South Africa should establish economic enclaves that are free from normal rules, similar to what Hong Kong is doing for China.
Minister of Trade and Industry Rob Davies’s new special economic zones fall in the politicians’ old syllogism: we have economic problems; something needs to be done; other countries are doing this; we must do this.
Reality may sober the dream. Special economic zones are supposed to work where the industrial development zones failed. The latter were placed in the most strategic economic nodes—at international airports and sea ports. Taxpayers poured into them R5.3-billion directly and more than R6-billion if one considers all indirect expenses and budgetary allocations. In 10 years the industrial development zones only attracted investment worth R11.8-billion, which, at the most optimistic average rate of taxable retained earnings of 10%, mean taxpayers will never get a meaningful return on their investment.
Employment figures were also disappointing. Most jobs were generated by the building of infrastructure rather than by the businesses such infrastructure was supposed to attract—the majority of the 33 000 was construction and temporary jobs.
There is consensus that the industrial development zones did not work as intended. But Davies assures us that the same concept, repackaged under the new name of special economic zones, will work just fine in remote rural areas and wants Parliament to write him a blank cheque to make it so. He wants the statutory power to create these economic zones where he wishes and establish in them unique regulatory and fiscal rules. He also wants the power to give businesses located in them as many subsidies as he deems necessary, including grants, loans, tax breaks, discounted electricity and free infrastructure.
When asked why Parliament could not approve an entire package of subsidies given to an economic zone on a case-by-case basis rather than giving a blank cheque to the minister for all, Davies’s advisers answered that it would take too long and each case was too different to be dealt with legislatively. Therefore, taxpayers will have no say over what the new beneficiaries will get of this extension of the welfare state to industrialists.
An additional problem, of a constitutional nature, is that the economic zones violate the equality clause in our Constitution in that those manufacturing in them would pay less taxes and abide by a different set of rules than those doing exactly the same thing outside them.
More fundamentally, we are dealing with the problem without fixing it. The need for development and economic zones arises from the realisation that our fiscal and regulatory environment is neither conducive to doing business nor internationally competitive, ranging from the lack of flexibility in the labour market to inadequate government services, taxes and manufacturing requirements. Plus, our logistics—railways and harbours—are obsolete, anticompetitive and too expensive.
This is the problem that needs fixing in the whole of South Africa. We have an overburdened and overburdening welfare state wrapped both in uncontrollable corruption and the self-delusion of one day growing into a “developmental state”. Instead of fixing this, the politician’s idea is to create enclaves where lucky manufacturers would get out of these burdens while the others elsewhere, including the small, medium and micro enterprises the government wants to assist, will need to put up with the situation as it is.
To overcome these objections, Davies’s last argument is that economic zones are a must-do and must-have because the countries we are competing with have them. Ideologically, neither I nor the Inkatha Freedom Party can object to the abstract notion of these zones. In the 1980s, party leader Mangosuthu Buthelezi pioneered them in KwaZulu, where they still exist and work well. In the constitution adopted by the KwaZulu legislature in December 1992, we made provision for both Durban and Richard’s Bay to be given the special status of free ports exempt from the application of the fiscal and regulatory rules of the country.
We realised that, to bring about the intended result, one needed to have a constitutional dispensation that took the area concerned out of the general constitutional jurisdiction of South Africa, albeit for a limited purpose. This remains the proper and successful way of doing it, because half measures will not work.
This is how Hong Kong now performs for the whole of China and various principates did in Europe in the past. Southern Africa needs its own Hong Kong, Macau, Lichtenstein, Isle of Man or Monaco, both as special manufacturing zones as well as financial and free research and development enclaves. However, this requires courage, constitutional amendments and vision.
Some of the industrial zones could be given such extraordinary constitutional autonomy or quasi-independence. Richards Bay could be our truly free port taken out of the Transnet complex. As some would want it, in the Western Cape a semi-independent state could be established in the Republic of Hout Bay comprising Hout Bay, Llandudno, Camps Bay, Noordhoek, Kommetjie, Tokai, Constantia and Bishopscourt, providing an enclave of an alternative, free-market and non-welfare-based way of doing business, which could become to South Africa the engine of development that Singapore is to Malaysia. Other areas with no existing infrastructure of national importance could also be considered for such a courageous experiment. For instance, small Paraguay has 11 true free-trade zones.
Given freedom, such an area will soon see mushrooming skyscrapers the way undeveloped Singapore did when it broke away from Malaysia. Nonsense? Not quite. The Dubai International Financial Centre, which was set up in the desert as a centre of excellence to benefit an entire subcontinent, is a free zone that, inter alia, offers a zero-percent tax rate on income and profits, no restrictions on income repatriation and no exchange controls, resulting in total investment flexibility. It has its own separate laws governing financial services and commercial transactions, enforced by its own separate, independent judicial system. This is what we should match.
Forty years of National Party and 18 years of ANC government have pursued economically identical industrial policies, albeit for different beneficiaries. South Africa is now married to an economically self-defeating welfare plan for internationally uncompetitive industrialists. The industrialist-government welfare compact is based on subsidies, protected or tolerated cartels and monopolies, tariff barriers, preferential tenders with resulting higher pricing and government-backed conditions for higher pricing and forced transfers from consumers, all of which compounds the unsustainable cost of keeping millions of poor on social grants. There is little space for the desperately needed “let us do and let our goods go through”.
The best we can do is to create redeeming enclaves of economic sanity that, instead of receiving more subsidies, as planned for the economic zones, receive the freedom of free trade or semi-independent zones. In these enclaves, free market, not size, matters. Monaco is only 2km2, Macau 22km2, Lichtenstein 160km2, Andorra 468km2, Isle of Man 572km2, Singapore 697km2 and Hong Kong 1 140km2.
In the absence of courage, we will just end up throwing more money at problems to enable politicians to be seen as dealing with them, while in fact accumulating economic losses.
Mario Ambrosini is an MP and IFP spokesperson on trade and industry