Hailed by some as a catalyst for investment and criticised by others as a second best solution to competitiveness, the effectiveness of special economic zones (SEZs) as a tool for economic development remains a point of contention among policymakers and economists alike.
SEZs have proved popular in emerging economies, as areas with more liberal administrative, regulatory and fiscal regimes than the domestic economy are considered attractive to foreign investors. The World Bank estimates that there are approximately 3500 SEZs operating in 130 countries, with $850bn in goods and services exported annually through these zones by developing countries.
The latest high-profile SEZ to be established was launched in September this year in Nkok, Gabon, and will specialise in transforming timber into semi-finished and finished products. It is a joint venture between the Singapore-based Olam International – a supply chain management firm – and the Gabonese government, and forms part of a $4.5bn, three-year package of Asian investments in the country's infrastructure, road development and agriculture.
Olam’s investment is billed at $200m, and with a further 45 investors from nine different countries already onboard and a total FDI projected at $1.1bn per year, there is a heightened sense of optimism about the project. “This SEZ is something new to us,” says Gabon's president, Ali Bongo Ondimba. In reference to Gabon's abundance of timber, Mr Bongo adds: “Gabon is the land of red gold, and Nkok illustrates that our success so far comes from the fact that this SEZ is based on a product that we know.”
SEZs are not new to Africa. The International Labour Organisation estimates that 114 SEZs exist in sub-Saharan Africa, in nearly 30 countries. Yet the World Bank claims that most African SEZs are underperforming compared to their Asian and Latin American counterparts. Worse still, African SEZs have generally attracted only low levels of investor interest, making the continent a small player in the global SEZ market.
Senegal’s export processing zone (EPZ) is an example of how unsuccessful SEZs can be. Established in Dakar in 1974, it closed after 25 years, with its failure attributed to excessive bureaucracy, unrealistic goals and the high production costs related to energy and water.
Nigeria’s EPZ, launched in 1991, is another example of an SEZ that has failed to reach its full potential. Despite heavy government investment into its flagship free zone in Calabar – in an attempt to attract FDI into manufacturing to encourage economic diversification – very few companies currently operate in the zone.
Despite the large amounts of capital invested in them, little evidence exists to show that Africa's SEZs have catalysed economic development within the countries in which they are based. Nevertheless it is important to note that most SEZs are still in the early stages of development, with many operationalised in the 1990s and 2000s.
The World Bank acknowledges that the performance across Africa's SEZs is mixed, with a significant number experiencing rapid growth between 2000 and 2004. Ghana’s agro-processing EPZ, launched in 1995, is one such example. Its success is tied to robust growth in its cocoa processing activities, and between 2004 and 2008 it experienced an average annual increase in its exports of 31%. By 2008 its exports were worth $280m.
Kenya’s 55 EPZs, established in 1993, represent nearly half of the SEZs in Africa. Between 2000 and 2004, the EPZs achieved an average annual growth rate of 57%. By 2008, this growth had declined to 10%, with exports worth $400m that year.
The number of companies investing [in Nkok] shows we are already seeing success
Tanzania’s EPZ was launched in 2002, and in 2008 had exports worth $59m. It targets regional African markets through utilising its position as a bridge between the Common Market for Eastern and Southern Africa, and Southern African Development Community, two of Africa's major regional trading blocs.
The picture that emerges of SEZs is a complicated one. Yet officials in Gabon maintain that Nkok is unique. “The number of companies investing here shows we are already seeing success,” says Alexandre Chambrier, Gabon's minister of mines, oil and gas. “Nkok is at a special location and we are developing transportation networks to support this enterprise. We are confident in Nkok’s growth potential. Expanding the manufacturing base is possible and Gabon could become a hub for industry in the region.”
Blueprint for success
Examining Nkok through the prism of other efforts across Africa, the World Bank’s assessments of common pitfalls is a sobering one. One challenge faced by SEZs is that traditional sources of competitiveness for African zones do not correlate with SEZ outcomes. Moreover Gabon suffers from high labour costs as employee wages are unofficially set by the oil industry, the country’s economic mainstay. However, Gabon's government plans to offset this by offering investors in Nkok a host of fiscal incentives, and increasing its infrastructural competitiveness.
Plans have been put in place to avoid another common bottleneck – insufficient infrastructure – with several such projects under way to enable Gabon to capitalise on its foreign investment. The partnership agreement between the government and Olam includes the construction of an integrated modern urban complex, which combined with the current large-scale road construction works will allow Nkok to exploit its positioning. Situated 14 kilometres and 22 kilometres from the Ntoum and Owendo railways, respectively, less than 1 kilometre from the Gabon estuary and 30 kilometres from Libreville airport, Nkok will be strategically connected to Gabon and the rest of the world.
The success of SEZs is closely linked to the competitiveness of the national economy, and Mr Bongo admits that growth will not come easily. “This process could take decades to achieve,” he says. For now, Gabon appears to be learning from the mistakes made by other African SEZs, and focusing on activities in which it has a strong competitive advantage. The average maturity rate of economic zones can be up to 10 years, so it is still too early to evaluate Nkok. Yet judging by investor interest, Gabon may have struck red gold.