather than detailed and often unrealistic government-imposed criteria.
• Provision of reliable power, water, and other services – SEZ operators should be allowed to generate renewable energy and water from alternative sources and contract with private transport operators.

“The dissatisfaction with the existing SEZ programme inside the state has, predictably, led to calls by some for more centralised control,” Bernstein said.

“But the better solution is to open the programme to market forces and private sector expertise.”

“South Africa’s greatest challenge is creating jobs for millions of unskilled, inexperienced work seekers. A new experimental SEZ would be a kind of laboratory.”

“If it works, the lessons learned could be applied to the overarching SEZ programme and, eventually, to the economy as a whole.”