How Special Are Africa’s Enterprise Zones?

Enterprise Zones are areas set aside for diverse industrial development. They are created as facilitators to economic generation and growth of their parent countries which can also look forward to higher employment and increases to foreign direct investment (FDI). The reduced tax, light regulation, improved infrastructure and other business incentives created by central government attracts investors, foreign investors, in a large scale initiative to create jobs and boost exports – sometimes in areas of regeneration after economic decline from loss of traditional industry.

The World Export Processing Zone Association puts the earliest Free Zones (FZ) at 300BC in the Greek island of Delos. But there are more recent historical references to entrepôts in Gibraltar (1707), Singapore (1819) and Hamburg (1888). In the early decades of the twentieth century, the establishment of European and Asian Free Trade Zones(FTZ) as well as the first Free Trade Area in the United States in 1934, paved the way to Special Economic Zones (SEZ) operating today. Throughout early to the mid twentieth century, there was a proliferation of different models of FTAs around the world and Thomas Farole of the World Bank notes our understanding of SEZs today comes from an amalgamation of differing approaches including, but not exclusive to, the Puerto Ricans offering tax exemptions, the Irish – offering enticements beyond tax exemptions to include features of both a Free Trade Zone and an industrial park and the Mexicans introducing private investors involvement. Thus over the years the concept has evolved and the World Economic Processing Zone Association (WEPZA) notes that Free Trade Areas are more than just about trade but also include investment, industry, R&D, services, and education.

From 11 FTAs in the world at the start of the century, the establishment of Enterprise Processing Zones (EPZ) and FTAs around the world gathered pace so that by 1960s and ’70s zones were established in Asia, Latin America and the Middle East. In 1980, through Deng Xiaoping’s “Open Door” policy, four SEZs were set up in China which took FTAs and EPZs to a whole new level in terms of diversity and size. The success of what was an experiment for China has helped to drive their continual adoption so that there are currently, according to the ILO, more than 3500 SEZs found in more than 130 countries.

FIAS, an advisory service of the World Bank, notes that benefits from Special Economic Zones include boosting trade, investment, employment and exports, as well as facilitating technology transfer and diversification of the host economy. While governments principally think of SEZs in terms of FDI, balance of trade and employment, WEPZA also adds that Export Processing Zones help developing countries to gain market share. The businesses making this vision of SEZs a reality aim to take advantage of the incentives offered in the zone to obtain business rate relief, get closer access to a skilled workforce, a better investment environment, improved infrastructure, reliable supply chains and access to their markets.

Three decades on from 1980 when China’s created four SEZs Shenzhen, Zhuhai, Shantou, Guangdong few can deny they have achieved the objectives of attracting FDI, expanding Chinese exports, and increasing the spread of technology. But this success is far from accidental. The factors for the success of an SEZ like Shenzhen include size, the Shenzhen SEZ for example covers about 126 Square Miles and the location – it’s a long distance away from the political control of Beijing and most crucially close to Hong Kong, a thriving hub of international enterprise and finance. These Economic Zones have been at the vanguard of the Chinese experiment cum economic miracle. Indonesia, Malaysia, South Korea, Mexico are others sampled out by many studies to be “economically efficient” and “transformational”. Success breeds success thus, in a well managed enterprise zone, investor availability and confidence both rank high.

The developing economies of Africa have not been blind to the successes scored by SEZs around the world. Sub-Saharan programs of the 70s include Liberia, Senegal and Mauritius but by the 2000s the list had grown to 30 states having SEZs. Thomas Farole of the World Bank in a study, Special Economic Zones in Africa(2011), documents about 264 SEZs in Africa. The sources of investment include Asia, North America, Europe and in what is seen as a big push from China, in 2006 it selected 6 African countries to create Economic Zones in as part of its “Going Global” strategy. The principal industries in SEZs being garment manufacturing, food and beverages and mining but Nigeria however bucks the trend with a large services SEZ. Yet in what perhaps makes for sorry reading of the research result is the level of participation of African states in the SEZ of other states – only Lesotho, Senegal and Tanzania showing significant intra-African participation.

African SEZs became operational in the 2000s and while it may be too early to pronounce success or failure and also, despite the hurdles of getting time-series data, Farole presents evidence that African SEZs may have peaked and are showing signs of stagnation when compared to non African SEZs. This is view is of a similar shade to Claude Baissac, Secretary General of WEPZA who sees a “world littered with failed zones – Africa notably”. On that impression, Farole’s study looks at some factors critical to the success of SEZ including FDI, exports and employment.

Farole observed in his study that on FDI a non-African SEZs outperform the African ones. He notes however that this may have something to do with the scale SEZ elsewhere. Africa in the study was shown to have on the average 35 firms in an economic zone but the comparisons pale when pitted against say Honduras which has 350 or Vietnam which stands at 3500 firms. This statistic leads into the percapita exports from the African SEZs which were found to be 10-15 times smaller than those from non-African SEZs. Also, with the exception of Lesotho, Farole finds that the relative contribution of SEZs to employment in African countries is also limited. For example when Ghana and Kenya were compared with Honduras and Dominican Republic, the study found the non-African SEZs generated more than four times as much employment.

With other success factors such as diversification of African exports and transfer of technology and knowledge to SEZ hosts scoring equally poor, it can be understood when critics find little to laud in Africa’s implementation of SEZs.

If Farole and other commentators point to Mauritius as the most successful SEZ in Africa it’s useful to also look at perhaps one of the most poignant lessons of how not implement an SEZ in the case of the Senegalese and the Dakar EPZ (one of the pioneers on the African SEZ scene) which was shut down in 1999 after 25 years of operation. FIAS catalogues the reasons of the failure as excessive bureaucracy, lengthy lead times in obtaining permits, unrealistic goals, poorly trained, unproductive and expensive workforce, cost of energy and restrictive labour laws. The Dubai Government is banking on the fact that the Senegalese have learnt their lesson as they back an investment of $800 million USD in a new Dakar Integrated Special Economic Zone.

Special Economic Zones and their potential for diversification of a country’s exports are brushed aside by critics who find succour in Farole’s study which found a lack of job advancement opportunities, long working hours and a feeble coherence to agreed labour standards in SEZ. This finding also serves as a vindication of the ILO which in 1998 critisized SEZs for exploitation of women, suppression of labour rights, poor attention to environmental standards. The Economist also reports that in India where SEZs are looked at as something of a cash cow, farmers have complained they are being coerced to sell their lands for SEZs. Furthermore, other critics are categorical that investment attributed to SEZs are investments that would have been made in any event and by confining this investment to SEZs countries using SEZs are missing out on crucial tax revenues.

While Farole’s research found Africa provided its SEZs an improved business environment compared to that outside the zone, it’s important to note that “policy instability” marked by tenuous coordination and even conflict between agencies as exemplified by conflict between Nigerian Enterprise Processing Zone Authority (NEPZA) and the Nigerian Customs authorities can undo the investment to create a benign environment for SEZ re: the availability of utilities, transportation, light regulation, low duties and taxes.

On the whole, success or failure is judged by objectives set out in the onset and Farole finds some African countries are going over-the-top and setting themselves up for a fall when it comes to stating their goals for an SEZ. But it’s not only scoping deliverables that Farole has advice for African SEZs. The report also notes that having missed the rapid acceleration of global manufacturing of the 80’s and 90’s African SEZs are at a competitive disadvantage when compared to SEZs which are integrated in the “global production networks” such as in the case of low cost manufacturing economies in Asia. African SEZs would be better off concentrating on creating regional value chains and move away from the traditional EPZ model to focus on agricultural and mineral processing the report notes in its conclusions.

Lloney Monono
Bristol, UK

Sources:
Special Economic Zones in Africa, Comparing Performance and Learning from Global Experience
Thomas Farole,World Bank, http://www.worldbank.org

Special Economic Zones, Performance Lessons Learned and Implications For Zone Development.
FIAS for The World Bank Group, http://www.fias.net

India’s Special Economic Zones; Cash Cows
The Economist, http://www.economist.com/node/8031219

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Categories: Macroeconomics

2 replies

  1. Hi Lloney,
    I just read your article “How Special Are Africa’s Enterprise Zones?” Great article! It gives me an idea about industrial development in Africa. This is my question: Given that organizations that have always reached the acme of success in developing economies still have flaws, why do African SEZs not do low cost manufacturing like their Asian counterparts and reap similar benefits? If the Asians are succeeding, then Africans can too! However, I think Africans will get there someday but for now, Africa is still struggling to build adequate infrastructure that will grow economies and curb unemployment.
    Another question: In Africa, does government in any way control how these organizations function or do they function independent of the government but pay taxes and other?

  2. Interesting article Lyoney. By any chance do you know what might have happened with Cameroon’s Free Trade Zone that was created some 23 years ago?
    Samuel

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