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Tuesday, 6 April 2010

Economic impacts of MFEZs

Zambia is currently implementing a brand of special economic zones (SEZs), now popularised as Multi-Facility Economic Zones (MFEZs). Although debate in economic literature is sharply divided, among Zambian politicians there's actually significant consensus that this is the future for Zambia. All Parliamentarians appear on board with the broad stated aim of having "MFEZs in every district". In fact there has been little discussion in the Zambian press on the pros and cons of this policy, which has attracted significant attention (including protests) in other places around the world. I would say with some confidence, that any debate that has taken place, has largely been on the Zambian Economist.

This is unfortunate because the policy on MFEZs has profound implications (some discussions on this here and here). Proponents of MFEZs naturally argue that the policy will lead to significant impact on investment, exports and employments. Skeptics, myself included, express concern over the displacement of people associated with land acquisition,  land grabs, government subsidisation of infrastructure (which MFEZ should be delivering), inadequate promotion of domestic investors, huge revenue loss to the exchequer, labour exploitation and environment degradation. The bottom line is that there significant concerns not only with the fundamental economic rationale, but also the extent to which a proper cost benefit analysis would support
current MFEZ policy. Zambia of course has not undertaken any systematic appraisal of evidence before committing itself down the path, but the opposition should be looking at these issues for 2011 and beyond. They should not be scared to review whether the current trajectory is optimal. I say the "Opposition" because I am convinced that the current party in government is fully sold to the MFEZ approach. I doubt that we can see any movement from their end, but stranger things have happened.

A recent paper shares some lessons from the Indian experience with SEZs / MFEZs :

It finds that while SEZs are stimulating direct investment and employment, their role appears to be more valuable in bringing about economic transformation from a resource-led economy to a skill and technology-led economy; from low value added economic activities to high value added economic activities; from low productive sectors to high productive sectors; and from unorganised to organized sectors, both at the national and regional levels. They have the potential of promoting new knowledge intensive industries; augmenting existing industrial clusters/industrial states; diversifying the local industrial base; and localizing global value chain. However, a strategic approach is required to reap the opportunities offered by SEZs.
There's much to agree with from the paper, in particular the potential for SEZs / MFEZs to help contribute towards structural transformation of the economy. In theory MFEZs can help deliver real development by transforming the production side of the economy. The problem with the paper, is that while it proficiently highlights the many benefits it totally ignores the costs.  The key direct costs of course is the forgone tax revenues that may have accrued to government without the MFEZ policy, as well as the expenditure on "world class infrastructure costs". This is more than simply a question of whether the investment is additional, but whether the additional investments presents an additional  position net of tax loss and infrastructure support. This is an important question and one not settled in the paper. There are many credible ways for attracting investment from abroad divorced from the large tax breaks Government has offered. I have previously suggested that what we should focus on is to develop a bureaucratic hands-off approach, the freedom to invest across sectors, and promote contestable markets (with import competition, and privately financed infrastructure being two of the key factors - see the blog here). More importantly, with these things the MFEZ policy is totally redundant. It is at best a poor second best policy.

An interesting point noted in the paper is that Indian SEZ policy has focused on attracting domestic firms as well as foreign firms. This is certainly something that Zambia should try and emulate, if it continues to go down this path post 2011. Without sufficient Zambian firms in the MFEZ we are unlikely to see the technological spillovers that ultimately will determine whether the policy has delivered tangible benefits. However, even here optimism is tempered because existing empirical consensus suggests that it is difficult for emerging economies, like Zambia, to extract potential benefits of spillovers when a large technological gap exists between domestic and FDI firms operating in the MFEZ. If a future government wants to use MFEZ as diversification tool, it would need  to put the MFEZ policy within a broader economic policy context. The government would have to take the necessary steps to invest in basic non-MFEZ infrastructure, education and training, and above all encourage Zambian firms to invest in technological development. These policies would do a great deal in increasing Zambian firms technological capability, and also make it easier even for firms outside the MFEZ to benefit from spillovers of foreign firms within the MFEZ. But even then, the road is still uncertain as discussed in the blog - FDI and domestic spillovers...


  1. MFEZs seem to be premised on EPZs which failed to be implemented in spite of EPZ Act and subsequently the ZPZ Authority being put in place. Mey view is that MFEZs may not be fully implemented just like EPZs for one reason or the other. We must know why EPZs failed so that we avoid falling in the same pit.

  2. MFEZs go beyond EPZs in terms of infrastructure support and the scale of incentives. I think we can be confident MFEZs will be implemented, atleast the Chinese led MFEZs like Chambishi where money has already been spent. The question is how transformational these will be.

  3. MFEZ appears to be something done in a hurry without proper consideration. A look at the ZDA Act reveals some gaps- it fails to spell out clearly the benefits that should accrue to a Zambian firm that operates in a MFEZ. And making matters worse, some mines are also designated as MFEZ and one wonders what spillover effects it has.


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