Specific South African SEZs are discussed in future Working Papers in this series, which acknowledge some limited successes with innovation and sustainability investments. However, a look at the big picture is urgently required, because too many debates over South Africa’s lack of economic dynamism focus on microeconomic conditions, such as the 4^th Industrial Revolution, corruption, the strength of organised labour, state regulation, and youth employment subsidies.

Macro-economic conditions are vital to consider, when considering whether SEZs are appropriate. These conditions in turn, require contextualisation scaling down to local conditions of communities in SEZ locales

The United Nations Conference on Trade and Development (Unctad) is a proponent of SEZs, and although the Geneva agency traditionally had a relatively progressive role in advocacy for Southern interests, Unctad appears to have shifted to a ‘neoliberal’ (corporate-friendly), export-fetishising bias. Many of the criticisms of SEZs we make in the following pages, based on the current fragile global macro-economic and tumultuous geopolitical contexts, are simply ignored in Unctad’s June 2019 World Investment Report, a study dedicated to promoting SEZs: “(w)e are seeing explosive growth in the use of SEZs as key policy instruments for the attraction of investment for industrial development. More than 1 000 have been developed worldwide in the past five years and, by Unctad’s count, at least another 500 are in the pipeline for the coming years.” To be fair, however, Unctad (2019, 205) concludes the report with this caution: “(t)he key objective should be to make SEZs work for the Sustainable Development Goals: from privileged enclaves to widespread benefits.”

Future working papers consider whether workers, residents (especially the two-thirds of South Africans below the Upper Bound Poverty Line), environmentalists and the citizenry at large gain widespread benefits, or instead suffer greater losses. In general, SEZ benefits go to ‘privileged’ foreign corporations. Following this global trend, South African SEZs provide investors with relief from Value Added Taxes, import duties and corporate taxes (the SEZ rate is typically about half that prevailing outside the zone, i.e., 15% instead of 28%). SEZ leaders include the Dube Trade Port in conjunction with the Durban Port, Coega north of Nelson Mandela Bay, and – if the Chinese follow through on commitments made in September 2018 – the planned Musina-Makhado metallurgical complex in Limpopo Province. All are sites worthy of deeper study in future Working Papers given the amounts of fixed capital already invested and envisaged.

In this Working Paper we consider only the international and national economic conditions underlying the potential of SEZs to deliver on Global South commitments to inclusive development. In spite of generous subsidies, these conditions are increasingly hostile. Some adverse factors relate to systemic overproduction driven from China; some to the global trade and currency-depreciation war that is presently intensifying; some to world financial
volatility; some to South Africa’s foreign-debt stresses, high interest rate regime and declining currency; and some to the overall problem of South Africa’s uncompetitive production systems during an era of sustained overcapacity. The vulnerability of the current system includes its export-oriented, capital-intensive, carbon-intensive, uninclusive economic features.

This paper contrasts the existing strategies and development values that are embedded within current SEZ policy, with a different set that draw on 20^th-century developmental successes. The latter are much more closely associated with ‘import-substitution industriali- sation,’ but one that has more labour-intensive, ecologically-sustainable and inclusive features. One such approach is the ‘Million Climate Jobs campaign,’ similar to other countries’ discussions of a Just Transition and Green New Deal.

We begin with a brief review of the major local and international economic problems, including the lack of investment following a recent wave of overinvestment, also termed overaccumulation of capital. The problem, we will see, affects both the world and South Africa – and is one reason why ‘deglobalisation’ or ‘slowbalisation’ are terms entering our economic discourses.

Fixed Investment Strike and ’Deglobalisation’ Here and Everywhere

Like most of the world, South Africa confronts the harsh reality of declining local fixed investments and Foreign Direct Investment (FDI) (not just in SEZs), as well as much lower rates of global trade/GDP compared to 2008 highs. The South African economy not only suffered from excess exposure to globalisation, because much of the labour-intensive manufacturing base shrunk rapidly during the 1990s, especially in the clothing, textiles, footwear, appliances and electronics sectors. Moreover, because of new vulnerabilities that have emerged since then, South Africa also became one of the world’s ‘deglobalisation’ losers, once this phenomenon gathered pace since the 2008 peak year of international economic inter-relationships. For example, the SA Reserve Bank (SARB 2018, 9) in June 2018 bemoaned how “capital spending by both the private sector and general government decreased ... hampered by the constrained fiscal space, policy uncertainty (in the mining sector in particular), and very weak civil construction confidence.” In early 2019, the SARB (2019) reported a further decline of -9.8% in private fixed investment.

Gross Fixed Capital Formation as a % of GDP, 1970-2018

Source: World Bank 2019

Later we consider in detail a central reason for the decline in South Africa’s fixed investment since 2008. The local economy faces a generalised problem also witnessed internationally: the ‘overaccumulation of capital,’ a phrase indicating sustained over-investment in the prior period, disincentivising new fixed capital formation. As indicated above, South Africa’s overaccumulation from 1980-95 was only resolved briefly and untenably in the early 2000s thanks to the commodity super-cycle and intensified consumer borrowing – both of a short-term nature. Typically, an overaccumualtion crisis is most acutely felt within an undynamic, oligopolistic local corporate structure. One obvious local example was the way Chinese steel dumping forced the 2015 closure of the second-largest firm (Evraz Highveld, owned by the Russian tycoon Roman Abramovich) and still threatens the largest (ArcelorMittal, owned by the Indian Lakshmi Mittal) – notwithstanding rhetoric on economic collaboration between their home countries’ leaders.

As a result of such deep-rooted structural barriers to further accumulation, the South African economy is falling more rapidly than most when it comes to attracting FDI. Although a momentary uptick occurred in 2018, the inflows of FDI from 2013-18 amounted to just $17.1 billion, in contrast to $29.8 billion in South African FDI outflows. And in terms of FDI stocks, what had been in 2010 a net $96.4 billion positive inward capital stock of FDI reversed to a $109.1 net outward stock of FDI (Unctad 2019, Annex Tables 1&2).

South Africa’s FDI Inflow and Outflow, 2013-18

Source: Unctad, 2019, Annex Tables 1&2

To illustrate the extent of investment deglobalisation, the level of new FDI across the world fell by nearly 20 percent to $1.2 trillion in 2018, after three successive years of decline from the 2015 peak of just over $2 trillion (Unctad 2019, 1). From peak levels in 2007, FDI profitability, trade/GDP ratios, and even cross-border financial flows all dropped markedly (Garcia and Bond 2018).

Investment and Financial Flows Fall as % of GDP, 2002-17

Source: Unctad 2019

Not only has FDI been crashing, from the 4.5% of GDP peak level of 2006-07 to 2.4% in 2017, so too have cross-border financial flows (from 16.1% to 4.5% of GDP in the same period) and relative trade rates. The Baltic Dry Index, the world’s main measure of shipping, plummeted from a level of 11,500 in 2008 to below 1,500 since 2014. The 2008-09 collapse of trade and its subsequent slow decline was similar to two prior episodes of rapid deglobalisation, in which one measure – world imports/GDP – fell during roughly 15-year periods, from 1880-97 and from 1929-45. Along with other indicators, this suggests that a deglobalisation (or as The Economist now prefers, ‘slowbalisation’) era began after the 1980-2007 era of rapid globalisation, and that the most intense period of shrinkage is now on the immediate horizon thanks to trade and currency wars.

Baltic Dry Index, 2000-19

Prior Deglobalisation Episodes : World Imports as a % of GDP, 1820-2010

Ironically, the recent decline in world trade/GDP ratios was led by the Brazil-Russia–India–China–South Africa group; i.e., the economies that once were considered by Goldman Sachs manager Jim O’Neil to be the ‘building BRICs’ of 21^st-century capitalism (South Africa joined as the S in the acronym in 2011). South Africa was hit hard – as trade fell from 73 percent of GDP in 2007 to 58 percent in 2017, compared to a world trade/GDP decline over that period from 61 percent of GDP to 56 percent. All the BRICS witnessed reduced trade in much greater degrees than the global norm, and three spent parts of 2015–18 in recession: Brazil, Russia and South Africa, with the latter recording a negative GDP again in the first quarter of 2019.

Rise and Fall of Brics and World Trade (Imports and Exports), 1997-2017 : High Point Ration and 2017 Ratio, as Percent of GDP

Source: World Bank

Moreover, the trade that now occurs is increasingly disconnected from what are known as value chains: integrated production systems. McKinsey Global Institute’s (2019, 1) latest ‘global flows’ analysis confirms that “...a smaller share of the goods rolling off the world’s assembly lines is now traded across borders. Between 2007 and 2017, exports declined from 28.1 to 22.5% of gross output in goods-producing value chains.” The decline in trade intensity is led by China, where gross exports as a share of gross output in goods fell from 18% to 10% from 2007-17 (McKinsey Global Institute 2019, 1).

Yet the rhetoric of BRICS has, throughout, remained collaboratively export-oriented, for Xi Jinping (2015) insisted at the 2015 BRICS summit that they must “boost the centripetal (unifying) force of BRICS nations through cooperation in innovation and production capacity to boost competitiveness.” Ironically, this narrative China promotes within the BRICS as one that encourages tighter economic integration has been cannibalistic under conditions of Chinese-driven overaccumulation.

BRICS integration rhetoric can be expected to continue under rising Chinese domination, for as Xi (2017) famously put it in a plenary talk at the World Economic Forum in early 2017, just before Donald Trump took power:

There was a time when China also had doubts about economic globalisation, and was not sure whether it should join the WTO. But we came to the conclusion that integration into the global economy is a historical trend... Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible... We must remain committed to developing global free trade and investment, promote trade and investment liberalisation... We will expand market access for foreign investors, build high-standard pilot free trade zones, strengthen protection of property rights, and level the playing field... China will keep its door wide open and not close it.

This narrative is also superficial: not only has Xi effectively responded in kind to Trump’s threatened tariffs on $550 billion of annual exports from China to the US, by imposing countervailing tariffs and engineering a decline in the currency to below RMB 7/$ in August 2019. Well before Trump, Xi proved his rhetoric of liberalisation was not matched by reality, for during six months starting in mid-2015, Beijing imposed stringent exchange controls, stock market circuit breakers and financial regulations to prevent two Chinese stock market collapses from spreading beyond the existing $5 trillion in losses. Moreover, within eighteen months of his Davos speech, Xi had authorized a set of trade restrictions on US products in retaliation for Trump’s protectionist tariffs. Channeling toxic waters of geotrategically state based economic expansionist globalisation back into economic purification systems is indeed possible, and necessary, at a time when the world economy’s chaotic self-correction raises profound questions about SEZ feasibility.

The only remaining indicators of tightening integrative forces within the world economy are those features of globalised production systems that are less tangible, e.g. flows facilitated by e-commerce. The royalties and trade in services accounts do continue to rise, even while trade/GDP and FDI/GDP (and even cross-border finance/GDP) are falling from their 2007-08 peaks. As two Bloomberg News boosters ask, “(i)s globalisation really slowing? Maybe, if you only look at the trade in physical goods. But that doesn’t take into account an explosion of the digital economy. That’s important. Increasingly, the digital realm is where the 21^st-century economy lives” (Donnan and Leatherby 2019).

Meanwhile in South Africa, defenders of the New Dawn can point to only one economic success story associated with globalisation, namely rising FDI in 2018. As a CityPress business journalist put it, “(t)he investments began to increase after President Cyril Ramaphosa’s announcement ahead of the Commonwealth Heads of Government Meeting in London in the middle of April last year that he was aiming to entice investors to head to South Africa and so raise $100 billion in new investments over five years” (Brown 2019). Adding to official optimism, a leading financier (from Citadel), Maarten Ackerman, claimed in mid-2019 that there are ‘green shoots’ in the sickly South African economy in part because “(a)fter bottoming in 2015, FDI struggled to pick up significantly, but 2018 saw the rebound kick in. The importance lies in the magnitude of the rise in FDI. After dipping from 2.3 percent of gross domestic product (GDP) in 2013 to 0.5 percent of in 2015, FDI reached 2.2 percent of GDP in 2018. Accelerating at a faster pace than GDP, FDI is set to give renewed impetus to the South African economy.”

However, upon closer examination, the 2019 World Investment Report provides a breakdown:

FDI flows to Southern Africa recovered to nearly $4.2 billion in 2018, from -$925 million in 2017. FDI flows to South Africa more than doubled to $5.3 billion in 2018, contributing to progress in the Government’s campaign to attract $100 billion of FDI by 2023. The surge in inflows was largely due to intracompany loans, but equity inflows also recorded a sizeable increase. In 2018, China-based automaker Beijing Automotive Industry Corporation (BAIC) opened a $750 million plant in the Coega Industrial Development Zone, while automakers BMW (Germany) and Nissan (Japan) expanded their existing facilities in the country. In addition, Mainstream Renewable Energy of Ireland began building a 110 MW wind farm, with a planned investment of about $186 million (Unctad 2019, 38).

Without having further information on the exact nature of the intracompany loans (which are directed from multinational corporate headquarters into branch plants in South Africa, no doubt, due to extremely high interest rates prevailing here, as discussed later) and without going into details on these particular investments, this policy analysis that follows examines whether the hype about new investments is justified, particularly in view of the increasingly overaccumulated global markets and global political-economic turbulence. Future Working Papers will consider the characteristics of both major automotive sector FDI projects – the BAIC (Coega) and Mahindra (Dube Trade Port) semi-knockdown assembly kits (with negligible local inputs) – as well as other major SEZ investments. This paper sets out whether the broader conditions are appropriate for the SEZ strategy, including those relating to influences by Western economies and multilateral agencies controlled by the ‘G20’ group of powerful economies, including the BRICS bloc. In both G20 (North-South) and BRICS (Global South) multilateral platforms South Africa is the only African member. We consider specific market conditions in what is widely accepted as a new framing of the Global South, China and Africa. two critical economic contexts with which South Africa interrelates. The first area of inquiry is whether global geopolitics and economic conditions provide South African SEZs with a more supportive, or adverse, context.

Source : Friedrich Ebert Stiftung Policy Paper #1/2 on South Africa’s Special Economic Zones in Global Context September 2019 By Eric Toussaint, Ishmael Lesufi, Lisa Thompson and Patrick Bond