Not business as usual
Special economic zones can work in Africa, but they need the right policies and support to grow
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.