NS4301 Political Economy of Africa Summer Term 2015 Special Economic Zones (SEZs)

Introduction Oxford Analytica, “Africa: Special Economic Zones Have Muted Effects,” August 15, 2013 Compared to Asian countries, African counties have been relatively slow in adopting special economic zones (SEZs) SEZs are intended to produce faster and more diverse economic development. The zones take several different forms Typically compromise demarcated geographic zones where firms Receive preferential – usual more liberal administrative, regulatory and fiscal treatment Agree to invest in export-oriented products 2

SEZs Rationale Observations: Africa’s SEZs could conceivably benefit as rising domestic Chinese labor costs prompt some Chinese offshoring However labor productivity and cost levels in Asia will constrain scope of African firms to benefit SEZ concept encompasses a wide range of objectives Attraction of foreign direct investment (FDI) especially from multinational enterprises with potential for transferring technological, knowledge and skills Concentration of modern infrastructures as a means of promoting “agglomeration” economics including Competitiveness Employment creation Spin-offs to domestic economy 3

African SEZs: History SEZs History not encouraging In 1970s several African countries adopted a narrower version – export processing zones (EPZs) Idea to re-orient domestic economies away from failed import substitution strategies towards more export oriented strategy Offered duty free imports and other incentives Production usually occurred in fenced-in industrial estates Usually located adjacent to major ports or airports However except for Mauritius experiments largely failed to meet their objectives 4

African SEZs: Problems Failure associated with inadequate: Governance Political commitment Implementation capacity Due to failures not until the 1990s and 2000s that a number of African countries began to adopt the boarder SEZ approach Today most countries in eastern or southern Africa already have or are getting ready to establish SEZs Most are in Kenya and South Africa 5

African SEZs Today Patchy record outside of China Taiwan and South Korea For Africa: A second best policy option Enables countries to avoid tackling policy induced weaknesses that should be addressed directly Today SEZs account for almost ½ of sub-Saharan Africa’s exports Yet such exports were of very modest volumes Reasons SEZs have fallen short of objectives Largely failed to generate “static” benefits such as higher level of investment, exports and employment Have not yielded more “dynamic” benefits such as Diversification of production, Technological upgrading and Structural economic transformation 6

African SEZs: Limited Impact I Reasons for limited impact Many African SEZs have not moved much beyond the more limited EPZ model oriented toward export promotion Ignores some key contemporary policy challenges: Growing trade in services Movement towards closer regional integration Have not paid adequate attention to generating backward and forward production linkages between firms inside and outside the zones As a result their effects on the real economy have been limited. 7

African SEZs: Limited Impact II Reasons for SEZs failure Poor quality of infrastructure, especially inadequate water and electricity supplies Weak trade facilitation (simplification of import and export procedures) Weak governance Lack of institutional coordination Poor integration with national trade and industrial strategies Remoteness from markets and Policy uncertainty 8

African SEZs: Assessment Assessment Still an attractive alternative However considerable barriers to success remain Both within the enclaves and Ability to benefit the local economy Until countries successfully resolve their structural problems, SEZs will not be much se in diversifying and industrialization However removing structural problems might negate the need for SEZs 9