Not busi­ness as usual

Spe­cial eco­nomic zones can work in Africa, but they need the right poli­cies and sup­port to grow

China Daily (USA) - - ANALYSIS - By LU­CIE MORANGI lucy­morangi@chi­

African gov­ern­ments have re­cently en­tered into part­ner­ship deals with Chi­nese firms for the con­struc­tion and pro­mo­tion of spe­cial eco­nomic zones in the belief that the firms can im­port the suc­cess that China has had over the past three decades.

But Zan Baosen, the gen­eral man­ager of Zam­bia-China Eco­nomic and Trade Co­op­er­a­tion Cen­ter Ltd, says the re­la­tion­ship is a two-way street.

“This model is a strong drive to pro­mote so­cioe­co­nomic trans­for­ma­tion that has been suc­cess­fully proven in China,” he says. “But it can work only if gov­ern­ments pro­vide strong strate­gic lead­er­ship and man­age­ment.”

SEZs are de­mar­cated ar­eas with cus­tom­ized busi­ness and trade laws that dif­fer from the rest of the coun­try. They are es­tab­lished to boost trade, in­vest­ments, cre­ate jobs and widely in­flu­ence in­vest­ment poli­cies in the coun­try.

Ac­cord­ing to a sur­vey by China De­vel­op­ment Bank, SEZs con­trib­ute 22 per­cent of China’s GDP, 45 per­cent of to­tal na­tional for­eign di­rect in­vest­ment and 60 per­cent of ex­ports. SEZs are es­ti­mated to have cre­ated over 30 mil­lion jobs, in­creased the in­come of par­tic­i­pat­ing farm­ers by 30 per­cent, and ac­cel­er­ated in­dus­tri­al­iza­tion, agri­cul­tural mod­ern­iza­tion and ur­ban­iza­tion.

But zones es­tab­lished in Liberia, Sene­gal and Mau­ri­tius in the early 1970s have had mixed re­sults, es­pe­cially in in­creas­ing ex­ports and in cre­ation of jobs an­tic­i­pated for mil­lions of their peo­ple liv­ing in poverty.

In a 2011 World Bank study by Thomas Fa­role in 10 coun­tries, among them Ghana, South Africa, Lesotho, Nige­ria, Sene­gal and Tan­za­nia, he con­cludes most African pro­grams com­pare poorly to their Asian and Latin Amer­i­can coun­ter­parts.

“With the pos­si­ble ex­cep­tion of Ghana, African zones show low lev­els of in­vest­ment and ex­ports and their job cre­ation im­pacts have been lim­ited. African zones are sur­pris­ingly cap­i­tal-in­ten­sive,” the re­port says.

The study found lit­tle ev­i­dence of African pro­grams up­grad­ing, cat­alyz­ing wider mar­ket re­forms and in­te­gra­tion be­tween the zones and their do­mes­tic economies, or meet­ing so­cioe­co­nomic ob­jec­tives such as de­liv­er­ing qual­ity em­ploy­ment and a liv­ing wage.

“More­over, in many coun­tries, land ac­qui­si­tion, com­pen­sa­tion and re­set­tle­ment prac­tices are in­ad­e­quate,” says the re­port.

On for­eign di­rect in­vest­ments, a ma­jor source of ex­ter­nal fi­nance, in­flows to Africa fell by 31 per­cent in 2015 to an es­ti­mated $38 bil­lion, ac­cord­ing to a re­cent United Na­tions Con­fer­ence on Trade and De­vel­op­ment study. This is largely due to the end of the com­mod­ity “su­per cy­cle”. It comes as global FDI jumped by 38 per­cent to $1.76 tril­lion, the high­est level since the 2008 eco­nomic crunch, the UN agency says.

China’s suc­cess in SEZs stems from its abil­ity to at­tract FDI, and adapt poli­cies to chang­ing mar­ket con­di­tions while en­cour­ag­ing in­no­va­tion. China De­vel­op­ment Bank says that the coun­try was able to im­ple­ment a bot­tom-up prob­lem solv­ing ap­proach backed by top­down gov­ern­ment sup­port. These strate­gies pig­gy­backed on good in­fra­struc­ture and a large pool of ed­u­cated and com­pe­tent work­ers.

Africa could do well to learn from the Chi­nese ex­pe­ri­ence, says Zhang Huarong, vice-chair­man of the China-Africa Busi­ness Coun­cil, not­ing that de­spite re­cent ef­forts by African gov­ern­ments to prop up their hard in­fra­struc­ture, sim­i­lar ef­forts are needed in build­ing their soft in­fra­struc­ture. Long-term strate­gies and short-term poli­cies, he says, make a pow­er­ful com­bi­na­tion for suc­cess­ful in­dus­trial parks.

“For Africa to get its own Made in Africa brand, stake­hold­ers, which in­clude gov­ern­ments, in­vestors and civil so­ci­ety, need to have vi­sion, pa­tience and com­mit­ment to un­lock the con­ti­nent’s po­ten­tial. In­deed, Africa needs time, ca­pac­ity de­vel­op­ment and, most of all, re­silience to en­dure the harsh global trade land­scape,” says Zhang, who is also chair­man of Hua­jian Group, which has made a sub­stan­tial in­vest­ment in a shoe fac­tory in Ethiopia.

But whereas gov­ern­ments have pro­vided a con­ducive in­vest­ment en­vi­ron­ment for for­eign firms, they have been crit­i­cized for ne­glect­ing do­mes­tic en­ter­prises, thus fail­ing to di­ver­sify the lo­cal base. This was es­pe­cially seen in the ex­port pro­cess­ing zones that were fash­ioned un­der the US African Growth and Op­por­tu­nity Act to al­low sub-Sa­ha­ran coun­tries to ex­port about 6,000 prod­ucts rang­ing from live an­i­mals, meat, milk and milk prod­ucts, eggs, nuts and fruit to tex­tile goods at pref­er­en­tial terms to the United States. Most zones have in­vested in tex­tiles.

The act, which came into ef­fect in May 2000, has seen sub-Sa­ha­ran coun­tries ex­port less than 2 per­cent — only about $1 bil­lion — of what’s al­lowed by the act.

“In­dus­trial progress comes from part­ner­ships be­tween for­eign and lo­cal play­ers. For­eign in­vestors have to ac­knowl­edge that the con­ti­nent needs to build its skill ca­pac­ity, and in­fra­struc­ture and is in need of cap­i­tal. Part­ner­ships will also ease fledg­ling in­dus­tries into global value chains,” Zhang says.

His sen­ti­ments are backed by a United Na­tions In­dus­trial De­vel­op­ment Or­ga­ni­za­tion study that found that in­dige­nous en­ter­prises cre­ate more jobs than for­eign-owned en­ter­prises.

With the slug­gish­ness in the com­modi­ties mar­ket, re­cent co­op­er­a­tion be­tween China and Africa is breath­ing new life into the con­ti­nent’s SEZs. Ethiopia and Rwanda are emerg­ing as first movers.

Abebe Abe­bayehu Chekol, deputy com­mis­sioner of the Ethiopia In­vest­ment Com­mis­sion, at­tributes the suc­cess to his gov­ern­ment’s com­mit­ment in im­ple­ment­ing a five-yearstrate­gic plan that fo­cuses on pro­mot­ing a boom­ing man­u­fac­tur­ing sec­tor.

“We have pri­or­i­tized our na­tional bud­get to­ward fi­nanc­ing in­fra­struc­ture ex­pan­sion to re­duce the cost of do­ing busi­ness,” he says. “This is by build­ing rail in­fra­struc­ture to the Mom­basa port and Dji­bouti while ex­pand­ing our en­ergy sources by de­vel­op­ing the big­gest hy­dro­elec­tric dam in Africa.”

In­vest­ment poli­cies and im­ple­men­ta­tion are spear­headed by the Ethiopian In­vest­ment Board, which is chaired by the prime min­is­ter, Haile­mariam De­salegn. He­len Hai, a UNIDO good­will am­bas­sador and vice-pres­i­dent and CEO of Hua­jian Com­pany’s over­seas op­er­a­tion, says that it took only three months to de­cide on set­ting up a shoe fac­tory in Ethiopia.

“The first thing I want to share with you is that we did not pick Ethiopia — Ethiopia picked us,” she said last year dur­ing a think-tank fo­rum held in par­al­lel with the Fo­rum on China-Africa Co­op­er­a­tion in Jo­han­nes­burg.

In 2011, Me­les Ze­nawi, the late Ethiopian prime min­is­ter, vis­ited China to pro­mote the coun­try as an in­vest­ment des­ti­na­tion.

Con­se­quently, Hua­jian shoe fac­tory opened in 2012 and re­cruited 2,000 work­ers, dou­bling that num­ber by the sec­ond year. The in­vest­ment is fore­cast to reach $2 bil­lion over the next decade, and the firm is al­ready con­sid­er­ing set­ting up its own in­dus­trial zone on the south­west­ern out­skirts of Ad­dis Ababa. Its fo­cus is on light man­u­fac­tur­ing that will em­ploy around 100,000 lo­cals.

A strong ad­vo­cate for Africa’s in­dus­tri­al­iza­tion, Hai thinks that to cap­ture the op­por­tu­ni­ties pre­sented by the re­lo­ca­tion of light in­dus­tries from China, the world needs to hear Africa’s suc­cess sto­ries. She there­fore founded the Made in Africa Ini­tia­tive and also serves as an ad­viser to the gov­ern­ments of Ethiopia, Rwanda and Sene­gal. She joined with Ethiopia to pro­mote a state-owned in­dus­trial park that had not at­tracted a sin­gle man­u­fac­turer in five years. “But af­ter not­ing Hua­jian’s suc­cess, more than 15 lead­ing in­ter­na­tional man­u­fac­tur­ers set­tled in Bole Lemi, Ethiopia’s first in­dus­trial park. Suc­cess brings suc­cess,” says Hai.

Rwanda has noted this suc­cess and is ea­ger to repli­cate it. The land­locked coun­try in­vited Hai to set up a gar­ment fac­tory in Ki­gali.

The fac­tory, which is just over a year old, has 500 work­ers and is ex­port­ing prod­ucts val­ued at more than $1 mil­lion to Europe and the US. There is a to­tal waiver of cor­po­rate in­come tax for com­pa­nies plan­ning to re­lo­cate their head­quar­ters to Rwanda, and a 15 per­cent pref­er­en­tial cor­po­rate in­come tax for strate­gic sec­tors, in­clud­ing en­ergy, trans­port, af­ford­able hous­ing, ICT and fi­nan­cial ser­vices. There also is ac­cel­er­ated de­pre­ci­a­tion of 50 per­cent of the tax for key pri­or­ity sec­tors, in­clud­ing tourism, con­struc­tion, man­u­fac­tur­ing and agro­pro­cess­ing, and an ex­emp­tion of cap­i­tal gains tax and repa­tri­a­tion tax hol­i­day for cap­i­tal and as­sets from the gov­ern­ment to sup­port its sus­tain­abil­ity.

Fran­cis Gatere, CEO of the Rwanda De­vel­op­ment Board, says con­certed ef­forts by the gov­ern­ment and sus­tained in­vest­ments from the pri­vate sec­tor are be­hind the con­ducive busi­ness en­vi­ron­ment in the coun­try.

He notes that be­sides mak­ing it easy for busi­nesses to set up in the coun­try — it takes five hours to ap­ply on­line and get a busi­ness li­cense — the laws give le­gal guar­an­tees to for­eign in­vest­ments. The coun­try has ranked highly lately in World Bank sur­veys on ease of do­ing busi­ness, com­pared with other African coun­tries.

Gatere notes that Chi­nese in­vest­ments play a cru­cial role in Rwanda’s de­vel­op­ment since they come with fi­nan­cial backup from gov­ern­men­towned credit in­sti­tu­tions. “They there­fore jump-start projects us­ing af­ford­able loans and this plays a cat­alytic role to their suc­cess here.”

China Star Con­struc­tion Co Ltd, a con­struc­tion firm, has fin­ished the first phase of the Ki­gali in­dus­trial zone. The gov­ern­ment plans to em­bark on the sec­ond one with hopes of at­tract­ing more in­vestors.

“We want to repli­cate Chi­nese suc­cess in SEZs by ac­quir­ing busi­ness man­age­ment knowl­edge and tech­nol­ogy. We know they will be seek­ing lo­cal part­ners and there­fore we sup­port trips by our pri­vate play­ers to visit China and build link­ages with them,” says Gatere.

But af­ter not­ing Hua­jian’s suc­cess, more than 15 lead­ing in­ter­na­tional man­u­fac­tur­ers set­tled in Bole Lemi, Ethiopia’s first in­dus­trial park.” He­len Hai, vice-pres­i­dent and CEO of Hua­jian’s over­seas op­er­a­tion


Tex­tile prod­ucts made in Africa on show at an ex­hi­bi­tion in Bei­jing.

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