How to make special economic zones work

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NRZ wagons

The Special Economic Zones (SEZs) Act was promulgated into law in October 2016, largely to attract foreign direct investment (FDI) inflows, generate employment and promote exports.

By Prosper chitambara

To date, government has designated a number of sites as special economic zones. The introduction of SEZs in Zimbabwe is not a novel concept as government once came up with Export Processing Zones (EPZs) from 1996-2006 that were mainly export-oriented.
The EPZs initiative produced mixed results. An estimated 205 companies were established, creating 32,512 jobs and generating about US$172 million in terms of cumulative investment and US$1,15 billion in terms of export earnings.

There were, however, concerns over labour, social, gender-specific and environmental issues. In particular, there were concerns over the failure to deliver quality employment and a living wage, as well as the high opportunity costs involved.

Interestingly, a number of scholars have advocated for economy-wide liberalisation as opposed to implementing SEZs, which they view as a second-best policy.

Other scholars and activists have also criticised SEZs on the grounds of them being discriminatory against domestic investors.

Generally, a SEZ can be defined as a geographical site with preferential laws, policies and regulations that are more liberal than those existing in the rest of the economy.

SEZs operate through different forms such as Free Trade Zones (FTZs), Export Processing Zones (EPZs), Free Zones (FZs), Industrial Estates (IEs) and Urban Enterprise Zones (UEZs) among others.

The main motivation for designating SEZs is to attract greater FDI inflows, create jobs and increase exports from the host country. SEZs were first introduced successfully in the People’s Republic of China under Deng Xiaoping in the early 1990s as part and parcel of its “open the door, change the system” policy.

A number of countries were inspired by the Chinese and followed suit, including many African countries such as Ethiopia, Madagascar, Lesotho, Nigeria, Senegal, Ghana and Mauritius. In many of these African countries, however, SEZs have resulted in the creation of “enclaves” with weak linkages with the rest of the national, regional and global economies, thereby limiting their macro-economic and developmental impacts.

The failure of SEZs in other countries should, however, not deter us, but rather provide useful lessons, while the success of SEZs in other countries should inspire us.

For SEZs to be a success in Zimbabwe, there are a number of key success factors that will need to be addressed. First and foremost, the success of SEZs is a function of how competitive and strong the domestic economy is.

International evidence has shown that SEZs are hindered by the same problems affecting the rest of the economy, such as inadequate infrastructure and institutional weaknesses, among others.

In other words, the success of SEZs does not just depend on the incentives offered in the Zone, but more importantly on the economy-wide conditions prevailing in the country. In particular, the policy and institutional environment is very important.

The more business-friendly and competitive the surrounding environment, the greater the potential SEZs have to stimulate economic activity both within and outside the Zone. Currently, the investment climate in the country remains highly problematic with both foreign and domestic investment remaining largely subdued. This represents a big threat to the success of SEZs.

The country scores badly on the ease of doing business and competitiveness indicators. According to the 2017 World Bank Doing Business Report, the country moved four places down in the ease of doing business rankings from 157 out of 190 countries in 2016 to 161 in 2017.

The country is also ranked 183 out of 190 countries in terms of starting a business, one place down from 182 in 2016. On average it takes 91 days to start a business and the process requires 10 procedures. The key determinants of the investment and business climate include infrastructure (hard, soft and social), business regulations and policies and trade facilitation.

SEZs are more successful in national economies with adequate infrastructure, in particular, transport and energy infrastructure.

In China, starting from 1978, the Chinese government invested heavily in both physical and social infrastructure. They have also developed strong institutions.

This has helped to ensure the success SEZs. Infrastructure development in the country remains largely inadequate. According to the 2016-17 Global Competitiveness Report, inadequate supply of infrastructure is the fifth most problematic factor for doing business, with the country ranked 123 out of 138 countries with a score of 2,5 (out of a possible seven) in terms of infrastructure.

In the 2016, the Ibrahim Index of African Governance, Zimbabwe is ranked 34 out of 54 countries for 2015 in the infrastructure sub category with a score of 34,1 out of 100, down from 41,6 out of 100 in 2014.

Notwithstanding, government has embarked on a number of key infrastructure projects such as the dualisation project of the Beitbridge-Harare highway.

Such projects will need to be scaled up. Supportive social infrastructure such as housing, education, and health services is also key for the success of SEZs.

Innovative means of domestic resource mobilisation will need to be explored and fully harnessed in order to sustainably finance key infrastructure projects in order to unlock the full potentials of SEZs.

Empirical and experiential evidence has also highlighted the need for a deliberate emphasis on creating and strengthening linkages, value chains and systems between the local Small, Medium and Micro-sized Enterprises and multi-national corporations operating in the SEZs.

This will help to ensure that the spillovers from SEZs are pro-poor, inclusive and broad-based. This will also help to mitigate and countervail the risk of the creation of ‘enclave’ economies. SEZs are most successful when they are targeted toward labour intensive and export oriented manufacturing sectors.

The country will also need to focus on economic activities that exploit its comparative and competitive advantages such as agriculture, mining and tourism.

SEZs must also be an integral part of the country’s industrial, trade and investment policies. There must be policy complementary, synergy and consistency among all the country’s policies.

This has sadly been one of the country’s missing links. In addition, strong inter-departmental coordination within government and strategic public-private partnerships are also key. The enforcement of environmental and labour standards has been found to be very important for the success and sustainability of SEZs. In almost all the successful countries, wages for labour were higher, with working conditions more favourable inside the zones than outside.

In the less successful countries there were negative environmental and social impacts, particularly with respect to the exploitation of workers through failure to uphold international norms for labour standards.

There is need for high-level political support and broad commitment to ensure the successful implementation of SEZs in Zimbabwe. The Zimbabwe Special Economic Zones Authority must be well-resourced and capacitated to carry out its mandate.
Chitambara is a development macroeconomist based in Harare. The views expressed in this paper solely belong to the author.

The aim is to provide independent professional advice as well as objective in-depth analysis of monetary and other economic policies in Zimbabwe. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) cell +263 772 382 852 and email kadenge.zes@gmail.com.

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