Rather than moving to an exponential growth path, African Export Processing Zones have been characterized by a slowdown in growth across investment, exports and employment. A look at the case of West Africa – and why it’s time for governments to lift the game.
The common image of thousands of women busy on the production line in garment factories has become an iconic symbol of how export manufacturing puts poverty-reducing jobs in the hands of low-wage workers in developing countries. For one thing, this icon is typically Asian, and for good reason: Asian countries have been the center of labor intensive global manufacturing in the past four decades. But these poster board images could also easily be African – for Africa possesses some of the advantages that have turned Asia into the hub of international manufacturing especially with low-cost labor
The reasons this hasn’t happened are varied. But prospects that it could now happen are brighter than before. If governments play their cards well, tens of thousands of women and young workers in Africa could reap from the potential fruits of a manufacturing boom. One such big game-changer could be how governments strategize to make use of export processing zones. Export Processing Zones (EPZs) also referred to as Industrial Free Zone (IFZ), Free Economic Zone (FEZ), or Free Export Zone (FEZ), can be defined simply as an enclave or a designated area within which processing activities occur “outside” the customs territory of the country, insofar as the jurisdiction of normal customs provisions are concerned
While there are several across Africa they have not yet helped to change the game. What will it take to make them the hubs of hope where women and youth find decent jobs as their Asian counterparts have.
Sub-Saharan Africa has more than 90 Export Processing Zones
The trend towards EPZs dates back to the 1990s when a wave of EPZs legislation swept over African countries as they sought to replicate the East Asia model of export-led industrialization. The most recent survey lists 20 countries in sub-Saharan Africa with 1,043,186 employed persons in more than 91 zones (roughly 2.6% of the total in developing countries including China or 3.5% without China).
These zones offer a variety of incentives.The typical SEZ policy package includes import and export duty exemptions, streamlined customs and administrative controls and procedures, liberal foreign exchange policies, and income tax incentives—all meant to boost an economy’s competitiveness and reduce business entry and operating costs.
The rationale behind these very generous incentives is to support what are seen as key planks that are central to successful export-led growth.
The traditional economic activities which occur within the EPZs have been primarily been garment production and assembling of electronic and light electrical goods. In recent times, however, the development of food processing activities, production of optical goods, watches, leather footwear, clothing, furniture and toys, and others, including services, have been added.
This is all encouraging – except that for most countries pursuing this quest, success has proved elusive. West Africa is a good illustration.
The case of West Africa: a promising but disappointing record
Today almost all countries in the West African region have embraced export-processing zones as a strategy to attract foreign investment or export-oriented manufacturing. A survey of various types of EPZ facilities is given in the below.
|Country||Type of EPZ|
|Benin||1 Industrial park|
|Cape Verde||1 Industrial park|
|Cote d’Ivoire||Technology park|
|The Gambia||A free port and an industrial park|
|Ghana||2 free ports, an airport free zone, 4 EPZs and 150 free points|
|Liberia||1 free port and 1 industrial park|
|Mali||Some free points|
|Nigeria||9 free trade zones, 10 under construction and 3 planned, 19 free points|
|Senegal||1 Special Economic Zone (SEZ) under construction, 1 industrial park and 10 free points|
|Togo||1 free port, 4 EPZs and 40 free points|
In a few countries progress is visible, however small. Indeed in terms of exports, Ghana’s free zone program seems to be an example of success once again, partly attributable to cocoa processing activities, but also a variety of other exports. Togo’s Free Zones have also recorded some success. The enterprises in the Free Zones employ more than half of Togo’s secondary sector. The export processing zone employs 9,000 workers, of which 60% are women, in around 60 companies.
However compared to the EPZs stories of Asia, and Central and Latin American countries, the attempt by most West African countries to develop EPZs to kick-start industry and diversify the economy have been less successful. The trend in West African countries shows no significant changes in their export structure. Overall, West African SEZs are characterized by low absolute and per capita exports, 10 to 15 times smaller than in non-African SEZs. It appears that most West African SEZs fail to shift to the exponential growth path that typically occurs between 5 and 10 years of operation, with some zones even experiencing declining growth. As a result the zones have a very low density of firms compared to those in other emerging markets.
The region’s EPZs are also comparatively limited in labor-intensive sectors like the garment sector. This is rather surprising given the region’s (especially the Sahel belt) comparative advantage in growing cotton and with the added preferential access to markets under AGOA and EBA. Burkina Faso, the biggest producer of cotton exports over 90% of it in raw form.
Few EPZs provide good quality, upgradable job opportunities. For instance, in Togo more than two-thirds of workers in the Free Zones have temporary status, and unionization, although guaranteed under the Togolese labor code, is not enforced. Indeed, firms located in the free zone sites like using unskilled labor, and those employed by non-EPZ businesses are better paid than those in the EPZ.
Investors tend to be foreign nationals with limited local participation; a situation that gives little space to local entrepreneurs to learn and grow through partnerships with foreign investors. For instance, free zone company promoters, in Togo cover 13 different nationalities and only 29% of the companies are led by Togolese. Now, many local investors in the region feel that some governments invest too much in the development of free trade zones; and that granted similar opportunities, businesses outside the special zones may have potential to create more jobs.
Development experts in the region have begun to question whether the zones are reaping any significant benefits for national economies, considering the huge cost of infrastructure and relief (that imply potential revenue losses from concessions on income taxes and tariffs). Analysts have pointed out that the current net foreign earnings and jobs created within the SEZs may not necessarily constitute a large enough sum to warrant the investment undertaken by countries in the region to accommodate the zones.
Meanwhile investors may also be losing their enthusiasm for locating in free zones. In Benin, the progress of work on the site of the free zone tells us a lot about the future of free zones. Of 20 enterprises operating according to the free zone principles only 8 are located on the free zone site; 12 are outside. Some businessmen refuse to move their enterprises to the site due to lack of infrastructure like running water, electricity, security and good roads.
Same old problems
Most zones in West Africa have failed largely because of lack of government commitment to the program, policy reversals, and high costs involved with developing EPZ infrastructure. Bureaucracy and non-transparent procedures in accessing incentives are typical. Other constraints include serious deficiencies in telecommunications and power supply, unreliable and costly transportation services, poor locations of zones, labor difficulties and other general market failures.
In Senegal for instance, poor infrastructure, mismanagement and bureaucratic tendencies associated with state-owned enterprises have prevailed in the Dakar Free Zone. Additionally, there has been over-staffing by the authorities. In the case of the latter, 74 government officials were employed at a time when the zone had a single firm established in it.
What can be done? Some potential interventions
While EPZs may only provide low paying, temporary jobs, these are still jobs that give the poor some livelihood and a ladder to work towards better jobs in the future. However more effort should be put into ensuring some skills training and other job benefits. This requires engaging aid agencies that sponsor many of the EPZs, and programs like the United States’ AGOA that spur the establishment of EPZs. Aid agencies have the power to mandate minimum standards and benefits that countries should derive such as technology transfer.
Importers who buy from EPZs can also help to improve worker conditions. But this should not be achieved by demonizing investors as greedy capitalists. The definition of what is fair needs to be realistic given that EPZs are in global competition. Both importers and consumers need to be sensitized on the impact of EPZs on local communities. A sensible strategy which ensures that EPZs in the region do not turn into slave labor sweat shops is needed.
Perhaps the biggest challenge will continue to be the adeptness of EPZ companies in manipulating the system – such as big investors playing countries against one another or extracting concessions through relocation threats. Countries desperate for foreign investments and bureaucrats keen to see their EPZs succeed tend to comply (the end result is what has been termed as the race to “the bottom”) as countries relax rules, creating huge pools of working poor. This can only be countered through inter-country coordination and harmonization of regulations governing EPZs. Regional bodies should take up a regional investment code as part of their agenda
Investment codes should discourage investments that can be uprooted and transferred to another location on a moment’s notice as these tend to encourage investors who are only keen on reaping the rich benefits of incentives and running off to another location to restart when the incentives expire
The focus on exports should also be tempered with a focus on job creation and developing linkages between EPZ firms and local entrepreneurs. Local entrepreneurs will require better technical and management support to upgrade skills, and investment codes ought to mandate such linkages.
For the past several decades, Africa has lagged behind Asia and Latin America in manufacturing and exports. As the continent’s reputation begins to soar as a viable investment destination, and as many governments seek ways to diversify their economies and move up the export value chain, Export Processing Zones will become even more important than ever. EPZs have been poorly managed; it’s time for governments to lift up their game.
This article is an excerpt from the June 2012 issue of West Africa Trends, a newsletter for the Rockefeller Foundation prepared by the African Center for Economic Transformation (ACET).