Recent geo-economic challenges combined with China’s global rise have led to a rethink of international trade, which sees the African continent at the center of new geo-economic interests; as we will observe in this analysis, it is possible to try to reconcile the expansionist drives of the great superpowers with the needs and requirements of African countries, through the « special economic zones » (hereinafter referred to as SEZ), demarcated geographical areas, located within the national borders of a country and which have economic regulations created ad hoc so as to be more suitable for managing the needs of world business, as the Chinese case of Shenzen demonstrate.(1)
In this analysis we will firstly examine the general characteristics of these territories in order to fully understand their socio-economic results; secondly we will examine the SEZ located in Africa and the most relevant factors for their performance; finally we will observe the role played by the EU in these contexts.
2. Characteristics of the SEZ
The SEZ are formally delimited parts of the national territory governed by a specific regulatory regime that may be contained either in one or more dedicated laws or in a series of regulations; their administration usually requires a dedicated, centralized or decentralized governance structure; the characteristics of this structure vary according to the nature of the regime of the zone, the prevailing administrative culture, the number of existing zones, the role of the private sector in the development and operational zones, etc.(2) They usually include a physical infrastructure supporting the activities of businesses and economic agents operating within them. this structure usually consists of industrial or mixed-use areas, and main transport infrastructure connecting the area to its sources, markets and economic hinterland; thus, usually including real estate, roads, electricity, water and telecommunications.(3) Their creation is usually favored by a political intent, which is often based on the desire to generate or participate in the economic transformation of the countries, more quickly or more effectively than is possible otherwise, thus being specifically designed to become catalysts for growth.
It is possible to categorize these areas in the following way:
Free zones and free trade zones: these are the first forms of SEZ designed; they mainly concern customs warehouses located within, or near, international transport nodes (mainly in ports and some airports) and usually are, directly or indirectly, under their administration. Their activities are closely linked to commercial operations (warehousing, sales, organization of fairs) and product processing (packaging, labelling, quality control, sorting).
Export Processing Zones: appeared at the end of the 1950s – early 1960s, they represented a way to accelerate industrialization and international trade in developing countries: they were essentially made up of a fenced area of several hectares offering land for rent/leasing, free of customs duty, benefiting from tax incentives and regulated by simplified administrative procedures that aimed at re-exporting those goods that achieved significant added value as a result of processing on site.
Industrial parks: areas developed and divided into lots on the basis of a general plan that includes infrastructure, transport, utilities, with or without production units, in some cases with services in common use for the benefit of established companies.
Simplified logistical areas: these include large portions of land, including urban and rural areas and large transport facilities, such as ports and airports; they may include entire economic regions, with both the people who live and work there and all the economic activities carried out, sometimes even containing or even overwhelming political and administrative units.(4)
From a political point of view, we can see that these areas are created with the following objectives (although they are not absolutely exclusive): to attract direct investment from abroad; to alleviate large-scale unemployment; to support a broader strategy of economic reform; as experimental laboratories for the application of new financial, legal, labor and even price quotation policies and then extend them to the rest of the country. Considering instead the advantages, we can see that they are of two types, short-term, defined static economic benefits and long-term, defined dynamic economic benefits, characterized as follows:
Static economic benefits: they are possible in a relatively short time through the use of economic zones as instruments of trade and investment policy; they are the results of specialization in a given sector and the exchange of goods, including also the creation of jobs and the export development.
Dynamic economic benefits: these are long-term structural and development benefits that could be derived from the zones; they include the promotion of non-traditional economic activities, transfers of machinery, technology and know-how, the encouragement of domestic entrepreneurship and the promotion of economic openness. Finally, these areas can produce positive long-term changes in the competitiveness of a country or region.
- Socio-economic outputs in the SEZ worldwide:
Economic zones have grown rapidly over the last 20 years; in 1986, the International Labour Organisation (ILO) database reported 176 zones in 47 countries while by 2006, 3,500 zones had been registered in 130 countries; this enormous growth has occurred despite the fact that many zones have not achieved their objectives while others have contributed significantly to the growth of foreign direct investment (FDI), exports and employment, as well as playing a catalytic role in global trade integration and structural change, including industrialization and modernization.
Social development objectives have also been rather difficult to achieve, as although SEZ have created job opportunities for poor women (especially in rural areas), most of them still fail to achieve quality jobs and a decent living wage. There is also a strong correlation between the performance of special economic zones and national economic policies promoting competitiveness and investment and the role played by the position and size of the market; in this sense, areas with immediate access to large markets, producers of raw materials and labor in general tend to be more successful.(5)
Finally, the results of the survey show that the investment climate within the area – particularly for infrastructure and trade facilitation – is closely linked to the results achieved; thus a strong correlation can be observed between the quality of infrastructure and the results achieved in terms of investment, export and employment in the areas under review; on the other hand, factors related to trade licensing and regulation in the areas appear to be less relevant.(6)
- General considerations on SEZ in Africa
Although a number of African countries have implemented free zones since the early 1970s (Liberia in 1970, Mauritius Island in 1971 and Senegal in 1974), in most African countries they took their first steps in the 1990s or 2000s; it is important to note that there are few areas that have shown rapid growth since the beginning; even the most successful ones have grown slowly in the first 5-10 years, then move to an exponential growth curve and finally reach « maturity », slowing down growth. The facts suggest that success in African SEZ has been limited to a few countries, such as Mauritius, Kenya, Madagascar and Ghana. In many other countries, including Nigeria, Senegal, Malawi, Namibia and Mali, these areas appear to have several problems, including poor localization, lack of effective strategic planning and management, problems of national political instability and weak governance. Even where programmes have been successful in attracting investment, creating jobs and generating exports, concerns remain about the quality of investment and employment and their sustainability. The recent experience in Madagascar, where employment in the SEZ has collapsed following the prolonged political crisis, illustrates the fragility of the special economic zone models implemented in Africa and Indian Ocean to date.
- What factors are important for the SEZ performances?
In order to better understand the performance of the these structure located in Africa, the following variables have been considered: investment, access to basic necessities, exports, trade infrastructure and services, regulatory regime, trade tariffs and preferences, taxation, employment and social factors.
The investment climate
The first indicator analyzed is represented by the investments that a SEZ is able to attract; without them there will be neither employment nor export, nor any possibility to achieve economic benefits, thus determining the lack of a « favorable investment environment » which should be substantially better than the one available in the rest of the country.(7) Investments are made within a context characterized by risks, opportunities and transaction costs, elements which in turn involve not only the investment itself, but also the management of a company; it should be noted that this complex mix is determined by a complex interaction between laws, policies and bureaucracy at both local and national level; various reports indicate that the African SEZ are often affected by the same problems that can be found also in the rest of the country (and which also limit their investments there): the instability of the electricity grid, lack of water, highly penalizing bureaucracy and corruption.
Most of the investments in SEZ are aimed at increasing exports, and for this reason particular attention is paid to competitiveness, labor costs and productivity; traditionally these areas policies have always given priority to investments of foreign nature and origin. However, while the latter generally need a significant volume of FDI, or at least in their early stages, to attract the resources of know-how and technology needed for structural economic transformation, local investment will also play an increasingly important role over time; irrespective of where the funding comes from, it is spread over a wide range of economic activities; all these areas include companies operating in the food sector, especially in Ghana, where most of the investment in cocoa processing takes place within the free zone. Investments in this sector are also very significant in Kenya, Tanzania and Senegal, according to the importance of the agricultural sector in most African countries.(8)
Access to basic needs
In most of African countries the location of a company within a SEZ gives greater capacity to procure basic needs than the rest of the country; however, this is offset by a very poor quality of its infrastructure in most countries, which has a strong impact on the possibility of creating a favorable global environment for investors. For most of the manufacturing and service companies operating in the SEZ, electricity is the most important aspect, and its reliability and costs are extremely important; in these areas the supply of electricity is considerably more reliable than that available in the rest of the country.(9)
The volume of goods exported is probably the most widely used indicator of the performance of the SEZ. Those located in Africa are strongly oriented towards foreign markets, due to the fact that the zones have been designed and regulated to encourage companies to export rather than to sell on the domestic market; it has been noted that in general, with the exception of Nigeria and Lesotho, these areas place significant restrictions on sales on the local market by the companies located in the SEZ, although this situation may change.(10)
Infrastructure and trade services
The SEZ should also ensure access to quality transport between the areas themselves and the main transport hubs (ports and airports); however, this happens only occasionally and also involves additional costs; it is therefore likely that the return on investment in a transport in these areas is determined by where it is located: the closer these areas are to the main trade hubs (ports, airports and borders), the more likely it is that they will be able to stimulate foreign investment. It should also be noted that it is equally important to ensure that exporters have access to all those services that are essential to their business, such as customs services and logistics support, the further improvement of which is directly linked to increased attractiveness for foreign companies. It should be borne in mind that not all SEZ under consideration have customs clearance services in place and that secondly, the availability of special administrative arrangements for customs clearance does not necessarily guarantee their effectiveness. Finally, the efficiency of regulation in these areas is diminished by the inefficiencies of the transport hubs, which, by generating delays, undermine the work done by the customs administration in these place.
The regulatory environment includes several administrative-legal aspects, which could affect the ease with which companies can start and carry on their business; more specifically, it describes the relationship between the private sector and state institutions (e.g. bureaucracy), the laws concerning the SEZ and their accompanying regulatory frameworks, which are the basic basis for any Special Economic Zone programme; they must be comprehensive and clear, with clear basic rules established for all stakeholders. Although this may not be enough to ensure success, the absence of good laws and regulations almost inevitably leads to failure.(11) In general, there is often excessive and poorly enforced regulation in the countries concerned, which undermines the competitiveness of companies, increasing the costs and risks associated with business activities and requiring considerable management time which, by distorting incentives, undermines the competition of companies themselves; in particular, the process of setting up a company – including obtaining licences and permits, preparing facilities and access to public and non-public services – can be time-consuming, costly and subject to corruption by government officials.
One of the main non-tax advantages of these areas under consideration is their potential to simplify these steps; this is partly achieved by reducing the regulatory burden for companies operating in the area (e.g. by not requiring compliance with certain regulations, permits and/or licenses). Most of the SEZ also try to « safeguard » investors, avoiding direct interaction with the bureaucracy through service companies, which coordinate all regulatory requirements between investors and the various ministries and agencies.(12)
Tariffs and Trade Preferences
Another important criterion concerns tariffs, trade preferences and rules of origin; from the point of view of imports, the African SEZ offer practically the same preferences to companies operating in the zones as the use of products and equipment for duty-free production; most of these zones are in an enviable competitive position, especially as regards their access to US markets.
Fiscal and non-tax incentives for companies are part of established practices in these areas around the world; however, many of these schemes eventually become overly dependent on the granting of such incentives and overlook the possible presence of other issues related to the investment climate in these areas; on the other hand, incentives have played an important role in catalyzing investment in some SEZ, particularly in the early stages of their development, and it can be seen that these incentives are still very important for investors. The main incentive found concerns corporation tax: usually in the countries concerned, the standard tax rates for corporation tax do not vary much, mostly between 25% and 30%. All these areas (except in Senegal) offer substantial exemption periods, and Nigeria even offers tax exemption status to investors; tax incentives may play a role in attracting short-term investment, particularly in new zone programmes, but they do not have a positive effect on the long-term success of these areas.(13)
Employment and social factors
Although SEZ are often the main recipients of foreign direct investment and strongly export-oriented, their overall impact on the labor market tends to be rather small, despite they are excellent catalysts for employment in smaller countries; the absolute and relative contribution of these areas to employment in African countries is limited (with the significant exception of Lesotho), even when compared to domestic industrial production; as regards the quality of employment, the monthly wage, adjusted to purchasing power, varies from a minimum of $232 in Kenya to $371 in Senegal. It should also be emphasized the presence of several problems, related to a poor quality of work, with significant social consequences, like the lack of career advancement opportunities, especially for women, which, although they constitute the majority of the workforce and are more employed in companies located in the SEZ than in companies located in the rest of the country, hardly reach supervisory and management positions; the lack of social infrastructure, as despite the fact that most of these areas are located within or close to the main metropolitan areas, their workforce has to move from often distant rural communities; this has led to large-scale migration in some countries (such as Lesotho), which has put significant pressure on the already weak social infrastructure, particularly in terms of housing supply, education and decent health services, and has also encouraged the emergence of diseases such as HIV.
Although, at least in theory, significant progress has been made in most areas over the last decade in terms of compliance with international standards, de facto enforcement remains weak in a number of areas, particularly with regard to issues such as poor enforcement of labour standards, poor working conditions, low wages and near zero benefits.(14)
- The role of the EU
It is important to focus on foreign investments, given their potential for development in these areas; in this regard, the EU is an African important partner in trade, in foreign investment and in development, and in this respect it has contributed through various programmes:
The External Investment Plan (EIP), that since 2017 aims to increase investment in partner countries in Africa (and in the European Neighborhood) and that is intended to contribute to the UN’s sustainable development goals (SDG), while tackling some of the root causes of migration. It mobilize sustainable public and private investments to improve economic and social development, with a particular focus on good job creation by mobilizing finance – through the European Fund for Sustainable Development(15), providing technical assistance to help prepare investment projects and developing a favorable investment climate and business environment.(16)
Africa-Europe Alliance, launched by Jean-Claude Juncker in 2018 and intended as a new Africa-Europe Alliance for Sustainable Investment and Jobs, complementing a long-standing political partnership between the two continents; it stressed on the economic and trade relations going beyond the logico “donor-recipient approach”, putting the EU and Africa on an equal footing, developing more economic investment, job creation and trade.
Assistance (ODA) per year.
This Alliance proposes to boost strategic investment and strengthening the role of the private sector to create jobs, to invest in people by investing in education and skills, to improve business environment and investment climate and finally to exploit the full potential of economic integration and trade through resources of various kinds, including those of the long-term EU budget, in which Africa remains a priority.(17)
The success of these zones is strongly conditioned by their ability to integrate into the national economy, its ability to attract foreign investment and the government’s ability to do so; however, most of these zones have been designed to increase trade and foreign investment, based on low labour costs, trade preferences and tax incentives, which are important factors but which alone do not guarantee the performance or survival of these zones.
A consistent and sustained commitment on the part of the central government is so important for the success of these areas, given that the first results are achieved 5-10 years after the birth of these territories, thus determining both who manages these areas and how they are managed, highlighting their objectives, incentives and capabilities. An effective legal and regulatory framework is also an important step for the development of these programmes: in fact, while its presence is certainly not a guarantee of success, its absence will probably condemn any special economic zone to failure.
Further implementation of these regulations is equally important as it is often the case that laws defined as « virtuous » end up being poorly enforced; in this respect, effective monitoring and evaluation would allow some of their shortcomings to be detected (and subsequently resolved). The location of an area is too often determined by political, rather than commercial or economic considerations, and governments acting in this way usually condemn them to failure; the quality of infrastructure also represents an important gap in many African areas; the priority of programmes concerning the SEZ should consider their integration into local infrastructure networks and their integration within the domestic market.
Finally, another critical and determining factor for the success of these programmes is the support for inward investment in the areas; the data provided by the successful SEZ show that local investors play an important role in the medium term.
1 Originally a simple village which in twenty years has become a city of more than ten million inhabitants; Source: Wikipedia, https://fr.wikipedia.org/wiki/Zone_%C3%A9conomique_sp%C3%A9ciale
2 Source: Oecd Observer, http://oecdobserver.org/news/archivestory.php/aid/3101/Free_zones:_Benefits_and_costs.html
3Source: Exportiamo.it, https://www.exportiamo.it/aree-tematiche/13729/free-economic-zones-pros-and-cons/
4 Source: Oecd Observer, http://oecdobserver.org/news/archivestory.php/aid/3101/Free_zones:_Benefits_and_costs.html
5 Source: The World Bank, http://documents.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdf
7 Source: Theciip.org, https://www.theciip.org/sites/ciip/files/documents/SEZ%20Report_2017.pdf
8 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
9 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
10 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
11 Source: The World Bank, http://documents.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdf
12 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
13 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
14 Farole, T. (2011) Special economic zones in Africa, comparing performance and learning from global experience
15 The EFSD is one of three pillars in the European External Investment Plan as part of the EU’s response to the arrival of high numbers of migrants and refugees; it’s based on using “public funding as a guarantee to attract public and private investment to create real jobs,” as Juncker said in 2016; Source Devex.com, https://www.devex.com/news/the-european-fund-for-sustainable-development-what-s-it-all-about-91214
16Source The European Commission, https://ec.europa.eu/commission/eu-external-investment-plan/what-eus-external-investment-plan_en
17 Source The European Commission, https://ec.europa.eu/commission/africaeuropealliance_en
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