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Special Economic Zones in Africa: Upcoming Challenges

Gabon SEZ

Special Economic Zones (SEZ) in Africa have been the torchbearers of business reforms and skill enhancement for local populations.  In 1970, Mauritius became the first country to set up a SEZ, encouraged by the development progress achieved by SEZs in Asian economies. Later, countries like Ghana and Liberia joined the circle. From advancing traditional sectors like agriculture to providing the setup for modern-day sectors like biotechnology and metallurgical transformation, the SEZs in Africa have proven to be a trustworthy tool to manifest the dreams of the public at large. The political fervor of local government has also greatly helped in attracting bilateral and multilateral investment from countries all over the world.

SEZ Development in Africa

The primary focus of zone development in sub-Saharan Africa is to boost production capacity in low-skilled and labor-intensive industry sectors.[i] For instance, the textile sector in Africa is gaining momentum from both private and public enterprises for investment due to strong industry linkages and the employment capacity of the sector. The economic zones in Sub-Saharan Africa have led to both immediate static gains and dynamic resilient advantages for the continent.

Types of SEZs in Africa

African landscapes allow for the development of several types of economic zones, owing to vast natural resource heritage and increasing youth population. Policymakers have optimized and customized several types to suit African economy, while boosting exports. The different types of special economic zones in Africa are discussed below.

Industrial Development Zone

An industrial development zone is a ground zone linked with international air, water networks, and customer-controlled areas to ensure smooth purpose-driven manufacturing and transportation of goods and services while enhancing the employment statistics of the region. Since these zones facilitate international trade and employment levels, they are directly involved in boosting exports, investment, value addition to local products, and upskilling local communities. Companies registering for operations in these zones enjoy several benefits on custom duties and procedures, subsidy programs, upskilling workshops, and access to localized raw materials.

Free Port

Free ports are zones located near or outside the border of a country to facilitate economic activity by providing close to 100% tax benefits to enterprises. These zones add further value to imported products entering the African market. By causing a significant decline in total cost, these zones encourage the setting up of new businesses. Different countries in Africa have set different guidelines for businesses to avail the benefits of operating through these free ports.

Free Trade Zone

Free trade zones are another type of SEZ which facilitate the import, export, transportation, storage, and further export of products without leveling any customs duty on them. These zones are constructed near airports, seaports, or national frontiers, and deploy a greater number of employees to facilitate the exchange of services. FTZs are developed to escape the obstructions caused by intense regulatory procedures and tariff duties in and around seaports and airports.

Sector Development Zone

A sector development zone is a zone focused on the development of a specific industry sector within the cluster zone. It is obvious for these zones to have sector-specific guidelines, machinery, infrastructure, subsidy programs, and skill requirements. These zones are chosen and developed based on the principal sector with a golden future in terms of revenue and profitability. For example, the timber industry in Africa is particularly supported by all stakeholders because of its competitive advantage in the global sector.

Apart from these, Africa also has industrial parks, which are smaller versions of SEZs aimed at economic and technological development. The recent performance of these zones has given a boost to African exports and risen the interest of international investors.

Let us further discuss how a growing number of these SEZs impact the sustainability performance of the continent and whether the industry growth can be relied upon in the longer run.

Sustainability Goals of SEZs in Africa – Confrontations over Compromises

The growth and development consequences of special economic zones need to be discussed in tandem with the sustainability concerns of the modern-day African geopolitics.

The participation of foreign investors has enabled a quicker transition to a low-carbon economy, as can be seen in the recent initiatives taken by Gabon Special Economic Zone. These zones have also played a crucial role in supporting economies in their transition to better production processes and supply chains that are not as energy intensive. The positive government incentives have already gotten interest statements from key renewable energy players, who intend to use the geographical positioning of the continent for the installation of solar plants and windmills on an unprecedented scale.

SDG model zones, as proposed by UNCTAD can be a way forward for the region. These model zones act as catalysts for the growth of industries which help in the quicker achievement of SDG goals by 2030. These zones need to align with international standards, set by the UN and other organizations. A stern focus on ESG indicators will also ensure sustainable growth in the region, without compromising the current economic needs.

Are Special Economic Zones in Africa a Panacea for Growth?

Every classic economic literature has stressed the need for special economic zones as a panacea for ending poverty, facilitating income equality, and boosting the GDP of the countries in question. In almost every country of their establishment, SEZs have led to a direct positive relationship between FDI and GDP growth. Countries like Kenya, Mauritius, Togo, Gabon, and Benin have attracted investment from reputed investors. Domestic investment and linkages have also improved trustworthiness in the business ecosystem offered by the African government. Sufficient grounded evidence can be found in the following points:

Growth in Exports and Diversification

Countries like Ghana and Kenya were the first ones to take up the development of SEZ to boost exports. By 2019, four economic zones in Ghana contributed to more than US$1.25 billion in exports.[ii] Majority of the countries in the region have also initiated efforts to shift to diverse economic activities and not restrict themselves to primary industries like agriculture and oil processing.

Job creation

In small countries like Benin and Togo, the share of SEZs developed by Arise IIP in job creation has been extensive, to say the least. By triggering the pace of economic activity, these zones act as hubs for job creation and skill enhancement. Sufficient training is also provided by zone developers to make sure that communities living in and around the zone can get sufficient value from it. Training centers and workshops are organized periodically to upskill youth and support them in their career avenues.

Boost in FDI

SEZs in Africa have led to a massive upsurge in FDI stock and FDI per capita in countries like Gabon, Ghana, Nigeria, Benin, etc. Relative stagnation in FDI in several countries is owing to lacking investment and infrastructure facilities offered to the investors. Data for a lot of the zones is inadequate to paint a firm picture due to their recent establishment.[iii]

Mechanism for Implementation of Business reforms

Massive globalization during the 1970s-80s in the manufacturing sector pushed African economies to switch to competitive business practices. These practices have led to structural changes and capacity development programs. These reforms have led to Africa’s recognition as one of the most promising regions for sustainable growth.

Current Challenges Facing the Development of Special Economic Zones in Africa

Special Economic Zones in Africa have led to speedy results due to industry agglomeration. Positive interventions from leaders have also improved ties between investors and private players. However, certain challenges have resulted in the stagnation of numbers. Some of the challenges have been discussed below:

Tracking the social impact of SEZs on communities

Special Economic zones in Africa have been the harbingers of mass employment. Sourcing of primary and secondary products required for zone development and operation also takes place regionally, boosting community income and profit. However, apart from employment, the rest of the data remains fuzzy due to inadequate data tracking. These zones often become the hub of urbanization as migrations in and around the zone are a common practice. With the opening of a new SEZ, local communities spot opportunities ready to be exhausted. For instance, restaurants, bars, food chain units, grocery stores, and apparel units start cropping up around the zone. The off-zone infrastructure also acts as an incentive to shift around these regions. The security features deployed by zone operators also improve the quality of life, giving people more time to take up productive activities.

However, conflict with local communities due to land ownership and rights is also another face of the same coin. Land encroachment and even small protests can affect the future ties between local communities and zone developers. Therefore, it is only wise to keep an account of all the ground-level changes affecting local communities as it will help in gauging solutions that can enhance the positive numbers.

Diversification and adjustment

Africa has been delivering precious natural resources to the entire world, ranging from semi-precious stones to high-quality cotton fiber. Several industries have been able to find their global calling by becoming a part of these special economic zones. For instance, the timber and textile industries in the continent are widely known for their quality. However, moving forward, Africa needs to diversify these product lines or add to their current production phase to capture more markets and become a strong player in a highly commoditized world. Tapping unwarranted opportunities in special economic zones gains acute importance for governments across the region. For instance, timber industries finetuning wood products often leave a lot of residues, which can be further processed to make particle boards. Since integrated industrial zones like the one in Gabon already solve supply chain, storage, raw material, and transportation concerns, diversification can be done easily to increase the future profitability of these zones.

Balancing competition with sustainable community involvement in employment programs

There is no denying that African land has an abundance of promising human resources, a must-have for any special economic zone. The rapidly growing youth population has been the chief architect of the continent’s unparallel economic performance for the last few decades. However, businesses running in SEZs are often motivated to reduce costs while increasing profitability. The huge availability of the workforce often pushes back demand, prompting employers to prioritize certain sections or simply offer less than what is ideal for the position. Special Economic Zones are considered a panacea for stagnation. Therefore, it is important to ensure that these zones practice 100% transparency in the hiring process and continue to empower those affected most by their construction.

A lot of experts have also discussed challenges regarding job advancement opportunities for certain sections of society. For instance, most SEZs deploy women for production processes but fail to adequately push them to managerial and supervisory positions.[iv] Arise IIP has taken the initiative to balance this narrative by promoting more women to leadership roles in Togo and Benin.

Way Forward – Future direction of SEZs in Africa

Special Economic Zones have played a pivotal role in the development of Africa. The modern-day infrastructure solutions combined with a diversified workforce have led to rapid social and economic transformation, both regionally and globally. The continent is becoming an indispensable member of export-rich countries. The way forward for the continent would be to strengthen ties between foreign investors and the private sector by improving enforcement of fiscal and regulatory standards, maintaining transparency throughout the development of contracts, bolstering trust-building measures with local communities, and ensuring proper provision for off-site infrastructure for smooth operations. Supplier development programs and workshops aimed at encouraging local manufacturers and companies to set up units inside the zone will also be a welcome step. Maintaining communication with stakeholders by prioritizing engagements and high-level commitments will also continue to reap benefits for the African continent. A smooth partnership framework involving all the above pointers will be an unparallel force to reckon with.

[i] UNCTAD. (2019). World Investment Report: Special Economic Zones. Geneva, Switzerland

[ii] UNCTAD. (2019). World Investment Report: Special Economic Zones. United Nations

[iii] Farole, T. (2011). Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience. Washington, DC: World Bank.

[iv] Milberg, W., & Amengual, M. (2008). Economic Development and Working Conditions in Export Processing Zones: A Survey of Trends. ILO.