You would not think it judging by the attention they receive, but special economic zones fail more often than they succeed. This is all the more true when SEZ policy regimes are evaluated in terms of how much additional value they create. When viewed in this light many SEZ regimes worldwide are expensive failures.
Setting up SEZs in peripheral or declining regions hardly ever works, mainly because the level of subsidy required to make such areas attractive typically exceeds the zone’s economic feasibility. Linkages with existing business clusters are more difficult and costly, key infrastructure is likely to be minimal or missing entirely, and the resources and capacity to manage faraway programmes are usually lacking.
Successful SEZs should be correctly designed. Though there is no blueprint, they share a list of attributes. They are spatially designated business hubs where regulations differ from the rest of the economy — hence the term “special”. Integral to successful SEZs is supporting industrialisation and integration into global value chains. Chances of success are therefore maximised when zones are located at, in, or near ports.
Apart from these concessions, no other fiscal incentives would be offered. To protect all other local firms, the SEZ would be export-only; the local market would be off limits for businesses inside the zone and only new firms could locate in the zone. The SEZ would thus function as if it were an island off the coast of SA: a kind of policy laboratory-cum-shop window in which proposed reforms can be tested.
A new kind of SEZ is worth trying because it tackles both these problems while avoiding the pitfalls of other unsuccessful zones. It can test whether and to what extent SA could create labour-intensive manufacturing activities that could absorb low-income workers, while minimising the political costs of implementing the reforms needed to make this possible.
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