Which model of Special Economic Zones the AfCFTA should promote?

Special economic zones (SEZs) are growing rapidly in Africa. They become popular as a way to attract foreign investment by offering incentives and lax environmental and labour regulations to companies that move in such zones, to promote industrialisation and employment, as well as to boost exports. There are different types of SEZs. The Export Processing Zonez (EPZs) is one of the models that has been used mostly in Africa. Companies settling in EPZs are obliged to re-export the entire (of great part of their) production, this is their main characteristic. In other types of SEZs there is not such a limit.

EPZs have been at the heart of economic liberalisation in Africa, conceived as a means to boost investments and promote an export-led growth, based on the assumption that these economic stimulus tools permit the attraction foreign direct investment, boost employment, exports and economic growth, facilitating at the same time the transfer of technology and the acquisition of skills by the national work force, like it happened in Asia. But Africa as usual is different, because what has worked elsewhere, here has not produced the same results. The EPZ as a model has largely failed in Africa, like the export-led industrialisation model that African governments have tried to establish into the continent.

This happened because in most cases EPZs in Africa have been abused, causing massive losses to African economies (leading to the collapse of entire economic sectors), and States (because of the revenue loss caused by the tax exemptions associated to such tools). This would have not been possible without the complicity of local authorities. This is the turning point that has transformed the EPZs (that worked so well in Asia) into a resource-extractive practice in Africa, where corruption is a true cancer that eats every possibility of development. Several studies, like this one, have proved that EPZs, SEZs or other similar instrument foster conditions that facilitate corruption as they provide an extra layer of opaqueness and complexity. Moreover, EPZs in most cases have generated only low-wage jobs. There are also some successful examples, we must admit, like in Mauritius, where they have contributed to stimulate industrialisation. But looking at EPZs as a collective African experience, the conclusion is that exports of value-added manufactured goods have not substantially increased as it was expected, and they have not contributed to promote industrialization, at least so far.

Kenya can be mentioned as an example. The country has in force two separate regulations on EPZs and SEZs. Each scheme is managed by a different authority (the Export Processing Zone Authority-EPZA and the Special Economic Zones Authority-SEZA), and each of them offers different kind of incentives and benefits to investors that relocate in the designated geographical areas. The main difference between EPZs and SEZs in Kenya is that in the first type, EPZ companies are obliged to re-export their full production or great part of it, according to the conditions established in the relevant licence. Kenya introduced the EPZ in 1990s with the purpose of attracting investments in its territory by granting generous fiscal and non-fiscal incentives to interested companies. Such incentives included for instance medium term (10 years) tax holidays, withholding tax exemptions on dividends and remittances, exemption from Value Added Tax (VAT) and from customs duties on inputs, among others. However, what happened is that most of investors, after the tax grace period ended, closed their factories and relocated elsewhere, without transferring the envisaged skills or technology to locals. The government only lost taxes, arriving at a point to threaten foreign investors about the cancellation of the tax incentives initially granted. Moreover, EPZs caused unrest in the country, with frequent protests organized by workers over the poor working conditions, low wages and even cases of sexual harassment, just to mention a few problems that occurred in these zones. To correct the shortcomings of EPZs, the Kenyan government therefore introduced quite recently the SEZs, whose contribution to the growth of the economy, so far, has been marginal. But EPZs still exist, even though the fiscal advantages related to them have been considerably reduced.

Bilaterals, a website that is notoriously critical about free trade, especially between countries with different development levels, has published the transcription of a podcast that explores the functioning of SEZs in Africa and their nexus with the African Continental Free Trade Area (AfCFTA). The podcast was held in the end of July 2024 and is available from the same page. It gives an overview of the problems associated to such zones, seen from the point of view of an expert Ghanaian economic researcher. The article sees SEZs from a different angle, accusing them to have worsened industrialization in Africa.

In reality, the main culprit are not the SEZs, but the EPZs, as they have in most cases been abused by companies that have relocated in such geographical areas without transforming the continental economy. Despite we do not agree with some conclusions of the podcast, there are some points deserving attention, in particular for what regards the relation between SEZs (or better, EPZs) and the AfCFTA. Hereunder is a summary of the main points raised.

EPZs were originally meant to stimulate manufacturing exports. This is the model that many countries have adopted, like China. But in Africa, since they were adopted, the share of African manufacturing exports has dropped, and these zones have contributed very little to industrialization. They have not transformed the structure of the African economy, which still today is predominantly based on the export of raw materials and products with a low value-added content. This has happened mainly because in most cases African EPZs have been used for assemblying products, rather than manufacturing new ones. Such products, instead of being re-exported, have often diverted to the local and regional markets. This is a phenomenon that still exists. The case of Ghana is given, where some EPZ processing companies are reported to just mix imported inputs like tomatoes and food additives to produce tomato paste which is thereafter sold to countries in West Africa. EPZs firms are supposed to re-export most or their whole production, but this is not happening. The direct consequences is that not only the tomato industry in Ghana (and in the region) is suffering from an unfair competition, but also public health, because the additives used in producing the tomato past are mostly not regulated and substandard (they do not go through the quality controls, because the final product is supposed to be exported and sold on foreign markets and not to local consumers). So the original aim of boosting high value manufacturing for which EPZs were created, has not happened.

EPZs in Africa have a caused a race-to-the-bottom phenomenon. In an attempt to attract increasing foreign investment, African governments have offered better terms to multinationals (usually the only one that have the capital requirements to invest in EPZs), than to local companies. EPZs companies have been favored in terms of weaker union rights, lower wages, no conditions for technology transfer, no considerations about environmental health, and other advantages. In other words, they have increased the gap between the local industry – which has been neglected by governments and excluded from any incentives and facilitation - and foreign investors, lured by such incentives and by preferential trade agreements and investment protection agreements that African States have concluded with other countries to further convince them to invest in their territory. In fact, these agreements give them the right to export their production duty-free to their motherland. In addition, they provide investment protections to foreign investors, which in turn give them the possibility to use arbitration, for instance, to block attempts by African governments to introduce stricter laws that can increase their production costs, with regards to, for example, environmental or labour protection.

With regard to the AfCFTA, the relevant framework encourages the use of SEZs. Yes, but which type of SEZ? This is the key point, because in the podcast the two concepts are sometimes used as synonyms, which is not always the case, like in the case of Kenya, where there is a (quite) clear legal distinction between the two tools. But there is an important point to think about. According to the speaker, if the AfCFTA relies on an EPZ model to attract investments, there is a risk that it will further increase the gap between local industry and foreign investors. This will happen because the AfCFTA will treat foreign multinationals like or even better than domestic companies, due the incentives offered them when relocating in the EPZs. This will give them room to grow and expand, as well as to monopolise entire sectors of the economy, especially if a lousy control will be exerted on the export of the production of these companies, as it already happened. The spectrum of corruption, again, threatens the development of Africa.