macroafricaintel | African SEZs & GVCs in the age of automation (3)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I write a monthly research paper series for NTU-SBF Centre for African Studies at Nanyang Business School in Singapore. The following is the third and final part of the highlights of the issue published in June 2019.

Way forward
China, India and other Asian countries are already entrenched in global value chains. Automation might have completely diminished the opportunity for the migration of labour-intensive manufacturing to Africa by the time the continent deals with its competitiveness challenges. Thus, over time, there would increasingly be less scope for African SEZs to participate in GVCs. All is not lost, however. Domestic markets would still be able to accommodate some types of manufactured goods.8 The most attractive sectors are ideally “consumer-facing” and “infrastructure-related”.12 With a projected revenue increase of $122 billion over the next decade, agro-processing is one.12 Cement production and clothing and footwear, with projected revenue increases of $72 billion and $27 billion over the next decade respectively, are also thought to be attractive.12 Automobiles and consumer goods are promising manufacturing subsectors as well.11 And depending on the ambitions of the manufacturers and prevailing trade dynamics, these ventures could be extended region-wide or across the continent. Thus, the primary objective of African SEZs should now be to engender intra-African trade.17 They could also be used as reform labs, like China and closer to home, Mauritius, have done.17 Clearly, local firms would be crucial to such a strategic re-orientation. African SEZs should thus see local firms as their primary targets.

Use SEZs as reform labs
The concept of an “Early Reform Zone” (ERZ) is proposed.8 ERZs are designed to be oases of sanity in typically dysfunctional economies. So, whereas firms in the broader economy might suffer from a lack of quality infrastructure, red tape, and myriad challenges, ERZs circumvent all these. The so called “second-generation” SEZs differ from the first-generation ones along the following lines. They are not subsidized, thus not as capital-intensive as their forebears.8 And since they are literally designed to be permanent, there is no time pressure.8 Another key distinction of ERZs is speed. ERZs almost momentarily create the conditions for firms to be globally competitive within a specific geographic area in an otherwise distorted economy.8

Build strong linkages with the local economy
As opposed to the current practice of targeting foreign investment, African SEZs should increasingly look towards domestic firms. It is not a novel idea. Local firms have over time come to dominate SEZs in Malaysia, Korea, and Mauritius.17 It has also recently been observed to be the case in China.17 Emerging Asian countries like Bangladesh and Vietnam are also beginning to record a higher level of participation by local investors in their respective special economic zones.17 This has not been found to be the case in many African countries, at least not materially as yet.13 It explains their underperformance in part. Foreign firms can be fickle.5 And once they leave, without having already been integrated with local firms, with the expected attendant knowledge and technology transfer, they depart with the envisaged advantages of attracting them in the first place.

Nonetheless, African SEZs have primarily been designed to be “enclaves” for foreign investors.15 In light of evidence, in East Asia, for instance, that show a strong correlation between SEZ performance and linkages to the local economy, African zones would be well-advised to do the same.15 This could be done through deliberate local content policies by governments. Joint ventures with local firms are also another way to achieve this.15 That said, the ease of collaboration between foreign and domestic firms has been found to be dependent on sector dynamics.14 In other words, local firms might be better collaborators and participants in the value chain of a less complicated sector like agriculture but not in ones that require greater technological know-how, for instance.14

Plug into intra-African GVCs
Automation and Industry 4.0 suggest Africa’s place in global value chains, not remarkable at the moment in any case, may be non-existent if and when it finally gets its act together. This is because GVCs themselves might have become obsolete by then, with production and consumption becoming domestic or regional.10 In any case, there is already an opportunity to develop regional GVCs via the respective regional customs unions on the continent. And with the African Continental Free Trade Agreement (AfCFTA) now to be operationalized, there is a broader continental opportunity.

See parts (1) & (2)

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