An analysis of the regional economic development functionality of selected SEZs in the Eastern Cape, South Africa
Neethling, Jan Roan
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Special economic zones are selected geographical regions reserved for selected economic activities whereby these regions enjoy benefits such as limited corporate taxes, limited labour market regulations and relief from trade tariffs. These special economic zones do not only help the organisations or businesses situated within the geographical regions but also influences the local economy by creating more work opportunities, economic growth as well as Foreign Direct Investments (FDIs). The study of special economic zones and how it influences the regional economy is a critical aspect in modern economics because it may be seen as a growth pole for regional development in underdeveloped regions. If special economic zones are “well-planned” it will have a positive effect on the comparative and locational advantages, which will boost the local economy and can also be regarded as “engines for growth.” The total number of special economic zones grew significantly over the past 21 years with more than 4500 new established special economic zones established worldwide. Countries in Africa have only 237 special economic zones, while the world total is more than 5300 SEZ, showing that the continent only has only 4.40% of the total established special economic zones in the world, which contributes to lower regional economic development. However, it is said that the continents share in proportion to the world trade is below 3%, which suggests that the continent only focuses on natural resources as the main commodity for the exportation of products. The establishment of special economic zones can come a long way to encourage economic growth and development with the attraction of investment for the African continent and more specifically South Africa. In South Africa at the start of the new democracy in 1994 the government started to approach a new horizon in its industrialisation and manufacturing sector and the focus was drawn on an export driven tactic. The objective of the South African government was to apply policy, which reduced high unemployment rates and poverty, however, the main focus was to integrate into value regional and global value chains due to the past sanctions imposed on the country in terms of importation and exportation. The South African government imposed industrial development zones to curb the inequalities in the manufacturing and industrialisation sector and consequently to encourage export and overall trade activities within the country. The South African government followed the same approach as other developing countries such as Latin America and East Asia, which were successful in adopting inward looking policies Favourably, South Africa had some major potential in the macroeconomic surrounding and comparative advantages in terms of market intensity and natural reserves, indicating that the potential for economic development was significant. The plan to implement the industrial development zones in South Africa started in 1996 with the GEAR (Growth, Employment and Redistribution), however, the establishment of the zones was not as successful as initially expected. In South Africa, there are a total of ten established special economic zones while only six of these special economic zones are fully operational, which causes the existing special economic zones to be less competitive and insignificant in terms of local economic growth. While the special economic zones can contribute significantly towards economic growth and development, the question remained whether special economic zones in South Africa are functioning well enough to be sustainable in the long term and to contribute towards the local economies of South Africa. Limited studies have directed their exploration on how functional and successful operational special economic zones influence regional economic development within a specific region or area and some of the problems include aspects such as “insufficient knowledge” and the capability to use the inventive of special economic zones in Africa, which are limitless and unclear. The gap in the research of special economic zones in developing countries is tremendous. The main goal of the study is to evaluate and analyse the level of regional economic development in areas of functional special economic zones in South Africa. Two of the most successful industrial development zones in South Africa, the East London IDZ and the COEGA IDZ situated in the Eastern Cape was selected as the region where the study will take place, mostly due to its success since it was first established. The primary objective of this study is to evaluate the regional economic development functionality of selected special economic zones in the Eastern Cape of South Africa. This is a mixed-method study including both qualitative and quantitative data analysis. The qualitative part involved setting up and finding the success factors of special economic zones with the support of several case studies and sources and these success factors were divided into three broad categories namely microclimate, mesoclimate (region specific) and macroclimate. Moreover, the success factors of special economic zones identified were utilised in an interview schedule with various stakeholders from the industrial development zones in the Eastern Cape. The main categories within the interview schedule included basic information, physical features of the special economic zones, policy framework perceptions, policy framework constraints, incentives’ perceptions, enabling environment perceptions, economic leverage perceptions and the role of government. The standardised/structured interviews with close-ended questions were used in the qualitative approach of the study. A total of 12 people were interviewed within the East London industrustrial development zone and the COEGA industrustrial development zone. The results obtained from the interviews showed that the stakeholders had an optimistic view with regard to the physical features of the industrial development zone and that the infrastructure is of high quality. Most of the respondents also agreed that the industrial development zone is situated in a strategic location, which makes it easier for trade and efficiency in logistics. Green energy and renewable energy are being implemented within the industrial development zone and the long-term strategic plan is to have a leading eco-industrial park on the African continent. With regard to the policy framework perceptions, it was noticed that unemployment remains a huge concern within the local communities, however, the industrial development zones did create a substantial number of new jobs in the past few years. The shortage of skilled labour remains a huge concern, which hampers the firms’ abilities to employ new workers especially within the manufacturing sector, however, the industrial development zones do have science and technology parks which are able to provide the necessary skills. The industrial development zones contribute significantly towards the local economy since they are able to attract sufficient local and foreign investments and the industrial development zones themself use local material in their production processes. The stakeholders feel that more investments are needed for the industrial development zones to have a certain level of success, hence, South Africa should sharpen its value propositions so that it is in line with international standards. The stakeholders also agree that the industrial development zones provide investor-friendly and pro-business policies that are crucial for any economic zone. In terms of the policy constraints, it is noted that the stakeholders feel that the firms operating within the industrial development zones should focus more on sourcing products and materials from the local business community. With references to the respondents’ perceptions, it was noted that the industrial development zones do provide effective incentives. However, the firms operating within these industrial development zones should make more use of the incentives provided to them in order for them to get the full benefits provided by the industrial development zones. In terms of the enabling environment perceptions, it was noted that the industrial development zones do interact with the local communities, however, more can be done in terms of creating efficient and effective synergies between government, people and the local businesses. The influence of government in terms of financial and business support are adequate and the various departments do play a key role in terms of skills development and the provision of services. Some stakeholders feel that the DTIC can do more in terms of the industrial development zone programme since they lead from a policy perspective regarding infrastructure development funds. Skills development from the national government is fragmented and the different spheres between the different national departments need to improve to have a more integrated approach in terms of collaborations. The stakeholders had a positive feeling about the future of industrial development zones in South Africa, however, government should focus on aspects such as value proposition, the market, capital resources as well as human resources in order for the industrial development zones to be successful. The record of industrial development zones in South Africa shows that they do not perform as well as initially expected and if government do decide to establish new industrial development zones they will need capable management for the industrial development zones to operate effectively, however, the market should demand industrial development zones and there should be a need within the region to establish an industrial development zone. It was noted that if the industrial development zones are dependent on money from government in terms of funding in the long term, the industrial development zones will fail because the government does not have capital to sustain industrial development zones in the short and long term. Overall this study found that only a small number of special economic zones perform well, while the majority of the special economic zones in South Africa are not functioning well or they are not operative and this is due to the special economic zones’ location (inland), the inability of government to drive the projects and plans for the zones and the lack of co-ordination between the various departments of government. For the industrial development zones in South Africa to function well it is important that these zones create labour intensive manufacturing jobs to create more employment, focusing more on skills development as a priority to achieve sustainable work opportunities, a more integrated approach between the different government departments, a focus on policy direction, the creation of capable value chains, fiscal independence and the focus on creating excellent value propositions.