This is the 33rd post in a blog series to be published in 2022 by the Secretariat on behalf of the AU High-Level Panel on Emerging Technologies (APET) and the Calestous Juma Executive Dialogues (CJED)

The African Continental Free Trade Area was operationalised by African governments in February 2021 and was anticipated to significantly change Africa's socio-economic development and growth. However, the COVID-19 pandemic, financial, climatic, and food-related shocks have elevated Africa's poverty rates and further created socio-economic setbacks in African countries.[1] Therefore, operationalising the AfCFTA framework remains crucial towards strengthening Africa's economic viability and competitiveness. This can encourage equitable growth, hasten the post-pandemic recovery and enhance the attainment of the United Nation's Sustainable Development Goals and the African Union's Agenda 2063.[2]

Thus, a robust manufacturing sector can broadly serve as an absolute path to economic growth and development through the AfCFTA.[3] However, Africa's industrialisation and transformation agenda should be supported at the highest national, regional, continental, and global levels. By advancing the AfCFTA, Africa will enhance the industrialisation and manufacturing efforts to deliberately realise the mutually reinforcing interdependences between AU Member States.[4] If the AfCFTA is successfully implemented, it is anticipated that Africa's manufacturing sector will double in size, with annual output rising to $1 trillion by 2025 and creating over 14 million jobs. Notably, one of the primary goals of the AfCFTA is to "enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources."[5] Industrialisation through value addition and manufacturing has been touted as the path to Africa's sustainable development to accomplish diverse economic growth. This can be accomplished by diversifying strong multisectoral and multidirectional links to local economies.[6] However, African countries should address key structural and strategic weaknesses and fragilities that are impeding African economic growth and development and hinging on the success of industrialisation of the continent.[7]

Notably, AfCTA is projected to boost business-to-business spending in manufacturing in Africa to US$666.3 billion by 2030 from only $201 billion spending 2015.[8] As such, the African Union has been urging Member States to upscale their manufacturing capacities by developing dynamic pan-African enterprises and capital bases. This can potentially unleash an inclusive and sustainable industrialisation pathway that encourages the participation of all economic agents, including small-and-medium enterprises, youth, and women. This is anticipated to enhance the generation of national wealth, job creation, and the expansion of entrepreneurship opportunities.[9]

Africa contains a wealth of favourable factors, particularly the availability of youthful labour and abundant natural resources and raw materials, which are a prerequisite for an industrial revolution.[10] Even though Africa has enormous potential to manufacture and significantly industrialise, the continent is lagging in the global value chain. Currently, Africa shares a global manufacturing rate of only 1.9%.[11] As such, African economies primarily depend on raw materials' extraction and exportation without any substantial value addition. For example, between 2011 and 2013, AU Member States manufactured goods that comprised 18.5% of exports whilst importing approximately 62% of goods. This significant trade imbalance is drawing wealth away from the continent.[12]

Africa's industrial revolution has been impeded by the surplus of the low-skilled workforce and underemployed labour in Africa. For example, fewer than one in five Africans aged 15 to 24 have graduated from basic school, which constitutes about 20% less than the global average.[13] Furthermore, limited investments towards manufacturing are hampered by the lack of skills and efficiency, particularly in increasingly specialised forms of manufacturing.[14]

Observably, Africa's infrastructure funding has increased by more than double since the year 2000, up to US$80 billion in 2015.[15] However, the energy infrastructural gaps have remained the cause of frequent power outages in several African nations. As a result, most manufacturers operating in West and East Africa are forced to rely heavily on expensive backup generators as their principal energy supply, which has negative implications for their profit margins.[16] Additionally, African electricity costs are three times higher compared to other developing nations globally. This is also compounded by the inadequate transportation infrastructural challenges that further complicate manufacturers' capacity to benefit from local economic markets.[17] Notably, only a fraction of the African roads are paved to enable operations throughout the year.[18]

Most importantly, due to its burdensome taxation bureaucracy, Africa has substantial direct and indirect expenses compared to global manufacturing trade. For instance, it may require seven separate documents and approximately 51 days to export a container from Zambia to other AU Member States. However, undertaking the same process in Morocco may take only 10 days and four documents to transport a container of goods to another part of the world. This demonstrates the difficulty and disparity that manufacturers face when accessing African markets, let alone local markets, within the African continent.

To accelerate industrial development through manufacturing in Africa, Special Economic Zones (SEZs) have been established to promote an effective mechanism for rapid industrial growth.[19] These SEZs are delimited zones in which industrial development is promoted, incentivised, and supported through various developmental programmes. These SEZs are designed to attract and promote foreign direct investment and exports.[20] To this end, several SEZs are emerging in Africa, observed within various African countries establishing SEZs and industrial parks.[21] As a result, the number of African SEZs has increased steadily in the last two decades, with the biggest SEZ located in Botswana with 85 000 hectares[22]. This is encouraged and propelled by the successful implementation of SEZs in Asia and Central America. For example, the number of AU Member States operating SEZs grew from 4 in 1990 to 38 countries by 2020.[23] AU Member States occupying the most SEZs include Nigeria, Tanzania, South Africa, and Egypt (see figure 1 below).[24]

 

Figure 1: Top 15 countries with the most SEZs in Africa.

Several AU Member States and Regional Economic Communities (RECs) are promoting their economic growth and competitiveness by using SEZs as a crucial component of their strategic industrialisation policy framework.[25] Consequently, SEZs are enhancing industrial competitiveness through manufacturing and value addition and drawing in foreign direct investment towards manufacturing activities. In addition, SEZs are also encouraging widespread job growth, thereby strengthening job creation and employment rates. SEZs are also helping AU Member States implement more comprehensive economic reform plans through active manufacturing and value addition. This also encourages the diversification of Africa's export markets while maintaining national protective barriers.[26] However, for AU Member States to fully exploit the benefits of SEZs, they should strengthen their regulatory frameworks for their customs laws, public-private partnerships, and green industrialisation programmes.[27]

The African Union High-Level Panel on Emerging Technologies (APET) challenges AU Member States to provide a conducive environment for SEZs to grow to enhance an effective industrial revolution in Africa through manufacturing and value addition. APET urges AU Member States to incorporate SEZs into national and regional industrial policies and economic development strategies to strengthen local manufacturing activities and investments. The SEZs projects should form part of their broader national and regional development goals to complement and reinforce comparative advantages in local manufacturing. This provision can critically ensure their viability based on actual market demand in Africa.

To successfully implement the SEZs, APET appeals to AU Member States to adopt predictable and transparent legal and regulatory frameworks to ensure the clarity of various parties' duties and responsibilities. This can offer innovators, developers, and investors adequate protection and predictability of regulation. In addition, this can ensure that the zones attract the correct investments that can be implemented at high standards. This provision minimises the unforeseeable threats that may meddle with the developments, irrespective of the government in power.

Furthermore, given the considerable complexity and possible hazards of zone projects, top-level government commitment is required to ensure policy continuity and adequate supply of multiple public goods.[28] A zone programme also involves several government stakeholders in control of things such as land, transportation, utilities, customs, taxation, finance, immigration, and skills. As a result, it is critical to strengthen the conversations and build collaborative systems across the national, provincial, and municipal governments and between governmental departments.

APET notes that establishing an SEZ project is a costly endeavour; the process necessitates meticulous planning, design, and management. Therefore, private-sector engagements should be promoted through well-managed public-private partnership ecosystems to ensure effective functioning. This should include a thorough examination of the local market, connectivity, industrial base, well-managed supply chain, conducive business environment, and land and labour sources. Experienced private-sector partners should oversee zone development and operation and supply on-site infrastructural support and services.

Rwanda successfully established the country's first two types of Special Economic Zones in 2006, known as the Kigali Industrial Park for domestic production and the Rwanda Free Trade Zone, offering unique tax benefits to encourage exports, primarily to neighbouring nations.[29] As such, in 2019, the first smartphone manufacturing plant in Africa started its operations in Kigali SEZ. Additionally, Volkswagen moved its US$20 million production factory in 2018 into Rwanda SEZ as well.[30] This factory employs about 1000 people and can manufacture and assemble approximately 5000 automobiles annually. These vehicles are supplied by CFAO Motors, while the factory operator, Volkswagen Mobility Solutions Rwanda, is a part of Volkswagen Group, South Africa.[31]

Kenya has also established vibrant SEZs through a Special Economic Zones Authority (SEZA) governmental agency responsible for recruiting, enabling, and retaining domestic and foreign direct investment in SEZs. Kenya has developed 3 world-class SEZs[32] : the Mombasa SEZ, Lamu SEZ, and Kisumu SEZ. These SEZs are envisaged to grow the Gross Domestic Product by US$4 billion to US$ 7 billion per year for the next 13 years.[33] The SEZs promote logistics and warehousing, trade and exhibition, processing and manufacturing, port handling, and comprehensive handling of goods and services.

APET encourages SEZs to expand and diversify the production of goods and services to benefit domestic and export markets. They should also promote value addition and local entrepreneurship through small-and-medium enterprises. This includes enhancing technology development and innovation and strengthening rural and regional industrialisation by exploiting the comparative advantage of local resources. This is because, in many cases, the growth of SEZs across Africa has been driven by the potential of job creation by drawing investment and technology development to certain regions of the continent. Hence, SEZs should continue to provide mechanisms for corporations and SMEs to access workforce and national markets while operating under enabling regulatory frameworks.

Most importantly, there should be an increasing appetite to generate synergies across SEZs, particularly about the AfCFTA platform. The goal should be integrating regional economies and developing strong industrial economies within and between AU Member States.

 

Featured Bloggers – APET Secretariat

Justina Dugbazah

Barbara Glover

Bhekani Mbuli

Chifundo Kungade

Nhlawulo Shikwambane

 

[1] Free Trade Deal Boosts Africa's Economic Development. PUBLICATION, JUNE 30, 2022. https://www.worldbank.org/en/topic/trade/publication/free-trade-deal-boosts-africa-economic-development.

[2] The African Continental Free Trade Area. https://au.int/en/african-continental-free-trade-area.

[3] https://www.brookings.edu/wp-content/uploads/2018/09/Manufacturing-and-Industrialization-in-Africa-Signe-20180921.pdf.

[4] AU Member States urged to harness nexus between industrialization, continental free trade. https://clubofmozambique.com/news/african-countries-urged-to-harness-nexus-between-industrialization-continental-free-trade-227047/.

[5] https://www.brookings.edu/blog/africa-in-focus/2019/06/04/africas-industrialization-under-the-continental-free-trade-area-local-strategies-for-global-competitiveness/

[6] African Union Summit on Industrialization and Economic Diversification. https://au.int/en/summit-africa-industrialization-economic.

[7] https://au.int/en/summit-africa-industrialization-economic.

[8] https://www.brookings.edu/wp-content/uploads/2018/09/Manufacturing-and-Industrialization-in-Africa-Signe-20180921.pdf.

[9] https://au.int/en/summit-africa-industrialization-economic.

[10] https://unctad.org/system/files/official-document/aldcafrica2021_en.pdf.

[11] https://www.afdb.org/en/the-high-5/industrialize-africa#:~:text=Africa%20is%20at%20the%20bottom,at%20around%20only%201.9%20percent.

[12] Africa must reduce its dependency on raw material exports and imports, 05-Nov-2015. https://www.afdb.org/en/news-and-events/africa-must-reduce-its-dependency-on-raw-material-exports-and-imports-14957.

[13] Increase in number of out-of-school children and youth in SA in 2020. https://www.statssa.gov.za/?p=15520.

[14] https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_834081.pdf.

[15] https://corporateandinvestment.standardbank.com/static_file/CIB/PDF/2021/Insights/Infrastructure_Financing_in_Sub-Saharan_Africa_for_Inst_Investors.pdf.

[16] Africa: Back-Up Generators - a Heavy Cost for Business in Africa. https://allafrica.com/stories/202011190744.html.

[17] Moussa P. Blimpo and Malcolm Cosgrove-Davies, Electricity Access in Sub-Saharan Africa, Uptake, Reliability, and Complementary, Factors for Economic Impact. https://openknowledge.worldbank.org/bitstream/handle/10986/31333/9781464813610.pdf.

[18] https://www.brookings.edu/wp-content/uploads/2018/09/Manufacturing-and-Industrialization-in-Africa-Signe-20180921.pdf.

[19] PRESS RELEASES, 10 things Africa must do to accelerate industrialization and economic diversification in Africa. https://au.int/en/pressreleases/20221114/10-things-africa-must-do-accelerate-industrialization-and-economic.

[20] https://www.tralac.org/publications/article/15591-special-economic-zones-in-africa-an-overview-of-policies-and-regulatory-regimes.html.

[21] https://blogs.worldbank.org/psd/how-make-zones-work-better-africa.

[22] https://www.adrianoplegroup.com/post/special-economic-zones-in-africa

[23] https://unctad.org/system/files/official-document/diaeia2021d3_en.pdf.

[24] https://www.adrianoplegroup.com/post/special-economic-zones-in-africa

[25] Handbook On Special Economic Zones In Africa, Towards Economic Diversification across the Continent. https://unctad.org/system/files/official-document/diaeia2021d3_en.pdf.

[26] Special Economic Zones in Fragile Situations: A useful policy tool? https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/SEZ_anglais_SEZ_anglais.pdf.

[27] https://au.int/en/newsevents/20200928/3rd-au-symposium-special-economic-zones-and-green-industrialization.

[28] Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa, Prepared by Economic Policy, National Treasury. https://www.treasury.gov.za/comm_media/press/2019/towards%20an%20economic%20strategy%20for%20sa.pdf.

[29] Working paper, Analysing the impact of the Kigali Special Economic Zone on firm Behaviour. https://www.theigc.org/wp-content/uploads/2017/10/Steenbergen-and-Javorcik-working-paper-2017_1.pdf.

[30] Working paper, Analysing the impact of the Kigali Special Economic Zone on firm Behaviour. https://www.theigc.org/wp-content/uploads/2017/10/Steenbergen-and-Javorcik-working-paper-2017_1.pdf.

[31] https://www.adrianoplegroup.com/post/rwanda-report-economic-development-sez-kigali-bugesera-carnegie-mellon-mara-phones.

[32] https://kip.or.ke/wp-content/uploads/2018/10/1_ICPBF_MoITC_Special-Economic-Zones_Robinah-Mwenesi.pdf.

[33] https://kip.or.ke/wp-content/uploads/2018/10/1_ICPBF_MoITC_Special-Economic-Zones_Robinah-Mwenesi.pdf.