China and its African partners want to scale up industrialisation on the continent in addition to China’s infrastructure development projects – the “Three Major Network” of railway, road and regional aviation. China’s own experience in industrial development through the special economic zones offers valuable lessons.
Special economic zones are geographically designated trade areas that are used to attract foreign investors and boost industrialisation. They generally have trade laws that differ from the rest of the country and companies are offered tax incentives to set up operations.
For African countries, setting up special economic zones can boost the diversification of their economies and promote manufacturing. China’s experiences indicate that for zones to succeed, African governments must improve infrastructure and technology and have an educated and competent labour force as well as efficient and effective administration.
What China did
China introduced special economic zones in the 1970s as part of its policy to open up to international trade. Deng Xiaoping’s economic reforms became the turning point towards a market-oriented economy. A series of experiments, including the establishment of special economic zones, became the driving force for growth.
China set up zones in Southern coastal areas as part of the economic reforms under the open door policy. They were very successful and led to unprecedented growth. Shenzhen, a small fishing town, became the first special economic zones. It is now the most prominent manufacturing hub on the globe.
This inspired African countries and became the rationale to establish the so-called Chinese led-SEZs in Egypt, Mauritius, Nigeria, Zambia and Ethiopia in the mid-2000s. More African countries are planning to establish special economic zones. In South Africa, the Special Economic Zones Act was passed recently and ten were selected.
While physical infrastructure and modern facilities at SEZs can contribute to the modernisation of industrial processes in the country, soft infrastructure is as important when it comes to attracting investors. In the case of China, investment in human resources and local industry has played a significant role.
Cooperation between the central and provincial governments under the overarching long term plan was also crucial. The Chinese cases show that the zones have brought about spillover effects like forward-backward linkages with domestic enterprises.
This contributed to the development of entire provinces, as well as the country. In addition, the country was able to provide abundant and skilled labour to sustain the zones.
Over the years, China has also continuously upgraded its SEZs. One example is the creation of the Shanghai Free Trade Zone.
Shanghai is one of the largest metropolises in China. In 2013 it ranked third in China’s economy in terms of GDP. It boasts the world’s biggest container port and Shanghai Pudong International Airport is an international hub. Heavy and chemical industries have become one of the mainstays of the city’s economy. Its versatile manufacturing sector ranges from cars to household appliances and textiles.
The establishment of the Shanghai free trade zone is in line with China’s reform process. Shanghai is the country’s first special customs supervision zone and enjoys the status of a free trade area like Hong Kong.
Shanghai already has a high quality financial services sector. This will further enhance Shanghai’s competitiveness and can create jobs and absorb new workers that enter the job market. The hope is that the Shanghai free trade zone will reignite regional and national economic growth just as Shenzhen did nearly three decades ago.
There are challenges. The slowdown in China’s economy has affected development. The prospect of cheap labour that once enabled the country to attract foreign investors is no longer there.
Another concern is that right after the establishment of the Shanghai free trade zone 12 cities and provinces expressed interest in having the same arrangement. In the original plan, the focus was on Shanghai alone, but it seems that competition between provinces and other free zones has intensified.
What African countries need to get right
Special economic zones have become a popular buzzword in many developing countries and competition is intense. Most countries think that special economic zones will be a panacea for their economic woes.
There are an estimated 3,500 SEZs operating in 130 countries globally. The zones are in serious competition with each other. In response to the growing competition each zone is trying to specialise so that it can take advantage of local conditions.
In Africa, many countries have provided unprecedented fiscal and non-fiscal incentive packages to attract foreign direct investment into special economic zones. But those that have been established have not delivered what was expected.
The reason, among others, is that governments made poor location choices and lacked effective strategic planning and management.
On cost and benefits, the initial cost, for instance fiscal and non-fiscal incentives for investors, is often higher than the gain. In addition, benefits are not automatically generated after a zone has been established.
In many cases, policy makers have not set up long term plans and there is a lack of consultation with local communities.
To benefit from the zones African governments must set up and implement sound policies. African governments should note that the Chinese government improved the regulatory environment and tax policies for trade and investment.
Many African countries produce similar raw materials. This means that there is strong competition between them. Host countries should therefore develop strategies based on competitive advantage that can maximise potential.
And host governments often think only about attracting investors and of short-term gains. Long-term assessment is often not conducted properly before construction starts.
African governments have already shown willingness to pursue industrial development, and policy frameworks and infrastructure are underway. They should now improve the general investment conditions to circumvent existing bottlenecks.
But special economic zones are only a stepping stone in a bigger strategy for industrialisation and the diversification of any economy. Promoting strategic competition remains crucial to any government action when it comes to industrial development zones.
This article is published in collaboration with The Conversation. Publication does not imply endorsement of views by the World Economic Forum.
To keep up with the Agenda subscribe to our weekly newsletter.
Author: Yejoo Kim is a Research Fellow, Centre for Chinese Studies, Stellenbosch University.
Image: Pedestrians walk under red lanterns which were installed as Chinese New Year decorations, at Pudong Financial Area in Shanghai, January 24, 2014. REUTERS/Aly Song