How can Africa ensure success for special economic zones?

Sub-Saharan Arica has launched a new wave of “special economic zones” (SEZs), with more and more countries establishing or planning to establish SEZs or industrial parks. However, can Africa overcome the past stigma and make the zone programs truly successful?

This was one of the hot topics during the China-Africa “Investing in Africa Forum,” held in Addis Ababa, Ethiopia, from June 30 to July 1, organized by the World Bank Group with the government of Ethiopia, the government of China, the China Development Bank and UNIDO.

Why did the the African zones fail, in the past, to attract many investors? My answer was they were not truly “special” in terms of business environment and infrastructure provisions, and many constraints were not significantly improved inside the zones. This analysis was supported by another panelist, His Excellency Dr. Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia. According to Dr. Oqubay, past zones in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategy.”

That viewpoint was shared by almost all the other panelists, which included senior African and Chinese officials and international experts at the SEZ session, which was characterized with candid discussions and greatly benefited from the background paper prepared by Douglas Zeng of the World Bank Group’s Trade and Competitiveness Global Practice.

There was a broad consensus among the members on the panel on the lessons of success of Chinese zones and on what can be applied in Africa; the reasons for limited success of earlier SEZs in Africa; and that promising future for African zones. For zones to attract investment, create jobs and have positive spillovers in the local economy, the panel agreed that the following conditions need to be met:

• Clear strategy for SEZ development, fully integrated in national or regional industry policy and economic development strategy. SEZ programs should be part of the broad national or regional development agenda and should be designed to best complement and support comparative advantages, as validated through a detailed strategic planning, feasibility and master-planning process. This is the key to ensure their viability and long-term sustainability based on real market demand.
• A sound legal and regulatory framework. A predictable and transparent legal and regulatory framework is needed to ensure the clarity of roles and responsibilities of various parties, and to provide protection and certainty to the developers and investors. Such a framework also helps to ensure that the zones attract the right investments and are implemented with high standards. That will also avoid unpredictable risks, such as political setbacks or interference and land speculation, among other factors.
• High-level leadership and interagency coordination. Given the great complexity and potential risks of zone programs, strong and long-term government commitment from the top leadership is needed to ensure policy continuity and the adequate provision of various public goods. In addition, a zone program involves many government stakeholders in charge of such factors as land, transport, utilities, customs, taxation, finance, immigration and skills. Thus it’s very important to establish a proper dialogue and cooperation mechanism among the central, provincial and local governments and across different government agencies.
• Careful planning of zone development and operation. Since creating an SEZ is a very expensive undertaking, the process requires very careful planning, design and management. This should include a rigorous assessment of local market conditions, connectivity, the industrial base, the supply chain, the business environment, and land and labor supplies. To ensure its smooth and efficient operation, private-sector participation can be encouraged through a public-private partnership (PPP) approach. In such cases, experienced private-sector partners will be responsible for zone development and operation and for the provision of certain on-site infrastructure and services.
• Zones have to be truly “special” and provide services that are not available outside of zones, with particular focus on infrastructure and the business environment. Zones should be developed to overcome nationwide binding constraints, such as rigid and constraining regulatory regimes, poor infrastructure and inadequate trade logistics in a limited area. They must provide the basic infrastructure, such as power, water and roads. Meanwhile, zones can be used to “pilot” policy and regulatory reforms to support economic development, as evidenced in many East Asian countries. What’s important is to make sure that benefits (e.g., the simplification of customs procedures) can then be made available economy-wide..
• Catalyst vs enclave. Despite some success of the “enclave” model (especially export processing zones) in the past, today, in practice, the success of zones is more and more entwined with the local economy. To be a catalyst for structural transformation, the zones need to be linked to key elements of infrastructure (like ports, railways and highways); need to be well-matched to local resources, leveraging the nation’s comparative advantages (e.g. mining or agriculture); and need to be focused not only on exports, but also on the domestic market. In addition, they need to be well connected with the local economy through SME linkages and forward/backward linkages, in order to maximize the spillover effects.

African nations are very interested in continuing to learn from the Chinese experience. Many study tours to China have been arranged for high-level African government officials, either through bilateral arrangements or, in many cases, through such multilateral organizations as the World Bank Group, the United Nations and other donor agencies. Such knowledge-sharing and learning has helped many host governments understand the concept and operational mechanisms of industrial zones. There is an increasing presence of Chinese experts, developers/operators and investors in Africa, especially in those zones set up by Chinese investments. China plays a key role in the future of SEZs in Africa, and it can offer useful lessons. African nations can tailor those lessons to suit their particular context.

Links to publications, by the Trade and Competitiveness Global Practice, about SEZs:

• Global Experiences with Special Economic Zones — With a Focus on China and Africa (2015, background paper for the Forum): http://www.worldbank.org/content/dam/Worldbank/Event/Africa/Investing%20in%20Africa%20Forum/2015/investing-in-africa-forum-global-experiences-with-special-economic-zones-with-a-focus-on-china-and-africa.pdf
• Special Economic Zones: China’s Experience and Lessons Learned (2015, handout at the Forum): http://www.worldbank.org/content/dam/Worldbank/Event/Africa/Investing%20in%20Africa%20Forum/2015/investing-in-africa-forum-special-economic-zones.pdf
• Low-Carbon Zones: A Practitioner’s Handbook (2014): https://www.wbginvestmentclimate.org/toolkits/low-carbon-zone-handbook
• Fostering Women’s Economic Empowerment through Special Economic Zones (2012):http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/learning+and+adapting/knowledge+products/publications/publications_report_sez-global
• Special Economic Zones: Progress, Emerging Challenges, and Future Directions (2011): https://openknowledge.worldbank.org/handle/10986/2341
• Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience (2011): https://openknowledge.worldbank.org/handle/10986/2268
• How do Special Economic Zones and Industrial Clusters Drive China’s Rapid Development? (2011): https://openknowledge.worldbank.org/handle/10986/3349
• Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters (2010): https://openknowledge.worldbank.org/handle/10986/2501
• Special Economic Zones: Performance, Lessons Learned and Implications for Zone Development (2008): https://www.wbginvestmentclimate.org/toolkits/investment-generation-toolkit/upload/SEZ-Report-April-2008.pdf

This article was originally published on The World Bank’s Private Sector Development Bank. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Cecile Fruman is a Director in the Trade and Competitiveness Global Practice of the World Bank Group. Douglas Zhihua Zeng is a Senior Economist with the Trade and Competitiveness Global Practice at the World Bank Group.

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