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Dr Gift Mugano
Special Economic Zones (SEZs) are normally established to act as catalysts for trade,investment and employment creation.
Most often, they aim to improve competitiveness to facilitate the economic transformation of their host countries faster or more effectively than would be possible without them. In different countries and at different times, however, the specific objectives vary, from attracting foreign direct investment (FDI) to creating employment to experimenting with reforms. They include employment creation; the attraction of FDI; the generation of foreign exchange through exports; and the creation of economic value added.
On measures of FDI stock and FDI per capita, the non-African zones generally outperform the African zones (especially the Latin American and Asian countries). One exception is Ghana, which experienced large-scale investment in its free zone programme during the2000s. A large majority of FDI in Ghana’s programme has come through single unit free zones rather than through investment in firms based in the Tema Free Zone. These single unit firms are licensed as free zone companies but entitled to operate anywhere in Ghanaian territory.
A similar programme operates in Kenya, Senegal, and Tanzania. It is striking that with the exception of Nigeria, whose free zone programme has failed to attract significant investments by almost any measure, the African zone programmes show relatively high contributions to national FDI inflows from the SEZ programmes, despite low absolute levels of investment in the SEZs.
Thus the relative failure of African SEZ programmes to attract investment may be due more to a poor overall investment environment than to the failure of the zone programmes themselves.
No strong evidence exists that enclave models are either more or less effective than single factory models on a national basis. Africa’s most successful zone programme, Mauritius, was based on the single factory model,although the small size of the island means that most EPZ firms are concentrated in a few industrial areas.
On the other hand, many successful East Asian programmes operate under enclave models. Single factory models provide flexibility of location while offering the fiscal and trade-related benefits of zone programmes. However, they do not provide the benefits of concentrated infrastructure, administration,and services that are possible in effectively implemented enclave programmes. In certain situations, enclave programmes tend to be more advantageous than single factory models; for example, when significant challenges exist in the broad economy regarding access to infrastructure or its quality.
Enclave programmes also work better when resources to deliver on the administrative benefits of zone programmes (e.g. licensing, efficient customs administration, value added services) are limited, so that concentrating these resources in one location rather than spreading them over a large geographical area will result in superior service delivery.
The evidence suggests that single factory free zone firms in Africa fail to reap the investment climate advantages, in both infrastructure and services, available to firms based inside the industrial zones. And, enclave programmes are more effective where regulatory capacity may not be strong enough to define and enforce the terms on which firms can access single factory licenses, opening up the programme to significant risk of rent-seeking by domestic firms that choose to “switch in” to the zone programme to access fiscal or other benefits.
Traditionally, SEZ policy has focused on foreign sources of investment as a priority. However, while SEZs generally need a substantial volume of FDI, at least in the initial stages, to attract the knowledge and technology that can be the basis of structural economic transformation, experience has shown that local investment also plays an important role over time.
In fact, most successful zones that start with substantial FDI are eventually dominated by locally based firms. This was the case, for example, in Mauritius, Senegal, Tanzania and some countries outside Africa (that is, Malaysia and the Republic of Korea, and a similar pattern is beginning to emerge in China).
One of the reasons why Africa has failed to attract significant FDI the sectors designated for SEZs may not be globally competitive as platforms for assembly activity. Evidence has shown that activities related to the processing of regional natural resources may be a source of comparative advantage for African zones as noted in Nigeria and Ghana.
The Government of Nigeria put significant investment into its flagship free zone in Calabar during the 1990s. The aim was to develop a base to attract FDI into manufacturing to support the diversification of Nigeria’s economy. Despite significant efforts and investment, more than a decade later only a handful of companies are operating in the zone, and only some of them are actually manufacturers.
However,a second, smaller initiative to establish a free zone in Port Harcourt to support Nigeria’s large oil and gas sector quickly attracted scores of international investors and now employs more than 20 000 workers (compared with little more than 1 000 in Calabar).
Similarly, Ghana established a free zone program in the mid-1990s and developed a flagship project at Tema to attract global FDI and position itself as a regional manufacturing and trading hub. Despite programmes designed to establish its position in the textile and ICT sectors, Ghana initially struggled to attract investment.
However, large-scale foreign and local investors in natural resource sectors particularly in cocoa processing, wood and fish processing saw the opportunities of the free zone programme and have invested heavily both at Tema and (mainly) through the single factory scheme.
From an employment perspective, while economic zones have made an important contribution to absorbing large-scale unemployment in some countries (e.g. South Africa, Tunisia and Lesotho), their relative effect has been much less on jobs than on trade and investment. This is not surprising, as the externally traded sector is a minority in almost all economies.
Data from United Nations Conference for Trade and Development shows that the relative contribution of SEZs to exports in developing economies is 40 times greater than its impact on direct employment.
Again, the data available from the International Labour Organisation (ILO)show that, as of 2006, zones in Africa and the Indian Ocean (Mauritius, Madagascar, and the Seychelles) employed more than a million workers. This is equivalent to 4 percent of worldwide zone employment (excluding China; 1,6 percent including China). However, half of the total employment in the ILO database is from one country, that is, South Africa.
With respect to exports, the impact of African SEZs on exports has been elusive, both an absolute and per capita basis (with the exception of Lesotho).
The Ghana’s Tema enclave which hosts a small number of firms saw exports reaching US$280 million in 2008. Exports from the single factory units were almost four times as high. The success of exports under the Ghana programme is partly attributable to cocoa processing activities, which account for a large share of activity under the free zone program and have grown robustly since the program was launched in 1995. Interestingly, the activity goes beyond just cocoa, with firms in Tema involved in prefabricated housing (US$64 million in exports) and plastic household products (US$11 million in exports).
Outside the enclave, the free zone includes several exporters;for example, a tuna processor (US$100 million in exports); a processor of fresh fruits and juices (US$33 million in exports); and a number of timber companies (together accounting for up to US$200 million in exports).
In contrast, Kenya’s EPZ programme, often held up as an example of African success, looks rather lacklustre. Even including the single factory units, the programme, which has been operating for nearly two decades,accounted for just over US$400 million in exports in 2008, that is, US$11 million in exports per capita.
The free zone programmes in Nigeria and Senegal performed even worse, and Tanzania’s programme also produced limited exports, although Tanzania’s is still in the very early stages of development.
As was the case with investment, while nominal exports from the African zone programmes were extremely small (on average 10–15 times smaller than the corresponding absolute and per capita exports in the non-African programmes especially in Asia and Latin America), their contribution to national exports was much more in line with international SEZ norms. However, in some countries particularly Kenya, Nigeria, and Tanzania, the relative contribution of the SEZ programme is limited.
Anecdotal evidence suggests that success in African zones (even defined narrowly in terms of scope and time) has been limited to a few countries, such as Mauritius, Lesotho, South Africa, Madagascar, and to some extend Ghana.
In many other countries in the region including Nigeria, Senegal, Malawi, Namibia, and Mali SEZs appeared to be struggling for a variety of reasons, including poor location, lack of effective strategic planning and management, and problems of national policy instability and weak.
Even where programmes have been successful in attracting investment,creating employment, and generating exports, concerns remain over the quality of investment and employment, as well as its sustainability.
For example, recent experience of Madagascar, where employment in the SEZs has collapsed following the prolonged political crisis, illustrates the fragility of the economic zone models implemented in Africa to date.
As Zimbabwe is spearheading the establishment of SEZs, it must take into account some of these factors which were seen to be derailing the success of SEZs in a number of African states.
Together we make Zimbabwe great!
Dr Mugano is an author and expert in Trade and Competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University and a Senior Lecturer at the Zimbabwe Ezekiel Guti University. Feedback: Email: [email protected], Cell: +263 772 541 209.
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