SPECIAL ECONOMIC ZONES IN AFRICA: COMPARING PERFORMANCE AND LEARNING FROM GLOBAL EXPERIENCE Book launch seminar March 9, 2011 Thomas Farole, Senior Trade Specialist PRMTR 1
Why the interest in SEZs in Africa? 3,500 3,000 2,500 2,000 1,500 1,000 500 - Source: ILO (2007), FIAS (2008) 1975 1986 1997 2006 World excl Africa Africa >100 Potential to address key constraints to investment and job creation infrastructure, scale, investment climate High profile zone successes Korea, Malaysia, China, Costa Rica, Mauritius but also plenty of failures. Need for better understanding of performance and the factors that contribute to sustainable success
A few caveats SEZ v EPZ v FZ v IZ many concepts, often quite different. The subject of this book is mainly EPZs. Data on zones is hard to come by and harder to trust This is a story about Africa, but much of it should resonate beyond the continent
Background and methodology BNPP funded research program designed in partnership with the Investment Climate Department Ten countries Africa: Ghana, Kenya, Lesotho, Nigeria, Senegal, Tanzania Asia: Bangladesh, Vietnam Latin America: Dominican Republic, Honduras Methodology: case studies and surveys of SEZ firms Field research carried out between June 2009 and January 2010
A few key findings on zone performance
African zones have not yet delivered on their potential: limited investment # of active firms operating in economic zones (2009)
Exports are low in most African zones, and some evidence that growth is slowing Zone exports (US$m)
Job creation has been limited many African zones are surprisingly capital intensive SEZ employment (2008) SEZ employment as % of national industrial sector employment Bangladesh 218,299 3% DR 124,517 30% Honduras 130,000 30% Vietnam 1,172,000 19% Ghana (Tema) 2,025 Ghana (single units) 26,534 3.5% Kenya (EPZs) 15,127 Kenya (single units) 15,551 15% Lesotho 45,130 >80% Nigeria 1,156 (Calabar- est.) <1% Nigeria 20,000 N/A (Onne- oil & gas) Tanzania 7,500 2.5% Source: SEZ employment based on data from individual country SEZ authorities; national industrial employment from various sources
What matters most to investors in SEZs? Investor perception of criteria determining investment location (ranked in order of importance) Investment criteria Rank Cost and quality of utilities 1 Access to transport infrastructure 2 Business regulatory environment 3 Tariffs, duties, rules of origin 4 Level of corporate taxes 5 Access to highly skilled labor 6 Access to suppliers 7 Access to low cost labor 8 Availability and cost of land and buildings 9 Access to local and regional markets 10 Access to technology 11
What matters for SEZ program performance? exports investment employment infrastructure -0.654** -0.145-0.832** customs -0.698** -0.654* -0.579* Zone investment logistics 0.805** 0.103 0.843** climate setup 0.386 0.053 0.340 onestop -0.314 0.313-0.233 regulation -0.201-0.310-0.218 GCI 0.396** 0.473** 0.486** National investment DB -0.214-0.352** -0.287** climate WGI 0.195 0.141 0.155 incentives 0.069-0.424** 0.072 wages 0.073 0.146 0.289** Traditional factors preferences -0.022-0.083-0.029 Management private -0.070-0.133 0.104 Remote 0.026-0.158 0.048 Market access Market 0.402** 0.654** 0.431** GDP/cap 0.100 0.335** 0.331** Access 0.165 0.074 0.307** Other years 0.230 0.175 0.160
Do SEZs improve the investment climate? utilities quality Average downtime (hours) monthly resulting from power outages 100 95 90 80 70 60 50 40 54% 44 46 30 20 92% 10 - Africa avg 4 Non-Africa avg Zones Country
Do SEZs improve the investment climate? transport (soft) infrastructure Average time needed for imports (through main seaport) to clear customs (days) 12.0 11.0 10.3 10.0 8.0 6.0 31% 7.1 69% 4.0 3.4 2.0 - Africa avg Non-Africa avg Zones Country
Some conclusions and policy messages
Traditional EPZ model increasingly inappropriate Trade preferences Fiscal Incentives EPZ MODEL Low labor costs These may all have a role, but risk of race to bottom SEZ success linked to competitiveness of national economy Consider re-orienting to better exploit comparative advantage and regional markets will mean re-focusing on zones as spatial industrial strategy promoting clusters and value chains
Starting points for improving potential to attract and retain investment in SEZs Improved strategic planning and a transparent, robust legal and regulatory framework Address infrastructure gaps inside and beyond the gates: integrated approach linking to trade gateways Utilities Road connections and port improvements Social infrastructure Improve zone management through: Stronger and more consistent government policy support Institutional improvements authority and coordination Private sector participation
Linkages are critical to achieving dynamic benefits Worldwide, zones struggle to shift from being enclaves to integrated contributors of wider economic growth Traditional EPZ models work directly against integration need to promote domestic investment and open up potential for exchange between zones and local markets But improving linkages require actions outside zones alone Access to finance and entrepreneurship Training and skills development Open labor markets Public-private institutions to promote inter-firm coordination and information exchange
Political economy: using SEZs as reform pilots This is the real success story of China and also Mauritius Given the regulatory and wider investment climate constraints to competitiveness in SSA, using SEZs as reform pilots is a major missed opportunity to date Also offer the potential for piloting innovations on social and environmental compliance Government willingness to deliver on piloting reforms through zones may be a useful litmus test as to whether the commitment and capacity exists to follow-through with a successful zone program
In conclusion 1. Still early days hardly a success story to date, but some signs of progress 2. The African context is different target: competitiveness, regional markets, and value chain integration 3. Focus on: infrastructure and improved planning /operations, but don t forget the importance of national competitiveness 4. Long-term, dynamic success with zones requires integration: Strategic integration: into industrial policy Physical integration: transport, industry linkages Institutional integration: inter-agency + public-private There is much we still need to understand about zones and how to make them more effective
THANK YOU + 2 advertisements 1. An edited collection of papers (co-edited with Gokhan Akinci) Special Economic Zones: progress, emerging challenges, and future directions to be published in June 2. We are having another BBL on Monday March 14 at 3PM in MC7-100 This will focus on practical challenges with implementing SEZ projects on the ground, with presentations from practitioners