FZW talks to Dr Deborah Bräutigam about China-Africa trade and the long-term impact of free zones.
In your research of Chinese-African joint establishment of free trade zones in Africa in the 2000s, you noted mixed results as of 2011 in terms of investment, trade volumes, and employment. In terms of these parameters, how would you characterise the state of these free zones today?
In China, special economic zones had a surprisingly slow start. Most did not blossom until at least a decade after construction began. We have now had almost a decade since the first Chinese trade and economic cooperation zones began construction in Africa. All are behind where they were optimistically expected to be by now, but some have made very visible progress since 2011. I visited the Eastern Industrial Zone in Ethiopia several weeks ago and was struck by the large number of companies that had set up operations since my last few visits. The Ogun Zone in Nigeria is also doing very well. A practicum team from Johns Hopkins University School of Advanced International Studies (SAIS) worked with the Ogun Zone on a sustainability plan in 2015-2016. The Zambia Chambishi and Lusaka zones are making slower progress. The Tianjin TEDA zone in Suez, Egypt was doing well until political instability made investors more cautious about that country. The zone in Mauritius has been reconceptualized and might finally begin to show some progress. And now a new generation of Chinese-supported industrial zones is being discussed – linked to railway projects in Tanzania, Kenya, and Ethiopia. I deliberately use the term “industrial zone” because these zones are governed by a lot of different policy regimes, and those regimes are set by the host governments, not the Chinese firms.
To what extent does China’s central government have major, specific policy goals vis-a-vis African free trade zones, or do individual zones meet the needs of different Chinese businesses and development entities on a case-by-case basis?
Beijing has an overarching goal of promoting “win-win” development in Africa, i.e. Chinese engagement that is, on balance, profitable for Chinese companies and also beneficial for Africans. Infrastructure meets this goal well, and the zones in Africa are, above all, infrastructure. The first generation of trade and economic cooperation zones were subsidized by the Chinese government through the Ministry of Commerce. Once the firms met construction benchmarks such as leveling, roads, electricity they could apply for rebates. Aside from this, the zones have evolved to reflect the interests and needs of the Chinese company that is building them. In some cases, this interest is limited to the zone as a real estate investment. In other cases, Chambishi for example, most of the firms in the zone are related to the developer, a copper mining company.
How far should value chains, transforming raw materials into diverse exports, be the top priority of African governments vis-a-vis free zones?
This will vary by country and by the particular value chain. In Ethiopia, for example, electricity is very cheap and labor is inexpensive. Simply employing that labor can be a top priority at this stage of development. Because of this, it even makes sense to import raw leather for transformation in the country’s tanneries. That finished leather can then be made into shoes, gloves, and other leather products. But it also makes sense to import fabric for the manufacture of garments for export. That’s how China and Asian countries started, importing fabric from Japan and Korea, and using cheap labor to turn it into garments. In mineral rich countries it may make sense to add some value to raw materials. Bauxite, copper, iron ore all need energy-intensive processing. Agro-processing is also a sensible subsector. Yet the purpose of a true free zone is to process inputs that come in from outside—that’s why they’re free, so that inputs can easily enter, and exports easily leave.
What might African free zones be able to do to attract overseas investment from high-end industries like high-tech and communications?
It’s still too early in most African countries for this kind of investment, although some simple assembly of handsets and other electronics is possible. Garments, shoes, etc. are the entry stage industries. High-tech and communications demand more educated, skilled labor. Even in China high-tech is a more recent addition. Perhaps zone managers with this kind of vision can cooperate with local municipalities to build and operate vocational schools to prepare the next generation of workers – but they would need an anchor company willing to employ these workers, and expand as needed.
Is there a need for international standards of best practice, and more formal, organised means of sharing best practice between free zones? Which areas specifically, and has there been meaningful progress in this area more recently?
It’s always helpful to share best practice, although those best practices might vary depending on the kind of zone and the role of host governments. I know that the World Bank has been working closely with the government of Ethiopia on their new industrial zones, as have some Chinese institutions, such as Peking University and consultants. Tsinghua University hosted a workshop on zones for officials from several African states. It is often helpful to figure out what African officials want to know and then tailor site visits and expert assistance to meet specific learning goals.
The Southern African Development Community (SADC), the East African Community (EAC), and the Common Market for Eastern and Southern Africa (COMESA) have come together to create the Tripartite Free Trade Area (TFTA) in Africa, mirroring similar concurrent projects in Europe, Asia and the Americas. How might this agreement affect the development of free zones in the region?
If the entire area is a free trade area, then zones will still be needed, but they will be principally industrial (or service) zones, where companies can cluster together with one-stop-service offices providing logistics, government permits, waste treatment, and so on.
A lack of infrastructure and logistics integration has inhibited FDI flows to Africa. Can TFTA realistically spark greater continental integration in energy, transport, and telecom?
No. The TFTA can only promote integration where the physical infrastructure is in place – primarily roads, ports, and cross-border railway. Currently, zones substitute for the lack of these things. Only governments working in concert, can lead to cross-border integration of power supply and other infrastructure. Even when the private sector takes the lead, governments need to negotiate guarantees and terms of engagement.
Lekki Free Zone in Nigeria, the Nkok SEZ in Gabon, and the Suez Economic Zone in Egypt are examples of African free zones developed in partnership with, or principally by foreign entities. To what extent do you foresee African business groups taking a more leading role in the creation of free zones, with the expansion of free trade on the continent?
The experience of zone construction in Asia was driven more by governments. In China, for example, zones were built by provinces and cities, not by private companies. For African business groups to implement zones, they would need to be confident that the government won’t change the policy environment. I’m not sure there are that many governments yet in Africa committed to industrialization, structural transformation, and industrial employment.
What conditions must be in place in order for a country to develop a successful free trade zone model? Can African countries and others implementing free trade zones learn from China’s successes, or were the economic and political factors in place too specific to emulate?
It’s not just China’s experience. Free zones have been successful in Ireland, Taiwan, Singapore, Malaysia. The basic political factor is consistent government commitment and leadership – real local ownership of industrialization and labor-intensive employment as a priority. Other things can fall into place once you have that.