SA must enter this no-go zone

The paucity of employment growth remains an intractable problem facing policymakers in South Africa,” says the latest Quarterly Bulletin of the South African Reserve Bank.  

“Employment opportunities in the major formal sectors of the economy have been declining since 1989, relegating growing numbers of workers to low-quality jobs in the informal economy, to unemployment and poverty.

“Some improvement set in during 2002, when employment totals in the formal sector economy increased for two consecutive quarters.”

The challenge is clear — it’s all about jobs.

In the context of more than half a million job losses in the early 1990s and an unemployment rate above 30%, the marginal increases in employment cited above are cold comfort and cannot address poverty and unemployment in a meaningful manner.

South Africa has two fundamental problems. Firstly, there is a mismatch between the low skills levels in the economy and the skills-intensive services sector of the economy, which is currently driving South Africa’s economic growth rate — and consequent labour absorption.

This leaves the unskilled largely unengaged in the economic process, unemployed and destitute in the absence of clear social security policy.

Secondly, there is a clear conflict between the interests of the employed labour aristocracy and a battery of laws protecting their rights, and the general good. Unit labour costs are rising, and productivity is declining, with inflationary consequences. Stifling labour laws, designed to protect the labour aristocracy, are among the obstacles facing millions of job-seekers.

What do we do about this “intractable problem” and its skills dimension?

In the 2003 Budget, the government’s vision on unemployment was minimal. It entailed improvements in the regulatory environment for small business; streamlining dispute resolution and regulatory institutions; promoting skills development; spending on infrastructure and expanding provincial social services.

The Democratic Alliance has identified four obstacles to job-creation: insufficient political commitment; inadequate fixed investment; a shortage of skilled people; and an enterprise-unfriendly environment.

These brakes on faster economic growth and job-creation must be removed. We need growth rates in excess of 6%.

The second step is to abandon all the holy cows and no-go areas of economic debate.

We have a dual economy, with substantial First World and Third World components, and special measures are needed to redress joblessness among the semi-skilled and unskilled. The race for jobs is a race with workers in Vietnam, Malaysia, India, China and other  developing countries — which have a similar skills profile but have sought more creative and politically courageous solutions.

We need to make it more attractive to build a factory here than elsewhere. We have several advantages over many developing countries, including a more sophisticated economy and political system, superior financial infrastructure and a relatively visitor-friendly environment.

Export-led growth still has a substantial role to play in accelerating growth. To enhance it, we need to consider new ways of boosting our export performance with available skills.

Export processing zones (EPZs) provide a platform to increase exports, attract fixed direct investment and employ lower-skilled workers.

EPZs lure foreign investors by providing enclaves of specially tailored provisions and regulations, including access to duty-free imports of capital and intermediate goods; special administrative procedures, especially to expedite customs clearance; and, in some countries, tax holidays. Labour laws and minimum wage restrictions would also be relaxed.

We believe real EPZs — not the halfway-house options of spatial development initiatives, development corridors and industrial development zones currently pursued by the trade and industry department — could trigger labour-intensive jobs and generate competitive manufactured products to boost our export revenue.

Unskilled and semi-skilled workers could find employment in EPZs, gain experience and, in some cases, learn new skills. This could be a stepping stone to an improved quality of life and better-paid employment in the future.

The DA believes we must create EPZs in which all goods produced must be exported out of the Southern African Customs Union; only labour-intensive industries will be permitted; import and export permits are issued by the EPZ on the same day; work permits are issued by the EPZ entitling foreign managers and specialists to unlimited-entry visas.

Other features would be a 10-year tax holiday for new ventures; duty-free imports of machinery and raw materials; exemptions from more onerous labour laws, while legislated minimum wages would not apply; full repatriation of profits and capital; and the completion of all customs formalities in the EPZ.

For obvious reasons, South Africa’s trade unions are vocally opposed to the EPZ concept. But while some EPZs have been sweat shops, paying poor wages and trapping workers in low-skilled tasks, this is not the general picture. A recent study by United States economist Steven Radelet has shown that real wages in EPZs are not declining. On the contrary, well-managed EPZs have raised the real wages of industrial workers, as experience and productivity rise.

The most successful EPZ countries have seen sustained increases in manufacturing wages, and a shift towards more skilled production.

Export platforms alone do not solve unemployment and development problems, but they can make an important contribution, both directly and as a showcase to other exporting firms.

Confront any of the millions of jobless South Africans with the simple option of no job or a job in an EPZ — how would they choose? Which matters more, the sensitivities of unionised employees, or the salary and dignity jobs would give to jobless and unskilled South Africans trapped in destitution? Are the unions afraid that productivity in EPZs could embarrass them?

EPZs have mushroomed in number and sophistication across the developing world in recent years. A November 2002 International Labour Organisation report shows that the number of countries with these platforms surged from 25 in 1975 to 116 last year. Many countries have negotiated exemption from the World Trade Organisation’s agreement on subsidies and countervailing measures so as to retain their zones.

The US is the primary utiliser, and EPZs have become major features of labour markets in developing countries. China, which attracts close to 70% of fixed investment among emerging destinations and has consistently impressive growth rates, has 48 technological economic development areas and hundreds of new zones. Many are on the scale of full-sized urban and industrial developments, complete with community infrastructure such as education, transport and social services.

Bangladesh, Pakistan and Sri Lanka have extensive EPZ strategies. In Africa there are 47 EPZs, 14 in Kenya. The whole of Mauritius has been zoned for export processing, and the judicious management of EPZs is a major contributor to its economic growth.

No matter what form EPZs take, the free trade, foreign investment and the export-driven ethos of the modern economy has transformed them into “vehicles of globalisation”.

There is strong evidence that growth in manufactured exports accelerates economic growth and technological progress by fostering closer connections with international firms that are using leading-edge techniques, encouraging economic specialisation, promoting high investment in profitable activities, and providing foreign exchange to finance capital goods imports. 

Developing countries can take the opportunities provided by EPZs to acquire superior technology, upgrade labour and managerial skills, and gain improved access to foreign markets.

A recent article in the East African highlights the relative success of EPZ policy in Kenya. It quotes a spokesperson for the country’s Export Processing Zones Authority, Jonathan Chifallu, as saying: “Figures … show that the (EPZ) sub-sector has grown at an average 30% a year over the past five years, despite the decline of the country’s domestic manufacturing sector.

“Up to 11-billion Kenyan shillings ($139-million) had by last year been invested in the zones, creating some 25 000 jobs, almost double the 13 000 jobs the zones had created by 2000.”

It is clear South Africa should be doing more to debate the use of EPZs as a specific route to job creation and addressing the skills-growth mismatch in the economy. The DA believes EPZs are a viable alternative. A lively debate on the option is overdue.