China-Africa economic cooperation zones: Political and economic implications

4 November 2011

Over the last decade, China's economic engagement with Africa has grown exponentially. Trade between China and Africa reached $129 billion in 2010. New models of bilateral cooperation have emerged. Among others, China's Ministry of Commerce (MOFCOM) is supporting the development of six official economic and trade cooperation zones in five African countries. (1) While all of these zones are still at an early stage of development, we provide here an initial analysis of their political and economic implications.
Implementation
The six official zones involve three parties: Chinese developers, African governments, and the Chinese government. Four of the Chinese enterprises involved in the primary phases of these projects were large state-owned enterprises, but the Mauritian and Ethiopian zones were initiatives from private enterprises (minying). (2)The business models for these ventures were diversified. In the Zambia zone, China Nonferrous Metals Corporation planned to focus on industrial processing of copper and other mineral resources. They have also begun to develop an industrial assembly subzone near the capital, Lusaka. Others planned to use their zone as a manufacturing beachhead to serve new markets (Ethiopia and Algeria). In a third pattern, the Mauritius zone is expected to become a hub of Sino-Africa trade and services. Developers of the zones in Nigeria and Egypt planned to attract a variety of manufacturers interested in the large domestic markets in these countries as well as their preferential access to Europe.

The Chinese government has not taken a direct role in developing these first six projects, but actively provides a variety of assistance to Chinese developers through grants and long-term loans, most provided on the basis of reimbursement for some expenses. Several Chinese provinces have assisted their developers with investment and marketing. Moreover, the China Africa Development Fund (CADF), a $5 billion equity fund set up by China Development Bank, has invested in at least three of the seven pilot zones (Nigeria Lekki, Mauritius and Egypt) for a total of $100 million.

African host governments regulate the activities in those zones and provide incentives for their development. Most of the pilot zones are governed by standard packages of incentives offered by host governments: tax holidays, waivers on import tariffs for raw materials and inputs, restrictions on strike activity. The Mauritius Jin-Fei Zone received the same incentives as other firms in the Free Port, however the government of Mauritius reportedly offered additional incentives to attract the Chinese investors, in part to compensate for its refusal to give a holiday on the standard 15 percent corporate tax. In both Nigerian zones, the state governments have formed partnerships with the Chinese firms holding the majority of shares. In at least one of the Nigerian partnerships, local officials apparently expressed concerns about the quality of the infrastructure being constructed by Chinese partners. In several countries, Chinese developers have been frustrated by the slow provision of infrastructure and facilities promised by local authorities.

Strategic issues

Over time, four aspects of these official zones will be critical for a positive development impact in Africa: investors, employment, environmental and social impact and the transfer of skills.

Investment. Running the zones at close to full capacity is obviously critical for benefits to be achieved. Although China's national government is keen to attract investment from Chinese firms, the zones are open to investors from all over the world. At this early stage, Chinese companies make up the majority of investors, although a small number of African enterprises are also present: bank branches, customs brokers, and local goods suppliers. Chinese companies, especially those new to Africa, appreciate the fact that developers speak Chinese and can offer a crucial information network. Yet the pattern of successful zones in Asia and in Mauritius is that they were able to attract local investors. Without local investment, the zones could risk becoming isolated enclaves.

Employment. The zones have no standard requirements permitting Chinese companies to use Chinese labor. Some countries have strict regimes for foreign labor. For example, Egypt allows one work permit for every nine Egyptians employed. Yet in Zambia, the percentage of Chinese workers was as high as 50 percent during the early phase of construction, and while machinery was being installed. In factories established in the Zambian zone, however, the percentage of Chinese workers (mainly managers) has been about 20 percent. Since Mauritius has a long tradition of receiving foreign workers, it has the most open approach to Chinese workers. Its zone, still under construction, was at first expected to employ half Mauritian and half Chinese workers. When Mauritians raised concerns about the sheer number of Chinese expected, the plan was revised.

Social and environmental impact. As most zones are at a very early stage, there is little information yet on environmental impact. In Zambia, the zone developer CNMC has established a social responsibility programme and planned to have an ISO certified environmental appraisal of the zone. In Mauritius, Jin-Fei has conducted a full environmental impact assessment and obtained certification from the local authorities. In some zones, social impacts so far include resettlement and compensation of communities displaced by the zone developments, a responsibility of the host governments. In Nigeria's Lekki peninsula and in Mauritius, communities have protested that their compensation is inadequate.

Technology transfer. The Egyptian, Nigerian Lekki and Ethiopian zones were designed by companies from China's own successful zones. However, although some short-term training has been conducted for African officials who have visited Chinese zones, none of the overseas zones appear to have formal training or capacity-building programs in place to ensure that African officials or partners are ready to assist in the management of the zones. It is not clear if ‘learning by doing' will be sufficient.

Prospects

The Chinese cooperation zones in Africa combine the support of a powerful state with profit-oriented entrepreneurial ventures. This structure bodes well for the sustainability of the zones. The Chinese government provides incentives, including some subsidies, so that its enterprises can carry out the government's political and economic strategies. China's zones were an important part of its own success, and the sharing of the zone experience with other countries is part of the expansion of China's "soft power". Yet political interests are not intended to override the market principles that are supposed to make the zones both dynamic and sustainable. The developers believe that in order to attract companies from China and other countries they will need to provide excellent infrastructure, services and management. This model is an extension of the successful East Asian developmental state with its performance-based rewards and incentives. Despite the challenges raised by major projects in many African states, China's own experience in SEZ development and its strength in infrastructure construction significantly increase the chances of success for the zones.
For their part, the African host countries regard the Chinese zones as good business opportunities and potential partners to drive their countries' overall economic development. In order to achieve these results, the zones will need to have strong channels of communication with local communities with regards to resettlement, environment, employment and other issues. In the medium term, efforts need to be made to involve local firms both as investors in the zones, and as suppliers of goods and services. In the long run, the role of African partners has to be enhanced and the knowledge of zone management should be transferred to the African side so that the zones can be part of Africa's long-delayed industrial transition and become sustainable showcases of economic progress, as they have been in many parts of China.
The zone model reflects China's different perspective on what Africa needs for development. Western countries support microfinance and NGOs; China sets up a $5 billion equity fund. The West pushes African countries to open their markets through free trade agreements; China constructs special economic zones in Africa to attract Chinese firms. Western governments believe Africa must have good governance and democracy in order to develop; the Chinese believe that better governance is the outcome of economic development. Beijing's perspective is far closer to its neighbors Tokyo and Seoul than it is to London's or Washington's. The West long ago gave up trying to foster industrialization and structural transformation in Africa; strategists there seem to have forgotten that this was how they became rich. China's experiments in Africa are worth watching. After all, they climbed up this ladder very recently; they still know the way.

Authors: Deborah Brautigam is Professor of International Development at the American University, a Visiting Senior Fellow at the International Food Policy Research Institute, and the author of "The Dragon's Gift: The Real Story of China in Africa". Xiaoyang Tang is a Researcher at the International Food Policy Research Institute.

Note:
This article is based on a longer paper entitled "African Shenzhen: China's special economic zones in Africa"
See: TNI, Special Issue on "African development: The role of traditional and emerging players reconsidered". Vol.10, No.3, May 2011.

1 Seven zones were chosen for official support in two rounds of bidding, but the zone in Algeria has not been implemented due to uncertainties about changes in Algeria's foreign investment legislation.

2 Minying covers all enterprises not run by the state, including privatized state-owned and provincial enterprises.

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