Today Business Day was the first to publish an article by Ann Bernstein and Antony Altbeker – Get SEZs right and cash in on Asia’s rising labour costs. They are with the Centre for Development and Enterprise (CDE). This article is based on a new CDE report, Special Economic Zones: Lessons for SA from international evidence and local experience.
With the kind permission of Business Day I am posting some extracts from the article but the whole article should be read in Business Day or by clicking on the link.
“Turbulence in the global economy has obscured what may be an important development: labour costs in China have begun to rise. Millions of jobs may relocate to other parts of the world.”
“This is an important opportunity for SA. We should compete to host a sizable proportion of these jobs. Special economic zones (SEZs) could be the ideal way for SA to test what is required to attract labour-intensive industries. Today, there are about 3000 SEZs in 135 countries. They account for about 68-million direct jobs and $500bn in trade-related added value. In 2004, SEZs were the destination for about 32% of all manufacturing foreign direct investment and were the origin of 41% of manufacturing exports.”
“SEZs have proven to be a remarkable tool for growth and employment around the world. But not all of them succeed. Many — including most of those in Africa — perform poorly. The most important reason is many SEZs are simply not special enough. They fail to make themselves globally competitive in attracting investment.”
“SEZs are defined as specially demarcated geographic areas in which some aspect of the business environment — whether the quality of the infrastructure or the regulatory regime — differs from the norms prevailing in the rest of the country.”
“SA has three functioning industrial development zones (IDZs). The government has recently joined the consensus that the IDZs have not delivered.”
“Investment levels have been low, the number of permanent jobs created small and many firms located in the zones relocated from elsewhere in the country. Only about 5000 people work in the three IDZs.”
“The government is now looking to rejig the IDZs, upgrade them to SEZ status, expand their number and re launch them as platforms of industrial development, diversification, export growth and job creation. Draft legislation is in process.”
“If a special zone strategy is not to fail again, a very different approach is needed. SA needs to learn from the IDZ failings and the international experience of success.”
“Given the scale and nature of SA’s employment challenge, we should view SEZs as a platform for experimenting with reforms that induce the growth of large-scale, labour-intensive firms that employ low-skilled workers. SA’s industrial structure is characterised by the relative absence of industry of this kind — one of the key reasons our employment rate is so low. There are many reasons for this, but the main one is the range of policies that implicitly encourage firms to minimise their use of labour and rely instead on machinery and skills. The key challenge is that rising employment costs (without commensurate productivity gains) encourage firms to mechanise and rely on fewer, better-trained workers.”
“If SA is to create jobs for millions of young, unskilled, inexperienced workers, it needs to create the right conditions for a different kind of investor — one that looks to use large numbers of unskilled workers in the production process.”
“Achieving this is not easy, but SEZs could play a useful role if they are used strategically to address the constraints faced by potential employers of unskilled labour.”
“SA should prioritise the establishment of at least two large SEZs designed to meet the needs of low-skill, labour-intensive firms. This means paying attention to vital policy areas. These include ensuring efficient access to international markets, easy access to skills (including foreign skills), credible guarantees that policies in the zone will be maintained over time, and that red tape hampering start-ups is reduced.”
“The most critical interventions, however, are in the realm of labour market regulation. It is vital to permit competitive labour costs that match productivity. Equally important is the difficulty manufacturers face in adjusting staffing and shift systems to cope with the erratic nature of demand; this makes flexibility essential.”
“There are many countries in which wage levels are lower than SA’s and in which this kind of flexibility is standard. Unless we create a regime in which it is possible to offer firms a competitive regulatory environment, SA will never see the emergence of large-scale, labour-intensive firms. And we will never create the jobs required to change the opportunity curve for millions of poorly-trained, inexperienced workers who are unemployed. Current policies are skewed towards high-skill and high-wage methods of production, which do not address the core of the country’s unemployment crisis. A paradigm shift is required.”
“Well-designed SEZs have proven to be remarkable tools for growth and employment around the world. Their success in different countries has helped reduce poverty on a previously unimaginable scale and speed.”
“SA should seize the opportunity afforded by rising labour costs in Asia. This will require bold leadership and engagement with difficult choices that must be made. The alternative is yet again to waste resources and energy on a policy that fails.”
Today Business Day was the first to publish an article by Ann Bernstein and Antony Altbeker – Get SEZs right and cash in on Asia’s rising labour costs. They are with the Centre for Development and Enterprise (CDE). This article is based on a new CDE report, Special Economic Zones: Lessons for SA from international evidence and local experience.
With the kind permission of Business Day I am posting some extracts from the article but the whole article should be read in Business Day or by clicking on the link.
“Turbulence in the global economy has obscured what may be an important development: labour costs in China have begun to rise. Millions of jobs may relocate to other parts of the world.”
“This is an important opportunity for SA. We should compete to host a sizable proportion of these jobs. Special economic zones (SEZs) could be the ideal way for SA to test what is required to attract labour-intensive industries. Today, there are about 3000 SEZs in 135 countries. They account for about 68-million direct jobs and $500bn in trade-related added value. In 2004, SEZs were the destination for about 32% of all manufacturing foreign direct investment and were the origin of 41% of manufacturing exports.”
“SEZs have proven to be a remarkable tool for growth and employment around the world. But not all of them succeed. Many — including most of those in Africa — perform poorly. The most important reason is many SEZs are simply not special enough. They fail to make themselves globally competitive in attracting investment.”
“SEZs are defined as specially demarcated geographic areas in which some aspect of the business environment — whether the quality of the infrastructure or the regulatory regime — differs from the norms prevailing in the rest of the country.”
“SA has three functioning industrial development zones (IDZs). The government has recently joined the consensus that the IDZs have not delivered.”
“Investment levels have been low, the number of permanent jobs created small and many firms located in the zones relocated from elsewhere in the country. Only about 5000 people work in the three IDZs.”
“The government is now looking to rejig the IDZs, upgrade them to SEZ status, expand their number and re launch them as platforms of industrial development, diversification, export growth and job creation. Draft legislation is in process.”
“If a special zone strategy is not to fail again, a very different approach is needed. SA needs to learn from the IDZ failings and the international experience of success.”
“Given the scale and nature of SA’s employment challenge, we should view SEZs as a platform for experimenting with reforms that induce the growth of large-scale, labour-intensive firms that employ low-skilled workers. SA’s industrial structure is characterised by the relative absence of industry of this kind — one of the key reasons our employment rate is so low. There are many reasons for this, but the main one is the range of policies that implicitly encourage firms to minimise their use of labour and rely instead on machinery and skills. The key challenge is that rising employment costs (without commensurate productivity gains) encourage firms to mechanise and rely on fewer, better-trained workers.”
“If SA is to create jobs for millions of young, unskilled, inexperienced workers, it needs to create the right conditions for a different kind of investor — one that looks to use large numbers of unskilled workers in the production process.”
“Achieving this is not easy, but SEZs could play a useful role if they are used strategically to address the constraints faced by potential employers of unskilled labour.”
“SA should prioritise the establishment of at least two large SEZs designed to meet the needs of low-skill, labour-intensive firms. This means paying attention to vital policy areas. These include ensuring efficient access to international markets, easy access to skills (including foreign skills), credible guarantees that policies in the zone will be maintained over time, and that red tape hampering start-ups is reduced.”
“The most critical interventions, however, are in the realm of labour market regulation. It is vital to permit competitive labour costs that match productivity. Equally important is the difficulty manufacturers face in adjusting staffing and shift systems to cope with the erratic nature of demand; this makes flexibility essential.”
“There are many countries in which wage levels are lower than SA’s and in which this kind of flexibility is standard. Unless we create a regime in which it is possible to offer firms a competitive regulatory environment, SA will never see the emergence of large-scale, labour-intensive firms. And we will never create the jobs required to change the opportunity curve for millions of poorly-trained, inexperienced workers who are unemployed. Current policies are skewed towards high-skill and high-wage methods of production, which do not address the core of the country’s unemployment crisis. A paradigm shift is required.”
“Well-designed SEZs have proven to be remarkable tools for growth and employment around the world. Their success in different countries has helped reduce poverty on a previously unimaginable scale and speed.”
“SA should seize the opportunity afforded by rising labour costs in Asia. This will require bold leadership and engagement with difficult choices that must be made. The alternative is yet again to waste resources and energy on a policy that fails.”