Can SEZs attract FDIs?

Can SEZs attract FDIs? While Special Economic Zones have created job opportunities for poor, mainly rural women, most countries are still failing to deliver quality employment and a living wage
While Special Economic Zones have created job opportunities for poor, mainly rural women, most countries are still failing to deliver quality employment and a living wage

While Special Economic Zones have created job opportunities for poor, mainly rural women, most countries are still failing to deliver quality employment and a living wage

Gift Mugano

Special Economic Zones (SEZs) surged tremendously in the last 20 years. According to the International Labour Organisation (ILO), in 1986, there were 176 SEZs in 47 countries. In 2006, ILO shows that 3 500 SEZs were operating in 130 countries. This is a significant progression notwithstanding the fact that many SEZs were met with mixed results with respect to the fulfilment of set objectives. Some SEZs failed dismally while others are making significant contribution to growth in foreign direct investment (FDI), exports, and employment, as well as playing a catalytic role in integration into global trade and structural transformation, including industrialisation and upgrading.

In Sub–Sahara Africa, most countries initiated SEZs recently with the reception of few countries which started in the 1990s. Empirical literature shows that SEZs in Africa have performed dismally. Notable exceptions where SEZs performed significantly well are Mauritius and partially in Kenya, Madagascar and Lesotho.

Over the years, there is a long-standing discussion over the importance of SEZs as a policy instrument. There is no consensus among economists on this matter.

Many economists view SEZs as a second best policy, favouring economy-wide liberalisation of trade and investment. However, some researchers and policymakers see SEZs as panacea market and coordination failures, and to act as facilitators of both market forces and political-economic reforms.

Despite three decades of research on economic zones, many important questions remain unanswered. There is a lack of systematic analysis on the performance of economic zones around the world; policymakers are forced to rely on the same small handful of case studies (some now 10 – 20 years old). For African policy makers, virtually no research exists on the performance of zone programmes in the region.

This paper aims to address some of these questions and deliver an analysis that is both data-driven and policy-focused which can inform the institutional framework on the establishment SEZs in Zimbabwe.

The objective of the study is to analyse the experience of SEZ – with a specific emphasis on Sub-Saharan Africa – to understand the factors that contribute to static and dynamic outcomes. It seeks to provide input to the question of whether and how SEZs can make a significant contribution to job creation, diversification, and sustainable growth in African and other low-income countries and then build a business case for Zimbabwe to wholesomely turn the whole country into SEZs.

The study synthesis existing evidence from 10 countries, with specific focus on 6 countries from Africa (Ghana, Kenya, Lesotho, Nigeria, Senegal, and Tanzania); and 4 established SEZs in other regions (Bangladesh, the Dominican Republic, Honduras, and Vietnam). Lessons drawn from the case studies above are restricted mostly to formal manufacturing -oriented SEZ.

It therefore excludes any detailed discussion of Information and Communication Technology (ICT) parks or science parks, industrial clusters, or other less formal agglomerations. Although both ICT and science parks and clusters have close links with SEZs, lessons from this manufacturing sector can be applied to these sectors as well.

Outcomes to date in African SEZs defining and measuring the success of SEZs is not a straight jacket. SEZs are established to achieve numerous objectives.

The studies in SEZs normally benchmark the performance of SEZs against types of outcomes: (1) static economic outcomes, resulting in the short term through the use of SEZs as instruments of trade and investment policy (including primarily investment, employment, and exports); (2) dynamic economic outcomes, including technology transfer, integration with the domestic economy, and, ultimately, structural change (including diversification, upgrading, and increased openness); and (3) socioeconomic outcomes, including the quality of employment created and gender-differentiated impacts.

Based on against “static” measures of success, most African programmes are not fulfilling their potential and are under-performing compared with the Asian and Latin American programs included in the study. With the possible exception of Ghana, African zones show low levels of investment and exports, and their job creation impacts have been limited; African zones are surprisingly capital-intensive.

However, most of the programmes are still in the early stages of development, and some show promise. Despite poor nominal performance, the relative contributions of African SEZs to national FDI and exports is in line with global experience; this points to a bigger competitiveness challenge in the region and suggests that the SEZs may not be doing enough to catalyse wider structural change.

Little evidence exists that African programmes have made progress toward “dynamic” measures of success. None of the programmes studied show signs of zones having played any significant role in facilitating upgrading or catalysing wider reforms; and integration between the zones and their domestic economies is limited.

Success in meeting socioeconomic objectives has also been elusive.

While zones have created job opportunities for poor, mainly rural women (although, outside of possibly Lesotho and Madagascar, this has not been on a scale anywhere near that in Asia and Latin America), most are still failing to deliver quality employment and a living wage.

And given the high concentration of female workers in many zones, gender specific concerns are not yet being effectively addressed. Moreover, in many countries, land acquisition, compensation, and resettlement practices are inadequate.

The analysis of performance raises questions about the competitiveness of African zone programmes and the potential of African zones to compete for labour-intensive manufacturing activities, which have formed the foundation of traditional export processing zone (EPZ) programmes and have been the basis of growth in the successful models of East Asia, Central America, and Mauritius.

1. Reasons for dismal

performance of SEZs

Determinants of SEZ success and African zone performance against the results from the surveys underscore the importance of the national investment climate, providing quantitative evidence for what has been observed anecdotally – that the success of SEZs is closely linked to the competitiveness of the national economy.

Studies shows that there is strong correlations between SEZ outcomes and measures of national competitiveness and the national investment environment. There are likely to be deep determinants for some of these correlations, but issues of state capacity and governance are of critical importance.

Location and market size matter. SEZs with proximate access to large consumer markets, suppliers, and labour tend to be more successful.

In addition, the empirical evidence show that many flopped SEZs were established on the premise of tax incentives without right investment climate inside the SEZs – specifically, infrastructure and trade facilitation – is linked to SEZs outcomes. Evidence show a strong correlation between infrastructure quality and the levels of investment, exports, and employment in zones.

Trade facilitation shows a similarly strong positive relationship with outcomes. On the other hand, factors related to business licensing and regulations in the zones (e.g., one-stop services) appear to be less critical.

Studies done by World Bank shows that traditional sources of competitiveness for zones – low wages, trade preferences, and fiscal incentives – are not found to be correlated with SEZ outcomes. This may be, in part, because these factors are often employed as alternatives to making the hard policy choices that lead to improvements in productivity and in the investment environment. The results suggest that these are insufficient substitutes.

On the SEZ-specific factors that matter most to investors and programme outcomes – infrastructure and trade facilitation – African SEZs are delivering a much-improved investment climate compared with what is available to firms operating outside the zones.

For example, World Bank data shows that, on average across the African SEZs, firms inside the zones report 50 percent less downtime resulting from electricity failures than exporters based outside the zones. Customs clearance times are reported to be 30 percent faster in the zones.

However, this improvement in the investment climate may not be sufficient to attract global investors, because even the improved investment climate inside the zones falls below international standards. And the non-African SEZs in the study show much more substantial improvements inside their zones.

For example, despite the 50 percent reduction in electricity-related downtime in the African zones, reported average downtime (44 hours per month) only reaches the average levels outside SEZs in the non-African countries. Non-African SEZs showed an average 92 percent reduction in average downtime, bringing it to only 4 hours per month. A similar pattern is observed in customs clearance.

However, it may be useful to establish a clear framework for situations in which SEZs are appropriate, and the likely preconditions for their success. The following are suggested elements of such a framework:

(a) Ensure that SEZ programmes are focused where they can best complement and support comparative advantage, as validated through a detailed strategic planning, feasibility, and master planning process.

(b) Integrate SEZs as part of a broader package of industrial, trade, and economic development policies.

(c) Integrate SEZs with support to existing industry clusters rather than as an alternative or greenfield approach to cluster development.

(d) Ensure high-level political support and broad commitment-including the establishment of an inter-ministerial committee to oversee programme development-before launching any programme.

(e) Promote exchange between the zone and the domestic environment through both policy and administrative reforms.

(f) Support the provision of high-quality hard and soft infrastructure encompassing zones, key urban centres, and trade gateways. (One possible model is the Ghana Gateway project and its multi-purpose industrial park.) The focus should be on leveraging SEZs to support existing and planned infrastructure to facilitate the potential for growth catalysts/poles.

(g) Put SEZs on the regional integration agenda, with an emphasis on their role in facilitating regional production scale and integrating regional value chains.

(h) Ensure the development of sound legal and regulatory frameworks, and cement them by also addressing the challenges of institutional design and coordination.

(i) Promote private sector participation and public-private partnerships (PPPs), along with technical assistance for structuring and negotiating PPP deals.

(j) Take into greater consideration the capacity of governments to deliver on SEZ programs, particularly given their integrated and long-term nature. This will require a focus on institutional development and political economy factors that influence zone policy and implementation.

(k) Establish clear standards with regard to environmental, labour, and social compliance, and identify clear regulatory responsibilities for monitoring and enforcement.

(l) Develop and implement a comprehensive monitoring and evaluation (M&E) programme from the outset, with safeguards in place to ensure that SEZ programme developments remain aligned with strategic and master plans.

(m) Recognise the long-term nature of SEZ programme development. This means planning beyond short-term project cycles and monitoring progress on an ongoing basis.

(n) Coordination is important. In most cases, no single donor or government will be in a position to support all the financial and technical needs of a country’s economic zone programme. Co-ordination of all actors, including those in the private sector, will help ensure effective delivery, particularly given the limited absorption capacity in many zone authorities.


Dr Mugano is an Economic Advisor, Trade and Competitiveness Expert, Research Associate at Nelson Mandela Metropolitan University (SA) and Visiting Lecturer at the University of Zimbabwe’s Graduate School of Management. Feedback: Email: [email protected], cell: +263 772 541 209.

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