Can Chinese SEZs spur industrial development in Africa?
How much impact do Chinese SEZs have on Africa's industrialisation?
Ever since the Chinese government announced in 2006 that it would support the establishment of "economic and trade cooperation zones" (ETCZ) abroad as part of its "Going Global" policy, Africa has hoped to attract a fair share of the 50-or-so proposed special economic zones (SEZs) to the continent. At present, five zones are at different stages of construction - one each in Ethiopia and Mauritius, and two in Nigeria; the Chambishi zone in Zambia is partially operational while the proposed Algerian zone has been suspended. Only Egypt's Suez ETCZ is fully operational.
The African countries that competed to host the Chinese SEZs saw in these zones long- term prospects for industrial development or upgrading value chains in addition to the much-needed jobs that they would create. Although it is too early to assess the real impacts of the zones, we can put together some elements - based on experiences on the ground, theoretical insights, prospective analysis and even hypotheses about China's underlying motivations - in our attempt to determine whether these zones could be a springboard for industrialisation on a continent where several previous attempts by governments with similar zones have failed.
In this regard, the evidence so far is not very encouraging. The number of SEZs in Africa is too small to spark an effective industrial push at the continental level. Moreover, the countries in dire need of an industrial zone did not receive any attention from the Chinese developers - at least not in the initial round of tenders - and those hosting the SEZs are ill-prepared to benefit fully from the effort. Such evidence seems to weigh in favour of the critics, who claim that the SEZs are meant to extend China's growing influence in the world by trading a few thousand low-skill jobs and half-promises of knowledge transfers for market access, control over resources and ‘soft' power. These claims are often fuelled by a dearth of data and the characteristic opacity of the modes of Chinese engagement in Africa.
The state of industrialisation in Africa
Africa's poor state of industrialisation is well known and widely documented, as are the reasons for it. At 11.2 percent in 2011, Sub-Saharan Africa's (SSA) share of manufacturing value added in GDP - a commonly used measure of industrial development - is the second lowest among all regions of the world, only slightly behind the Middle East and North Africa (whose low share is due to the region's historical dependence on oil). Moreover, the SSA share would be 3 percentage points lower if South Africa was excluded, making the region the least industrialised in the world. SSA's export structure tells the same story: the manufacturing share of total exports (about 25 percent in 2011) is low, because SSA produces few industrial products of export quality. More worrying, both indicators have shown a downward trend in recent years, suggesting that Africa's timid industrialisation effort has waned. On the whole, the region (barring South Africa and a few other middle-income countries) remains globally uncompetitive; SSA ranks lowest on the United Nations Industrial Development Organization (UNIDO) competitive industrial performance (CIP) index.
China has dented Africa's efforts at industrialisation in several ways. First, it has perpetuated Africa's dependence on natural resources. China's share of Africa's fuel and mineral exports, which increased from 1.8 percent in 2000 to 19 percent in 2012, was a factor in deepening Africa's concentration in natural resource extraction. The share of fuels and minerals in Africa's exports went up from 54 percent in 2000 to 64 percent in 2012. While China's share of Africa's commodity exports is small relative to traditional partners, like the United States (US) and Europe, China is absorbing an increasing share of these exports. In recent years, over 60 percent of Africa's exports to China have consisted of oil and minerals.
Second, the influx of cheap Chinese imports into Africa has caused significant injury to local industry, with the impact varying in intensity across countries. Trade unions in Zambia have blamed Chinese imports for undermining the clothing and electrical sectors. In Ethiopia, while competition from Chinese shoe imports has forced the local footwear industry to innovate and upgrade, a number of producers have been squeezed out while surviving firms have contracted. Similarly, survey evidence from Mauritius shows that small- and medium-sized enterprises (SMEs) in the clothing, footwear and furniture sectors have borne the brunt of Chinese competition, being unable to match the price- quality ratio offered by Chinese products.
Third, African exporters of manufactures and processed goods have faced stiffer competition from China in their traditional export markets. In Mauritius, Swaziland and South Africa, the clothing industry suffered major setbacks in the run-up to January 1, 2005, marking the end of the apparel quotas and the beginning of Chinese dominance of the global apparel market. Specifically, more than 25,000 jobs (or 28 percent of employment) were lost in the Mauritian garment sector between 2001 and 2005 as foreign firms closed shop to locate elsewhere.
China's threat to African industry is significant, since China's comparative advantage lies in the same low-skill, labour-intensive and low-technology sectors, such as clothing, furniture and footwear, that offer the best chances for industrialisation in Africa. Some authors (e.g. Kaplinsky, 2008) have argued that China's global ascendancy can permanently damage the future of manufacturing in Africa.
Can Chinese SEZs help?
With the notable exception of Mauritius, Africa's performance with industrial development schemes, such as EPZs, has been lacklustre. The fact that the schemes were government led, marred with policy inconsistencies and failed to attract private investors - local or foreign - meant that they were bound to fail.
Against this background, the Chinese SEZs can be a harbinger of industrialisation in Africa - for at least two reasons. First, the SEZs propose investment in a wider range of sectors, spanning agro-industry, manufacturing and services (Table 1). These sectors will be new to the industrial landscape of most of the countries hosting the SEZs and will be particularly beneficial to Zambia, Nigeria and Ethiopia, which currently have very low levels of industrialisation.
Second, the SEZs are designed to be integrated into the domestic economy, as they are in China. The Chinese government has expressed its wish to transmit to Africa lessons from its own development experience as well as transfer through foreign direct investment (FDI) and aid much-needed knowledge and technology. The Chinese are also supporting African SMEs to develop their businesses in the zones through a USD 1 billion fund announced at the 2009 Forum on Africa China Cooperation (FOCAC).
The question then is how much of an impact will the SEZs (assuming they are successful) have on industrialisation in Africa?
We propose a two-tiered answer to this question. For the SEZs to have any long-term impact at all, they must first address the critical issues that have arisen in each country at the early stages of zone development. These relate to financing gaps and to policy incoherence. Construction works have often stalled owing to delays in the disbursement of loans, grants and subsidies promised by the Chinese government, and the zone developers' inability to raise funding of their own. Similar problems may also constrain subsequent FDI into the zones. Host-country governments, on the other hand, have encountered financial difficulties in providing offsite infrastructure or in refunding zone developers the agreed share of infrastructure costs, as in Ethiopia. Perhaps an even more important challenge is the lack of political will and/or the absence of a coherent incentive framework in the host country to support the SEZs. If the zones are not integrated into the country's national development strategy, they will struggle to achieve the desired impacts.
Beyond these constraints, the SEZs must attract a critical mass of investors, both domestic and foreign; develop linkages with the domestic economy; stimulate higher value-added manufacturing activities and generate significant productivity spillovers if they are to make a lasting impact on industrial development in Africa. However, significant challenges have emerged in each of these areas.
Zone developers are struggling to attract Chinese firms in the industries proposed, and the economic crisis has made matters worse. For example, the Mauritian zone has failed to attract a single Chinese investor two years after its completion, while the majority of companies operating in the Chambishi zone are merely subsidiaries of the developers. On the other hand, local participation in the SEZs is likely to be restricted by the reluctance of Chinese firms to seek joint ventures (both because of fundamental differences in the business models of Chinese and local firms and certain negative experiences (as in Egypt, w here Chinese developers have accused the local partners of embezzling funds)); by entry barriers, such as excessively high investment thresholds for local investors; by the lack of a supportive incentive framework at home; and, in the case of Mauritius, an outright ban on local investors' access to the zone.
Against this backdrop, it is interesting to note that a number of private Chinese industrial zones (in South Africa and Botswana, for example) are thriving. Even in the countries hosting SEZs, some Chinese investors are choosing to operate outside the zones (for example, Huajian Group, a Chinese footwear company, in Ethiopia) in an attempt to shun governmental control and to avoid high rent and utility costs in cases where the zones are underpopulated.
Prospects for the SEZs to build backward linkages within the local economy are rather weak both because the raw materials and intermediates needed in assembly-type operations may not be available locally and because of the known propensity of Chinese companies to source inputs through their own networks. At the same time, forward linkages, which usually involve the provision of ancillary services to the zones, may be constrained by deficient infrastructure and logistics and lack of competition in the host economy.
Higher value-added activities
The SEZs promised to bring new industrial activities as well as opportunities for higher value-added processing and upgrading to Africa. This is evident in the Chinese investment of USD 220 million in a copper smelter in the Zambian Multi-Facility Economic Zone in Chambishi. A bio-hydrometallurgy project, designed to increase the recovery of Zambian copper by 20 percent is being paraded as a model of technological collaboration between China and Zambia. However, beyond copper, there is no evidence that plans to manufacture televisions, mobile phones and other consumer electronics in the Chambishi zone have materialised yet.
The Chinese are already operating a cement plant in Ethiopia's Eastern industrial zone. Future investments are expected in the electric machinery and steel industries. But, these are yet to come, and emerging evidence suggests that the zone will feature mainly headquarter services. In Mauritius, the marginal impact of the proposed SEZs is likely to be smaller than elsewhere both because the country boasts a relatively diversified industrial base and because the Jin Fei zone will attract investments in sectors - such as property development, tourism and textiles - that are not strictly aligned with the country's future economic orientation.
Finally, prospects for technology transfer are also limited - both because Chinese investments may not generate significant spillovers (since Chinese firms are notorious for protecting proprietary knowledge and keeping trade secrets) and because local firms may lack the capacity or "technological readiness" to adopt any spillover that does take place. Joint ventures are an excellent vehicle for technology transfer, but, as noted earlier, the Chinese are generally averse to partnerships with local firms. Similarly, the lack of a critical mass of local investors in the zones will substantially reduce the scope to benefit from any technology spillovers. Last, but not least, skill transfer through labour turnover might be limited if the zones employ few local workers and if these workers are concentrated in low-skill jobs.
What should host countries do?
There are several measures that policymakers in host countries can take to maximise the impact of the SEZs on industrial development. First, while African governments are providing an elaborate set of incentives to Chinese investors in the zones, few are actually subsidising local investors, and even fewer have put in place a regulatory framework to encourage local investors to set up in the zones, or local suppliers to provide inputs and services to SEZ firms. For the zones to succeed as a test case of industrialisation, it is crucial that the government fully ‘owns' the SEZs, believes in their potential and shows the political commitment to make them work. This requires that the zones be fully integrated into the country's development strategy and be seen as platforms for learning and technology transfer beyond their short-term impact on jobs.
Second, local ownership will be fostered if the host-country government has an equity stake in the zones. This can be justified against the numerous concessions made to the Chinese developers, including leases of land, provision of offsite infrastructure and offers of a whole range of alluring fiscal incentives at high opportunity cost to the host-country government. The Nigerian government successfully negotiated a stake in the two zones; this experience should guide future zone development elsewhere in Africa. However, excessive participation by national governments - as in Egypt's Suez zone - should be avoided, since this might lead to interference and inefficiencies in zone management.
Third, since local participation in the zones is critical to realising productivity spillovers, African governments must set up an incentive scheme - complementary to the USD 1 billion SME fund proposed by the Chinese government - to support local firms' investment in the zones. In addition, they must play a proactive role in selecting and promoting potential "winners" as was the case in East Asia.
Fourth, the industry focus of the SEZs should be negotiated between the host-country government and the Chinese stakeholders, rather than being "imposed" by the latter. This will ensure that the zones' activities are aligned with the country's needs in terms of industrial development and that any resulting technology spillover is more readily absorbed. Industries that are highly capital- or skill-intensive might contribute little to industrial upgrading in economies that are endowed with low-skilled labour and have had little experience with industry. In Mauritius, on the other hand, the industry focus is misplaced for the opposite reason. Mauritius needs high-tech industries, but the Jin Fei zone will serve mainly as a residential and commercial base for Chinese operations in the African region.
The systemic constraints to industrial development will take longer to tackle, but they must not be neglected. The SEZ host countries, both existing and potential, must invest in making local firms and the economy technology-ready. This calls for substantial investment in local universities and research institutions and the provision of incentives for firms to train their workers, adopt best management practices and to restructure and innovate.
Finally, the government should make greater efforts to address administrative and regulatory constraints to local supply-side capacity and provide a platform for Chinese companies and domestic firms to come together to learn about win-win partnerships or commercial opportunities. These measures will help strengthen potential linkages with the local economy.
Vinaye Ancharaz is a Senior development economist at ICTSD