FZW talks with Mr Claude Baissac about the successes and failures of free zones in Africa, assessing free zone investments, and the future of the model worldwide.
To what extent have Special Economic Zones (SEZs) and Free Trade Zones (FTZs) in Africa met countries’ policy goals to date?
While many African countries were early adopters of Export Processing Zones (EPZs) – Ghana, Kenya, Mauritius, Togo and Senegal among them – in no country besides Mauritius and, to a more limited extent, Kenya, did these programmes deliver on expectations. Investments remained limited and concentrated in narrow product categories, and job creation was insufficient to address the perennial problem of unemployment. These zones never became more than small enclaves of export industries to the consumer markets of Europe and North America. They never led to the kind of export supply response that was witnessed in Mauritius and in the famous Asian tigers of the 1970s-1990s, either through massive FDI or through significant domestic investment. And this despite the fact that the vast majority of African countries benefited from massive advantages in consumer markets access. More concerning is the fact that the competitiveness of these zones was never sufficient despite such access. Infrastructure constraints were not adequately addressed, with sub-par industrial zones offering in most cases intermittent electricity and water supplies, costly telecommunications, and inefficient logistics and customs services. Low labour costs were not sufficient to compensate these problems. This led to a problematic response by governments trying to boost attractiveness or retain investors: tax incentives were, and in many cases remain, the easiest lever available. As a result, many early SEZ programmes remain unsustainably dependent on a costly form of competitive dumping that is, frankly, a race to the bottom.
These EPZs were supposed to be the springboard from which Africa would rise as a manufacturing center. This never happened: the poor conditions in these EPZs were far better than conditions outside. And that has been a tragedy, as the region as a whole missed the pre-WTO opportunity it then had. Someone said that China ate Africa’s manufacturing lunch. I entirely concur. The proof of that is in the fact that manufacturing as part of GDP for Africa actually declined throughout the 2000s. Africa’s “choice” has been instead to focus on the export of unprocessed commodities.
Madagascar is a case in point: in the 1990s and 2000s it developed a meaningful garment export industry located in EPZs, with at some point over 100,000 jobs in that sector. Regular cycles of political turmoil caused by contestation over presidential election results have resulted in a dramatic decline of that sector. And today Madagascar’s first exports are natural resources. This is regressive, as commodities have been afflicted by wild price swings and generate well documented economic problems – like Dutch disease and the infamous resource curse. Yet, nothing in the international trading system prevented that country from starting a potentially virtuous industrialisation process.
I hear very often the notion that the lack of progress in turning the region into a manufacturing hotbed is caused by the region being denied market access, being subjected to unfair competition and other quasi-conspiracy theories. This is nonsense. If small, isolated, cyclone-affected and resource-poor countries like Mauritius could do it, then any country can. In my view, too few governments in the past were ready to do SEZs seriously.
Now, new generation SEZs have sprung up in just about every country, or are being considered. Old or defunct EPZs are being rejuvenated. Countries that never had programmes are adopting them. I have personally worked on this new wave in Botswana, the DRC, Ethiopia, Kenya, Lesotho, Madagascar, Mauritania, Senegal, South Africa, Togo and Zimbabwe. Here is an opportunity to change the game, where the focus is not incentives to attract footloose firms to serve narrow product bands in narrow markets, but to provide a meaningful improvement in competitiveness. This means a balanced offering of solid infrastructure, responsive business environment (business permits and licences, logistics and customs, immigration and visas, labour regimes, etc.) and a focus on sectors where host countries possess meaningful potential for competitiveness.
This is hopeful. But I must confess that I see a few issues presenting risks:
- Firstly, I am not convinced that most governments understand why EPZs failed, and are ready to muster the political muscle required to generate truly special economic zones. It takes a lot of resources to create the right infrastructure, and even more resources to convince (and sometimes force) existing vested interests in the public administration (licencing, tax, labour, immigration, customs) to do things differently. And then it takes a lot of resources to investment promote and effectively enforce the SEZ regime so that a truly effective business environment prevails, and eventually acts as a positive pull on the rest of the economy.
- Secondly, the world trading system has changed dramatically, and Africa must now compete against countries on a level playing field. This means that the SEZ offering must be world-class. Incentives just won’t do. And they are actually dangerous from an economic standpoint. There is very little point developing kinda-sorta-SEZs. Do them well or do something else with your scarce fiscal and technocratic resources.
Emerging African economies without strong industrial bases, like Ethiopia and Uganda, are planning to use SEZs to add value to raw materials and create home-grown industry. Which countries or specific free zones should they look at as positive examples, or as cautionary tales?
As I said earlier, there are many cases of failure in Africa which are rich in lessons that still need to be absorbed. I would strongly encourage government officials and members of the private sector keen to see SEZs succeed in their country to take the time and read two essential books on success and failures of SEZs in Africa and beyond: Special Economic Zones in Africa: Comparing performance and learning from global experiences, and Special Economic Zones. Progress, Emerging Challenges and Future Directions. Both were published in 2011 by the World Bank under the direction of Thomas Farole. They are reference works.
As examples that are nearshore, I would obviously use Mauritius, which is a case study in pragmatism, progressive infrastructure investment designed to match incoming FDI, a strong encouragement of active domestic private sector investment in the different sectoral SEZs developed over the past four decades, and a judicious use of incentives.
As cautionary tales I would point to Senegal, which has for the same four decades experimented with different regimes without creating predictability while at the same time overcompensating for an overall weak offering with too many incentives. In my view, Senegal systematically got it wrong, doing the exact opposite of what Mauritius has done.
I would also point out to Lesotho, which is a fascinating success story in rapidly attracting large amounts of FDI in the apparel and garment industries, and experiencing rapid rises in productivity, and then getting stuck there. My own view is that they emphasised incentives and AGOA too much, without seeing the huge opportunities offered by their large regional market.
How far do you see China’s Belt & Road Initiative going toward promoting the diversification of industries in African free zones?
The role of China is really interesting. The arrival of China in the international trading system in the 1990s negatively impacted Africa, in that the continent found itself unable to compete against that economic juggernaut for the attraction of offshore manufacturing serving the world’s main consumer markets. For the reasons mentioned earlier the vast majority of African countries failed to develop frameworks like EPZs that could take advantage of their preferential market access. Yet, as demonstrated by authors like Ancharaz in the case of Mauritius, even when China’s share of global manufacturing exports was rising, concerted strategy could yield comparative advantage to smaller countries in select value chains.
In parallel to this competitive syphoning, China’s role as a trading and investment partner of Africa rose dramatically in the 2000s, supplanting all others by the end of the decade. Two factors contributed to this astounding phenomenon:
- First, China’s voracious need for commodities, which both served Africa’s need for export revenues and contributed to the relative decline of manufacturing in the region.
- Second, China’s search for markets for its consumer products, which also contributed to the region’s crisis of manufacturing.
The country simply swamped the region with cheap consumables. There is a telling set of statistics to support this view. One is the increased correlation between China’s GDP growth and Africa’s from circa 2000. Another is the increased correlation between China’s imports of minerals from Africa and Africa’s natural resource rents.
There is some argument that a new phase in China’s relation with Africa began post-financial crisis, marked by rebalancing. There are both economic and political factors behind this, including the lowered competitiveness of China in export manufactures, and the China Dream project, which seeks to turn the country into an advanced economy. China is now exporting jobs, searching for more competitive labour costs. The Chinese SEZ projects that are dotting Africa are a manifestation of this. Results in Ethiopia are impressive. There is similar progress in Rwanda, and movements in Senegal. Is this the beginning of a manufacturing revolution in Africa? My own experience tends to say that results are going to vary enormously between countries. Resource rich countries are now facing a resurgent resource sector. This will make competitiveness in manufacturing difficult to achieve. On the other hand, resource poor countries may be facing a real opportunity to regain what was lost in the past twenty years. But, as stated above, this requires a serious commitment toward meaningful SEZs, and encouraging domestic entrepreneurs to play an active role in manufacturing. Otherwise we risk seeing enclave manufacturing all over again, with no long term impact, and a systematisation to that economic dead end: the fiscal incentives based race to the bottom. That risk is real.
What kind of risk analysis will a multinational typically undertake before investing in a free zone?
This varies a lot according to the country of origin, type of firm (listed or not), size of firm and sectors. Large listed OEMs have to be very systematic, rational and adequately address country risk factors before selecting a location. Considerations are vast: geographic location within the commodity/value chain, logistics and transport costs, tax compatibility, country stability, factor costs competitiveness, quality of life, and so on. They must increasingly weigh in social and environmental issues that may create perception issues and liabilities. Specialist consultancies and divisions are dedicated to this task, using extensive databases and proprietary software. Selection rigor also applies to the large order taking manufacturing groups that serve OEMs and consumer brands, these businesses that produce most of the world’s stuff and whose names are not household names. To a larger extent, cost competitiveness is a much more significant factor for them. At the level of small firms or single factory entities, the selection process is much less empirical and much more experiential : personal experience or networks, recommendations by other firms, encounters with investment promotion agencies, etc.
To what extent do you see protectionist trade policies posing a threat to the expansion of free zone programmes worldwide?
This is a really interesting question. I remember clearly the debate on what the impact of WTO would be on SEZs back in the early to mid-1990s. At the time I was privileged to have been offered a research position at WEPZA by that giant of SEZ experts, Richard Bolin. Many experts then dismissed the relevance of SEZs in a post-GATT world as redundant since preferential trade agreements would be superseded, and most EPZ programmes at the time were designed to take benefit of these agreements. Right before joining WEPZA I had done a stint as a consultant with UNCTAD, and that view was prevalent there. A prominent SEZ expert there told me that SEZs were finished! For Bolin, this aspect of SEZs was but one of them. He understood that they were primarily an investment climate and innovation instrument. His views on this were very close to those of new growth theory (as propounded by the new Chief Economist at the World Bank, Paul Romer). At about the same time, new work was emerging on exactly the same topic. Johansson used Mauritius as a case study of SEZs as catalysts for growth. My own view is that they are a laboratory for government and domestic private sector to learn about international trade, investment and innovation. They are, if well done, tools of structural transformation. But, if badly done, they are costly failures… But, in summary, SEZs are resilient to changes in trading conditions and environment. Bolin was clearly right: the number of SEZs keep on rising.