Seeds of industry

Africa has a chance to follow in China's footsteps by planting special economic zones

During China's industrial rise, one strategy used to create centers for industry and commerce was nicknamed "build a nest to attract the phoenix". That is, create a favorable infrastructure and policy environment to attract investment.

But how do you build a nest in a continent where transportation problems, utility shortages and a scarcity of supporting industries severely hamper industrial development?

Solving all of those problems before starting to build factories is not a practical solution in a continent long troubled by joblessness and lack of foreign exchange.

A closer look at the "nest" solution, however, shows how it helped China become the second-largest economy in the world after it was implemented more than three decades ago, at a time when China faced some of the same problems that Africa faces today.

In China, the nest was given different names: Often it was called a special economic zone, sometimes an industrial zone, export processing zone or some other moniker. But no matter what it's called, it is a long-term strategy that can also begin to pay off relatively soon.

It requires significant, long-term investment from government and sometimes the private sector to upgrade infrastructure, and a big push from government to create a favorable business environment by reforming such systems as taxation and customs - first in a limited area and then, building upon that, extending it to other areas.

The model was invented in Ireland and adopted by China after the launch of reform and opening-up policies in the late 1970s.

It is estimated that in recent years, such zones have accounted for 22 percent of national GDP in China, 46 percent of foreign direct investment and 60 percent of exports, and have generated in excess of 30 million jobs. In some regions, they are estimated to contribute 80 to 90 percent of the local GDP.

The existence of such a model, used so successfully in China, seems a natural fit for Africa, according to participants at the Investing in Africa Forum in Addis Ababa, held from June 30 to July 1.

"The logic is simple, that a country needs transitions in its infrastructure, marketing environment and national policy if it wants to develop. This is easy to understand," says Lu Feng, director of the China Macroeconomic Research Center at Peking University. "However, it's impossible to change all of that quickly in the whole country. That's why we need industrial zones. We can change that in that specific point."

Getachew Reda, special adviser to Ethiopia's prime minister, says industrial parks can, on a small scale, address the infrastructure and logistics issues that hinder investment. "Second, it also makes it easy to push the government to improve its policy intervention models, because with more and more companies being housed in industrial parks, it will be easier for the government to tailor its actions in terms of structure and policies at the same time."

The issue is far from academic given that China plans to transfer more of its labor-intensive industry to the continent. Labor costs in China have grown to more than five to 10 times of those in Africa, says Justin Yifu Lin, former chief economist and senior vice-president of the World Bank. "If they are not transferred to Africa, those companies may gradually die out," he says.

But while labor costs are low in Africa, the inadequate infrastructure and government inefficiency mean that costs can still be high for businesses, he says. "The best way to solve the problem is to establish industrial parks, since they can include the best infrastructure and offer one-stop services to investors, which will reduce costs."

Experts say only those countries that understand the logic and realize the potential of special economic zones, and build good "nests", will fully benefit from industrial capacity transfers from China. It may sound simple, but a lot still needs to be done, they say.

Slapping the name "special economic zone" on an industrial area is not good enough.

Arkebe Oqubay, another senior adviser to Ethiopia's prime minister, says too many SEZs in Africa are sponsored by outsiders and are a kind of fad that is seen as a solution for everything. Oqubay says, however, that an industrial park "is not a replacement for the basics".

Shen Jiben, senior strategic and planning manager for the Planning Department of China Development Bank Corp, says SEZs should be located near convenient transportation and abundant natural or labor resources for starters.

International industrial development trends and local conditions must be considered when choosing which industries to develop, Shen says. Also, the industries should be highly connected, he says.

"If the industry doesn't reach a certain scale and realize the aggregation and scale effect, the industrial development in the region may fail in the end," he says.

One example of doing this successfully is found in China's eastern city of Wenzhou, a clothing manufacturing center. Qiaotou Button City there sells over 10,000 varieties of buttons, amounting to about 5 billion buttons a year, or about 60 percent of the world's button sales.

Industrial parks have existed in Africa since at least the 1990s. But few have prospered, experts say. There are many reasons for that, but experts cite a lack of support from a national policy or strategy is the first place to look.

"The first thing is a lack of strategic planning, where countries are not positioning the industrial zones on the agenda of national policy," says Cecile Fruman, a director with the Trade and Competitiveness Global Practice of the World Bank.

"The lack of legal and institutional framework" and "sometimes overlapping or contradictory laws" also hinder development, she says.

One example is Ethiopia's Eastern Industry Zone, which has 30 companies and is expected to add another 20 this year. Lu Qiyuan, president of the zone, says that while the Ethiopian government considers developing industrial parks important, the law forbade reselling land in the zone to companies based there, which created some hesitation on the part of the investors.

He says it took two years and a decision by the country's cabinet to solve the issue through special approval to resell land in the zone. That provision is now written into the law.

Fruman adds that some countries "lack know-how in how to manage the zones, and how to make them attractive to investors and bring in investors".

Partnerships between the foreign investors and domestic investors at times are fraught with difficulties, and the relationship between companies in the industrial zone and those outside it are ill-defined, says Philippe R. Scholtes, managing director of the Programme Development and Technical Cooperation Division at the United Nations Industrial Development Organization.

According to Guang Z. Chen, country director for Ethiopia with the World Bank, an important step in resolving such problems is to make sure the companies outside the zone are within the industry chain of the companies in the zone. Otherwise, the industrial zone might do a poor job promoting the country's development.

"If this is done, it will also reduce the conflicts between the foreign investors and the domestic companies," Chen says.

Here, too, China's experience can serve as a guide. Lu Feng, from Peking University, says it was difficult at the very beginning when China launched the Shenzhen Special Economic Zone, the country's first, in 1980. There were ideological conflicts, and resistance from the groups with interests in the project since many changes were required in taxation, customs and other areas. Every single change seemed to gore the ox of at least one interest group, he says.

The lesson of that experience is that you need a ministerial-level official in charge of developing SEZs, since a minister is able to report to the top leader, who has the power to solve problems in different departments that may hinder development of the SEZs, Lu Feng says.

That is an important reason Ethiopia has had a measure of success in development of its Eastern Industrial Zone. Former Ethiopian prime minister Meles Zenawi knew the secret behind the SEZs and knew how to put it into practice, Lu Feng says.

Ethiopia is using its experience in developing industrial parks to elevate them to an even higher level. In May 2014, the World Bank's board approved $250 million in credit to support the nation's effort to develop industrial zones, creating new jobs and increasing the competitiveness of its light manufacturing sector.

The Ethiopian Industrial Parks Development Corp was established that same year. It works with the Ethiopian Investment Commission, the Ethiopian Revenues and Customs Authority and other institutions to provide a one-stop service for investors who want to invest in designated industrial parks.

Experts say that African nations would be ill-served to miss the historic opportunity for industrial transfer from China.

Previous large-scale industrial transfers have taken place in three waves in recent decades: From the United States to Japan; from Japan to the four Asian Tigers (China's Hong Kong and Taiwan, Singapore and South Korea); and then to Chinese mainland.

"Experience after World War II proved that the country that could grab the opportunities in the international industry transfer of labor-intensive industries could achieve high-speed development for 20 to 30 years," says Lin, formerly with the World Bank.

"The development model many African countries took from Western countries after they gained independence hasn't helped them succeed to a large extent in developing their economy. However, if we could take advantage of the opportunity of industry transfer from China to Africa and combine that with the SEZ model, with the top leader to focus on projects, it would help African countries gain success in certain areas in the SEZs, and then that success would spread to even larger areas, even though the overall investment environment in many African countries is not that satisfying," Lin says.

International financial support is increasingly available to bolster the trend.

Shi Jiyang, president of the China-Africa Development Fund, a subsidiary of China Development Bank, says the fund's capital will be increased from $3 billion to $5 billion this year, and the fund will give priority to the development of industrial parks that promote the industrial cooperation of China and Africa.

Scholtes, with UNIDO, says the organization plans to work more intensively in the field of industrial parks, in particular with China Development Bank, because "that will lead to large investment, and a long-term, patient type of investment".

Still, African governments must take a leading role. Chen, with the World Bank, says it is difficult to depend completely on private investment for needed infrastructure construction, based on the experience of industrial parks around the world.

"It's a long-term commitment and it can be difficult to bring in private investment in infrastructure construction at the very beginning, since many are not convinced that the industrial park will be able to attract investment. The private investor also would like to recover their cost in a shorter term, and this may make rent at the industrial park even higher," Chen says.

"We hope for cooperation between private sector and the government, using the so-called PPP (public-private partnership) model. At the beginning, the government should have the will to invest in infrastructure, or it can be hard for us to bring in investment."

houliqiang@chinadaily.com.cn

(China Daily Africa Weekly 07/17/2015 page1)