Zimbabwe should try Asian models

THE new cabinet was sworn in with key expectations that, among other issues, it would revitalise Zimbabwe’s economy with private sector as the engine of growth and development.

By Nicky Moyo

An ideal approach would be adopting an export oriented-model given Zimbabwe’s its persistent current account deficit.

Another approach would be attraction of Foreign Direct Investment (FDI) in strategic sectors such as mining, agriculture and tourism to ensure broad-based socio-economic development in line with indigenisation principles. Yet one of the key issues for government would be to examine the role of Special Economic Zones (SEZs) to as part of efforts to revive the economy, particularly the industrial sector and expansion of trade.

SEZs have become the new buzzword for African governments who see in them the long-awaited rescue from the poverty scourge that has gripped the continent despite decades of structural reform programmes and vast resources.

A SEZ is a geographical region that is designed to export goods and provide employment. SEZs are exempt from national laws regarding taxes, quotas, FDI obstacles, labour laws and other restrictive legislation in order to make the goods manufactured there globally competitive.

The categories of SEZ includes Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Parks (IP) or Industrial Estates (IE), Free Ports (FP), Free Economic Zones (FEZ), and Urban Enterprise Zones (UEZ). It is more than 50 years since the establishment of the first modern special economic zones.

But it is only relatively recently, particularly since the 1990s, that their popularity as a policy instrument has taken off.

The International Labour Organisation’s database of SEZ reported 176 zones in 47 countries in 1986, by 2006 this had risen to 3 500 zones in 130 countries. FTZs, usually found next to sea ports and airports, allow unrestricted import and export of goods free of customs, while export processing zones EPZs specifically encourage investment and manufacturing for export.

Some advantages of establishing an SEZ includes attraction of FDI and exchange earnings. FDI spells long term capital that can help sustain solvency. In addition this brings latest technology and information on trade and markets.

Private businesses can also position themselves in the international markets and boost standard of living for citizens through job and associated opportunities.

If SEZs are successful they boost gross domestic product (GDP) and act as a good economic model for the policymakers.

Critics of this model however say potential problems such as bad labour and environmental practices are prevalent in the rush to attract foreign investment. Furthermore, existing companies could also relocate from other areas to SEZs to take advantage of the tax concessions and other incentives being offered there.

This will bring about a significant revenue loss to the government. Setting up a SEZ almost always involves large scale acquisition of land resulting in displacement of farmers and other productive activities, while government would need lots of money to compensate those displaced. There is also possibility that the SEZ could be set up in regions where there is already a strong tradition of manufacturing and exports.

This in turn can cause aggravate regional development disparities.

China’s success with the SEZ model has caught the attention of African leaders eager to try something new. African countries, and Zimbabwe in particular, stand to benefit not only from Chinese know-how, but also much needed FDI as large Chinese companies are keen to set up shop on SEZs. Already in Africa a number of have registered double digit growth rates such Ghana, Nigeria and Angola through this model.

A FTZ in Shanghai, a 29-sq-km swath of land carved out of the country’s most populous city and economic hub, was recently been launched as the world’s second-biggest economy prepares to test long-awaited economic reforms.

Restrictions on foreign investment will be eased inside the area and interest rates will be set by markets. Among other measures to be trialed inside the zone is allowing China’s heavily-regulated currency, the Yuan, to be exchanged freely for other currencies.

Inside there, foreign financial institutions will be allowed to invest and operate more freely than in the rest of the Chinese economy. Interest rates will be liberalised, cross-border financial flows freed up, and the renminbi, China’s currency, will be permitted to trade more easily.

The hope is that economic reforms that will implemented here in this zone, just like those in the SEZs, will eventually become national policy, leading to a fully convertible currency and open capital markets.

Eventually, the renminbi could become an international currency to rival the United States dollar and euro.

Chinese banks could become more integrated into global financial system to compete with institutions likes Citibank or JPMorgan Chase. The reforms could also help the entire Chinese economy to become more market-oriented and competitive.

But even if this succeeds in China it does not necessarily mean it will work for Zimbabwe and other African countries. While SEZs brought unparalleled growth to China, it remains to be seen if this Chinese model of development could be replicated else in countries like Zimbabwe.

In the 1980s, the main catalyst for development in East Asia was the Flying Geese Model, the multi-tiered development of Asia that was led by Japan, the first industrialised nation in the region.

The model identified four stages: the import of consumer goods from industrialised countries; local production of previously imported goods while imports shift to capital goods; exporting the newly manufactured goods; and finally local production on the same level as the industrialised countries, with consumer goods exports declining and capital goods exports increasing.

In 1985 Japan began looking for alternative markets following the signing of the Plaza Accord aimed at correcting trade imbalances between the United States and itself. The Accord effectively closed the US market to Japanese exports.

Japan turned first to Hong Kong, Singapore, South Korea and Taiwan and thus started the industrialisation of the four Asian Tigers – the second tier of Asia’s development. The third tier extended to the Association for South East Asian Nations (Asean) which at the time included only Indonesia, Malaysia, the Philippines and Thailand; and then to China and India.

In the same way, China is now leading the Flying Geese migration to other developing countries. In 1978, Deng Xiaoping, then Chinese leader, realised that the future path to economic development was opening up the country to foreign investment by throwing open the gates to the isolated Middle Kingdom in what has become known as Deng’s “Open Door Policy”.

SEZs have been successful elements in the industrialisation of the Asian Tigers, and in 1979 China established its first four SEZs. The zones were strategically placed to attract FDI from wealthy and newly industrialised economies (NIEs) where labour costs were beginning to reach unprofitable levels. Nevertheless, for Chinese companies investing in SEZs or FTZs in Africa, the motivation is not purely low-cost labour.

China’s overseas zones allow mature industries in the Chinese SEZs to transfer abroad, especially where there is excess production such as in textiles and other light industries. The SEZ in Ethiopia, for example, focuses on textiles, leather and construction, while the Chamibisi SEZ in Zambia specialises in metal processing and electronics assembly.

Chinese investors stand to benefit indirectly from Chinese government grants, long-term loans and tax incentives, easier access to China’s foreign exchange reserves, as well as other markets limited to Chinese producers within China. Setting up businesses in Africa, including Zimbabwe, would thus aid “high value-added Chinese brand name companies with their own intellectual property” to become multinational firms.

Of particular importance is the multi-billion dollar China-Africa Development Fund established in 2006 to provide venture capital to Chinese firms. But how will this benefit Africa and Zimbabwe in particular?

It is imperative to remember that structural adjustment programmes under the auspices of the International Monetary Fund (IMF) and the World Bank – the so-called Washington Consensus – have all but decimated the continent since the 1980s, leading to increased poverty and decreased income.

Prior to the era of structural adjustment in the 1980s, the gross domestic product (GDP) of Sub-Saharan Africa grew almost 40%, but between 1980 and 2000 it decreased 15%. While Zimbabwe long ranked as one of Africa’s most industrially diversified economies, this position has eroded considerably.

The Economic Structural Adjustment Programme (Esap) in the 1990s undermined Zimbabwe’s industrial base, and the urban sector was particularly affected.

Manufacturing’s share of GDP declined from about 20% to 16% during the first phase of Esap. Discontent with structural adjustment programmes created near-perfect nesting grounds for the Flying Geese of East Asia’s development to head the Global South. The success of Asia’s zones was compelling and since the 1990s many African countries have independently established similar zones.

Whether Zimbabwe can successfully copy the Chinese SEZ model depends more on what it does with it than on the model itself Moyo is Managing Director of DEAT Capital, a strategy advisory firm with clients in private and public sector in Zimbabwe and on the African continent. Email: nickymoyo@gmail.com

.Moyo is Managing Director of DEAT Capital, a strategy advisory firm with clients in private and public sector in Zimbabwe and on the African continent. Email: nickymoyo@gmail.com