The concept of Special Economic Zones (SEZs) and their impact on economic growth is gaining more and more acceptance globally and the instrument has been widely applied. The aim of SEZs is to stimulate economic development by attracting local and foreign direct investment (FDI), enhancing competitiveness, and facilitating export-led growth. These then lead to economic benefits from employment generation to export growth and increased government revenues to improved technology transfer and innovation.
Definition and Types of SEZs
So, how do they work? According to the World Bank, SEZs are geographically delimited areas, administered by a single body, offering certain incentives for businesses that locate and operate within the zone. They vary in size and scope and can include, for example:
• Free trade zones
• Export-processing zones (EPZs)
• Industrial parks
• Economic and technology development zones
• Science and innovation parks.
They can be implemented using a variety of institutional structures ranging from fully public (with government acting as operator, developer and regulator) through to fully private (with the private sector acting as operator and developer and the public sector only regulating). They offer a combination of serviced land, quality infrastructure, expedited customs and other administrative procedures, and other incentives that aim at overcoming investment barriers.
Rationale for Establishing SEZs
In general, SEZs confer two main types of benefits, which in part explain their popularity: “static” economic benefits such as employment generation, export growth, government revenues, and foreign exchange earnings; and the more “dynamic” economic benefits such as skills upgrading, technology transfer and innovation, economic diversification and productivity enhancement of local firms.
SEZs are typically established with the aim of achieving one or more of the following four policy objectives:
• Attracting foreign direct investment (FDI);
• Serving as “pressure valves” to alleviate large-scale unemployment;
• Supporting a wider economic reform strategy; and
• Acting as experimental laboratories for the application of new policies and approaches.
Investing in SEZs can also offer the following benefits:
• Provide a bundling of public services in a geographically concentrated area;
• Improve the efficiency of limited government funding/budget for infrastructure;
• Facilitate cluster development, or agglomeration of certain industries; and
• Propel urban development; provide conducive living conditions for workers and facilitate conglomeration of services, including obtaining economies of scale for environmental services such as water treatment plants and solid waste treatment plants.
Impact of SEZs
Their use by policy makers is on the rise:
• A World Bank researcher, Zeng (2015) reported that there are around 4,300 zones in over 130 countries.
• These SEZs employed more than 68 million people.
• In China it has been estimated that SEZs accounted for about 22% of national GDP, 46% of FDI, and 60% of exports and generated in excess of 30 million jobs (Zheng, 2014).
• The most successful Chinese SEZ, Shenzhen, has developed from a small village into a city with a population of over 10 million within 20 years.
• Of the 4,300, about 114 economic zones were reported to be established in around 30 countries in Sub-Saharan Africa (SSA).
Context: in Zimbabwe
The existing economic zones in Sub Saharan Africa are in the early stages of development and have involved traditional EPZs and industrial parks. The Cabinet has approved the SEZ Bill, which proposes modern large scale multi-use SEZ development programs. The establishment of SEZs is identified as key success factor in the attainment of the broad economic goals set out in ZimASSET. SEZs are critical in facilitating Zimbabwe’s transition from a primary producer to a producer of high value manufactured goods.
From 1996 to 2006, Zimbabwe implemented EPZs anchored by the EPZ Act of 1995. The EPZ was mainly an export oriented regime, requiring firms to export at least 80% of their production and retain 20% for the domestic market. The entire EPZ programme resulted in 205 companies established, generating an estimated US$172 million worth of investment creating 32,512 jobs and a cumulative US$1.15 billion in export earnings. Moreover, about 21.6% of the approved projects were attributable to FDI. However, EPZs suffered some challenges which include:
• Weak coordination due to multiplicity of legislation which were administered by various government agencies;
• Complicated customs administration due to the fact that EPZ companies were scattered across the country;
• Limited technology transfer; and
• Proliferation of tax incentives outside the zones, hence resulting in preference erosion.
This resulted in the discontinuation of the programme in 2006 when the EPZ Authority was merged with the Zimbabwe Investment Centre (ZIC) to form the Zimbabwe Investment Authority (ZIA) through the ZIA Act. Companies in the EPZs were allowed to continue operating under the EPZs framework until the expiry of their licenses and some of the companies are still in existence.
Despite the limited success of EPZs in Zimbabwe, the setting up of a one-stop investment shop and strong government buy-in in SEZs are some of the positive factors which enhance establishment and performance of SEZs. Prioritised sectors are agriculture, tourism, mining, services and manufacturing. Pilot projects are highlighted in the ZEPARU Economic Barometer Volume 19
When are SEZs successful?
The global experiences with SEZs have shown mixed results. Countries including China, Singapore, Malaysia, South Korea, Jordan and Mauritius have shown positive results. Except for the Mauritius’ success story and some modest achievements in Lesotho, Kenya and Madagascar, SEZs record in Africa is more mixed. The vast majority of SEZs have not had a transformative impact. In some instances SEZs in Africa are not integrated effectively with the local economy, and did not facilitate industrial upgrading, or act as a catalyst of wider economic reforms. Other reasons for this poor performance could include:
• Poor choice of location and insufficient strategic planning and management.
• Inadequate infrastructure (for example, in access roads, energy, water etc.)
• Ineffective policy, regulatory and institutional frameworks.
• Poor business environment.
• Lack of political leadership and buy-in.
Lessons for Zimbabwe
Despite the experience to date, governments throughout Africa (now, including Zimbabwe) remain keen to develop SEZ programs. So the question is how to maximise the chances of success. Drawing on the literature and international experience, the following 10 lessons can be proffered for Zimbabwe.
(1) A sound legal and regulatory framework and effective institutions are critical: the regulatory institution must be autonomous and adequately funded.
(2) Both a strong and long-term commitment from government and active participation of the private sector is essential.
(3) Linkages with the local market need to be strong: zones need to build on local comparative advantage in priority sectors.
(4) A better business environment inside the zone, including efficient services, such as a one-stop shop is critical.
(5) Integration of the zone master plans into regional urban development plans enhance economic and social benefits.
(6) Location is important: Zimbabwe should implement SEZs starting with those areas that are easily accessible.
(7) Partnering of foreign and local investors through joint ventures is an excellent vehicle for technology transfer.
(8) Being market-oriented matters: often this means a zone being developed and operated by private sector groups on a commercial basis.
(9) Delivery of external infrastructure (power, roads, water, waste management and information and communication technology (ICT)) is critical.
(10) Effective environmental impact management strategies are a must for sustainable development of the zones.
A key lesson drawn from international experience is that SEZs are, not a panacea, to solving all economic challenges. Instead, they catalyse deeper economic reforms and become a major engine for national development through backward and forward linkages with the rest of the domestic economy. In this regard they need to be complemented by the implementation of other policy initiatives and strategies outlined in the country’s development programme ZimASSET. In the Zimbabwean context initiatives to reduce the debt burden, expanding and modernising infrastructure; improvement in public service delivery; conducive doing business environment and improvements in productivity will all facilitate the success of the proposed SEZs. Furthermore, deeper research and dialogue is still required to inform policy decisions and implementation strategies to ensure SEZs have a transformational impact in Zimbabwe.