New SEZs a bold step into the past

even years before Mauritius became independent in 1968, Nobel prize-winning economist James Meade wrote sceptically about whether the country could improve its standard of living, concluding “the outlook for peaceful development is weak”. Seemingly to prove him wrong, Mauritius has grown at a rate of more than 5% for almost 40 years. Mauritians have increased their per capita income from less than US$400/year around the time of independence to more than $9 000 today.

It’s now the third-richest country on a per capita basis in Africa, but notably is the only one of the top group without any grand mineral endowment in the form of oil, diamonds or gold.

Moreover, as economist and Nobel prize winner Joseph Stiglitz noted a few years ago, it has built a diverse economy, a democratic political system and a strong safety net. School and university are free, health care is largely free and home ownership is now around 90%. Mauritius is on the verge of full employment.

At the heart of the economic success of Mauritius has been its very innovative Export Processing Zone (EPZ) system. The zone was established very early in global terms, launching in 1970. It began with only five enterprises, but now has over 1 000 which are responsible for more than half the country’s exports.

The establishment of the EPZ is remarkable in many respects. It was established by a strongly socialist government, but from the start, its benefits were generous. For example, there is no designated area; the “zone” constitutes effectively the whole island. There is a generous flat tax rate, which has remained absolutely stable. As is so often the case, the first companies were in the textile industry, but now they are widely spread across a variety of sectors.

But the chief utility of the EPZ was the development of a culture of business friendliness. Official bodies boast that Mauritius is in the top ranks of a whole host of “ease of doing business” surveys and is easily the best in Africa. The EPZ notion is really now fading into a kind of irrelevance; it’s just the way the country works. The country is now focused on new ideas, like free ports, regional head-office incentives and residency investment schemes.

Partly because of the Mauritian success, a host of countries in Africa and elsewhere have tried to establish EPZs, or something like them. Many have failed or have had marginal success. SA joined the throng in the early 2000s, developing what were then called industrial development zones, of which Coega was the main flag-bearer. The zones showed extremely slow progress, mainly because what they offered was really minimal. Faced with a decade of failure, government is updating the schemes, with new legislation offering better incentives. The main improvements are a lower tax rate, now more or less the worldwide accepted rate.

Yet, like an addict never quite able to relinquish its vices, the new legislation, the Special Economic Zones Act (SEZ Act), falls short. The legislation fails in three key areas. First, most zones around the world include increased labour flexibility. SA’s most emphatically do not.

Perhaps that is just too much to ask for. But the second failure is not. It is commonplace that the business voice on the body that manages the zone should be influential. The SEZ Act makes provision for a single business person on the 15-person special economic zones advisory board. Sitting opposite this one, lonely business voice will be four government officials, three quasigovernment officials, a labour representative and a community representative, among others. But the worst part of the legislation is that applicants cannot be private companies acting alone. Companies can apply only in conjunction with government entities, parastatals and public-private partnerships.

If anything underlines the enduring antipathy of government to private enterprise, it is this.

Consequently, the SA government is effectively offering substantially less than Mauritius was offering 40 years ago. This helps to explain the rather sad welcome that the legislation has received from business organisations; it’s better, but a long way from good.