/ 14 February 2020

The fable of SA’s special economic zones

Automobile Manufacture At Bmw Ag's Rosslyn Plant
Wasted effort: The government’s reliance on the petrol and diesel vehicle export market now looks like a disastrous industrial policy, according to three economists. (Kevin Sutherland/Bloomberg/Getty Images)

The Brazil, Russia, India, China and South Africa (Brics) bloc met late last year in Brasilia, just more than a year after the Forum on China-Africa Co-operation summit in Beijing. These two bodies are seeking to generate a new Global South-South development policy narrative, even though Brics host — Brazilian President Jair Bolsonaro — mimics United States President Donald Trump’s hostility to multilateralism, and China’s gross domestic product (GDP) growth and imports slowed to the lowest levels in 40 years.

One thing all these institutions — plus the G20 countries — agree on: South Africa needs more special economic zones (SEZs), which grant generous subsidies to both Brics and Western corporations.

The SEZ export fetish conforms to Finance Minister Tito Mboweni’s policy paper, Economic Transformation, Inclusive Growth, and Competitiveness. “Export orientation and sophistication are key drivers of long-run economic growth. South Africa needs to promote export competitiveness and actively pursue regional growth opportunities in order to leverage global and regional value chains for export growth. Technologically sophisticated exports, in particular, are crucial to structural transformation as they enable the economy to move from low- to high-productivity activities,” it reads.

Yet when he addressed the ANC economic transformation committee in September, Mboweni could not supply concrete cases: “We need to promote exports because exporters grow faster, generate more jobs, pay better and innovate more — provided they are able to export competitively,” he said.

But the only examples he gave concerned agricultural niche products, when he spoke about the need to “implement required sanitary and phytosanitary standards and veterinary protocols and raise awareness of [South African] products in key export markets in the short term, [for example] pears to China; table grapes to South Korea; oranges to Vietnam [and] avocados to Japan and [the] US …”

Yet the first of his policy’s “key elements” is to “generate growth and export revenue to compensate for low savings: export-led growth through a new approach to industrial policy”.

In reality, South Africa does not suffer from low savings. The JSE is the world’s second-biggest bubble measured in terms of the Buffett indicator of market capitalisation to GDP.

The country’s R11-trillion in institutional investment funds are rewarded with high returns to financial assets, especially an interest rate that is lower than only three of the world’s major countries: Turkey, Argentina and Pakistan.

So with financialisation (financial capitalism) keeping speculators busy, there is little incentive to invest in the lower-profit real economy.

South Africa has run a trade surplus over the past three years, but that did nothing to compensate for raging capital flight, to which the treasury and the Reserve Bank generally turn a blind eye. Illicit financial flows were, last November, officially estimated in the range of R150-billion to R370-billion annually.

For Mboweni, earning more hard currency with exports so that banks and corporations can loot South Africa faster, seems to be

the unspeakable subtext. And with offshoring announcements by Naspers, Sibanye-Stillwater and AngloGold Ashanti, the licit (not merely illicit) financial flows will soon be measured in trillions of rands, as the balance of payments deficit soars.

In any case, the record of using industrial policy for exports is much more substantive than Mboweni’s examples of fruits, thanks in part to the SEZs.

His policy suggests that: “Consideration should be given to full or partial exemptions for small, medium and micro enterprises from certain kinds of regulations, including labour regulations … SEZs can be used as potential places where these and other interventions can be tested before being implemented across the economy.”

For two decades the Coega Development Corporation has won awards as the most successful SEZ. But it is still called “the ghost on the coast”, has had persistent corruption problems and is yet to show significant creation of appropriate skills and permanent employment.

The failure is partly because of the treasury’s tax-break generosity, but also because of a risky strategy of betting on car exports, which was adopted by the department of trade and industry in the mid-1990s.

(John McCann/M&G)

The most recent SEZ board annual report reveals government’s ongoing optimism; an institutional faith in copy-catting China’s ministry of commerce; and a reliance on China for “capacity building” in South Africa’s SEZs.

Analysis of state SEZ funding from the report is revealing, because only 12 380 jobs were created at a cost of R15.5-billion — the most expensive employment in Africa.

A great many of these jobs are now vulnerable, precisely because they are export-oriented. For example, global carbon taxes will soon be imposed on long-distance transport by ship or air, thanks to the climate emergency.

But well before these kick in, three other factors will foil exports from South Africa’s SEZs. The first is global recession; the second is Brexit, which will raise tariffs on South African products; and the third factor is Trump.

In 2018, the US president imposed irrational trade sanctions against South Africa’s already crippled steel and aluminium producers. Then last November, Washington put President Cyril Ramaphosa on notice that if he signs a Parliament-approved Bill providing for “fair use” in intellectual property reform, that could spell the end of the Africa Growth and Opportunity Act provisions that permit vehicle imports to the US on favourable terms.

The US and Britain are the third and fourth main export markets for South African goods. Vehicles are the third main export category ($10.9-billion in 2018) and steel and aluminium are also major exports ($8.3-billion).

More generally, Trump’s protectionism contributed to dramatic declines in the 2018 World Trade Organisation’s Index of Trade, including a fall in that index of 6.3% (year-on-year from 2017), as well as a 7.9% drop in export orders, and a 10.3% global crash in demand for imported vehicles.

The government’s reliance on the petrol and diesel vehicle export market now looks like a disastrous industrial policy.

The Motor Industry Development Programme (MIDP) is one of Pretoria’s most generous corporate-welfare programmes, as even Deputy Finance Minister David Masondo explained in 2018: “Instead of building a developmental state, the post-apartheid state elite has built a nanny state, which simply provides handouts to transnational companies.”

The annual handouts include about R30-billion in tax losses, plus additional costs to consumers of R15-billion.

In return, University of Cape Town economist David Kaplan charges, the MIDP failed to meet its own three main objectives: fast-rising production (2018 output of 611 000 vehicles was only 8% higher than in 2008); deepening of local content (it is shrinking quickly and is now less than 40% of total value); and more jobs (the past 15 years has witnessed a crash in the sector from 116 000 jobs to only 92 000).

So, when Coega recently attracted an R11-billion investment — a Beijing Auto Industrial Corporation plant — it is worth knowing that the Chinese built a capital-intensive (robot-rich) factory, did not pay suppliers until major protests arose, conducted little or no skills transfer, and now import most of their vehicles under a semi-knocked down kit system.

The urgency of switching from petrol and diesel vehicles to electric cars and public transport (because of the climate crisis) is lost on these corporations and the government. But the more general problems of SEZs are becoming obvious, just at the point when the treasury wants them to do the heavy lifting to solve the economic crisis.