What Africa can learn from China’s special economic zones

Yejoo Kim Correspondent
China’s own experience in industrial development through the special economic zones offers valuable lessons. Special economic zones (SEZs) are geographically designated trade areas that are used to attract foreign investors and boost industrialisation.

They generally have trade laws that differ from the rest of the country and companies are offered tax incentives to set up operations.

For African countries, setting up SEZs can boost the diversification of their economies and promote manufacturing.

China’s experiences indicate that for zones to succeed, African governments must improve infrastructure and technology and have an educated and competent labour force as well as efficient and effective administration.

China introduced SEZs in the 1970s as part of its policy to open up to international trade. Deng Xiaoping’s economic reforms became the turning point towards a market-oriented economy.

A series of experiments, including the establishment of SEZs, became the driving force for growth. China set up zones in southern coastal areas as part of the economic reforms under the open door policy.

They were very successful and led to unprecedented growth. Shenzhen, a small fishing town, became the first SEZ. It is now the most prominent manufacturing hub on the globe.

This inspired African countries and became the rationale to establish the so-called Chinese led-SEZs in Egypt, Mauritius, Nigeria, Zambia and Ethiopia in the mid-2000s. More African countries are planning to establish SEZs.

In South Africa, the Special Economic Zones Act was passed recently and 10 were selected.

While physical infrastructure and modern facilities at SEZs can contribute to the modernisation of industrial processes in the country, soft infrastructure is as important when it comes to attracting investors. In the case of China, investment in human resources and local industry has played a significant role.

Co-operation between the central and provincial governments under the overarching long term plan was also crucial. The Chinese cases show that the zones have brought about spillover effects like forward-backward linkages with domestic enter- prises.

This contributed to the development of entire provinces, as well as the country. In addition, the country was able to provide abundant and skilled labour to sustain the zones.

Over the years, China has also continuously upgraded its SEZs. One example is the creation of the Shanghai Free Trade Zone.

Shanghai is one of the largest metropolises in China. In 2013 it ranked third in China’s economy in terms of GDP. It boasts the world’s biggest container port and Shanghai Pudong International Airport is an international hub. Heavy and chemical industries have become one of the mainstays of the city’s economy. Its versatile manufacturing sector ranges from cars to household appliances and tex- tiles.

The establishment of the Shanghai free trade zone is in line with China’s reform process. Shanghai is the country’s first special customs supervision zone and enjoys the status of a free trade area like Hong Kong.

There are challenges, however. The slowdown in China’s economy has affected development. The prospect of cheap labour that once enabled the country to attract foreign investors is no longer there.

Another concern is that right after the establishment of the Shanghai free trade zone 12 cities and provinces expressed interest in having the same arrangement. In the original plan, the focus was on Shanghai alone, but it seems that competition between provinces and other free zones has intensified.

SEZs have become a popular buzz-word in many developing countries and competition is intense.

Most countries think that SEZs will be a panacea for their economic woes.

There are an estimated 3 500 SEZs operating in 130 countries globally. The zones are in serious competition with each other.

In response to the growing competition each zone is trying to specialise so that it can take advantage of local conditions.

In Africa, many countries have provided unprecedented fiscal and non-fiscal incentive packages to attract foreign direct investment into SEZs

But those that have been established have not delivered what was expected. The reason, among others, is that governments made poor location choices and lacked effective strategic planning and manage- ment.

On cost and benefits, the initial cost, for instance fiscal and non-fiscal incentives for investors, is often higher than the gain. In addition, benefits are not automatically generated after a zone has been established.

In many cases, policy makers have not set up long-term plans and there is a lack of consultation with local communities.

To benefit from the zones African governments must set up and implement sound policies. African governments should note that the Chinese government improved the regulatory environment and tax policies for trade and investment.

Many African countries produce similar raw materials. This means that there is strong competition between them. Host countries should therefore develop strategies based on competitive advantage that can maximise potential.