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Is the African dream of industrialisation via special economic zones (SEZs) hosting global value chains (GVCs) feasible? 

SEZs are “demarcated geographic areas contained within a country’s national boundaries where the rules of business are different from those that prevail in the national territory.” Key success factors for SEZs are cheap labour, large domestic markets, proximity to inputs, and high quality infrastructure, supported by strong institutions and leadership. The global value chain (GVC) concept describes production of a good or service and its supply, distribution, and post-sales activities when they must be coordinated across borders. GVCs are now involved in two-thirds of global trade. China’s phenomenal industrial revolution was on the back of SEZs and GVCs. When wages in China started to rise, in tandem with the authorities’ desire for higher value-added manufacturing, labour-intensive GVCs moved to neighbouring but less developed Asian countries, such as Vietnam and Bangladesh.

African SEZs have underperformed thus far. Some view bad luck and bad policy as causal factors. The real threat to the future of the African SEZ may be that Industry 4.0 labour saving technologies – “the Internet of Things, AI, advanced robotics, and 3D printing” – will reduce the differentiation role of wages in the production process. Consequently, Africa’s relatively cheap labour may cease to be an advantage over time. Nonetheless, some remain optimistic that African countries would be beneficiaries of the about 100 million labour-intensive manufacturing jobs expected to exit China to lower cost jurisdictions by 2030. And there is evidence of increased Chinese foreign direct investment (FDI) into African manufacturing. Still, labour-intensive GVCs are increasingly facing disruption from automation. In light of this, what must African SEZs do to remain relevant to their countries’ goal of industrialisation?

2.0 Why have African SEZs underperformed?

Factors identified for the poor record of SEZs in Africa thus far relate to “problems with infrastructure, local management, policies and incentives, location, design and maintenance, and promotion.” Poorly-skilled labour has also been identified as a constraint. Studies find African SEZs to be relatively more expensive to develop. Weak linkages between African SEZs and local economies have also been observed. Job creation objectives have been somewhat elusive as well. True, infrastructure and trade facilitation are reportedly better for firms inside African SEZs than for those outside them. Even so, they have been observed to be below international standards. That said, a number of African countries like Egypt, South Africa and Morocco, which have large markets and high competitiveness, can still compete favourably with their Asian counterparts. Relatively new Chinese-backed SEZs in Ethiopia, Egypt, Mauritius, Nigeria and Zambia, initiated in the early 2000s, have a decent chance of succeeding as well.

3.0 Way forward

China, India and other Asian countries are already entrenched in global value chains. Automation might have completely diminished the opportunity for the migration of labour-intensive manufacturing to Africa by the time the continent deals with its competitiveness challenges. Thus, over time, there would increasingly be less scope for African SEZs to participate in GVCs. All is not lost, however. Domestic markets would still be able to accommodate some types of manufactured goods. The most attractive sectors are ideally “consumer-facing” and “infrastructure-related”. With a projected revenue increase of $122 billion over the next decade, agro-processing is one. Cement production and clothing and footwear, with projected revenue increases of $72 billion and $27 billion over the next decade respectively, are also thought to be attractive. Automobiles and consumer goods are promising manufacturing subsectors as well. And depending on the ambitions of the manufacturers and prevailing trade dynamics, these ventures could be extended region-wide or across the continent.

Thus, the primary objective of African SEZs should now be to engender intra-African trade. Some could also be used as reform labs, as for many years in China and closer to home, Mauritius. The “Early Reform Zone” (ERZ) model is proposed in this regard. Clearly, integrating local firms would be a strategic re-orientation. African SEZs should thus build strong linkages with the local economy. They should also be keen on intra-African GVCs. And with the African Continental Free Trade Agreement (AfCFTA) soon to be operationalized, broader continental opportunities will arise.

This is an executive summary of Africa Current Issues (ACI), Volume 1, written by Dr Rafiq Raji, Research Fellow of NTU-SBF CAS. The full report is available here.

 

 

 

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