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Thursday, 25 August 2011

Policy Challenges of Zambian MFEZs

Tom Moody on the policy challenges of Zambia's special economic zones : 
Firstly, it is important to note that despite all the successes of China’s SEZs in providing incentives for investments and fostering growth, it has created a vast disparity in levels of development between coastal areas and the interior. The problem of ‘enclave economies’ is pronounced in countries where economic growth is weak outside of the export hubs. If the Zambian state merely collects rents, then, as Leonard and Strauss have pointed out, production will remain “disconnected from the overall productivity of the overall population…thus making the general health of areas outside of the enclave quite secondary”. Utilisation of SEZs needs therefore to be part of a much wider development strategy by the Zambian government if maximum utility is to be made from foreign direct investments. The efficacy of SEZs largely depends on the ability and the will of a government to distribute the proceeds of growth from these areas outwards.

Secondly, as states look to relocate more labour-intensive industries, the Zambian government will have to be bolder in placing demands on multinational companies to source local inputs into their global chains. The proclivity of multinationals to adopt policies of vertical integration and use pre-existing inputs into production processes should be checked by the enforcement of quotas that encompass local Zambian suppliers. Given the tax breaks offered to investors, it is absolutely crucial that Zambia is adamant on the use of local sources if the government is serious about the welfare of Zambians. With investments totalling $2.5bn, China’s CNMC in particular needs to be cajoled into moving away from its structure of sister companies that avoid integration with local suppliers. On this front the Zambian government has not done enough.

SEZs will provide no panacea to Zambia’s extreme poverty, weak economy outside of the export hubs and chronic infrastructural deficits. However, the Chambishi MFEZ has shown early promise: to such an extent that it will be expanded to include a sub-zone near the Lusaka International Airport. The acquisition of value-added products and technology transfer is a vital pre-requisite for long-term success and SEZs have a track record of addressing this. Combining this with the strong hand of government and a less accommodating tax regime might just provide a much needed kick-start for Zambian development.
These points echo largely what we have already said in our monthly essay, Five Questions on Zambia's Diversification. The central point being that deliberate policy is necessary to harness FDI as part of wider diversification process. But crucially Zambia needs money and that money can only come from a stronger mineral taxation regime, as we argue in Debunking the Government's Case for Low Mining Taxation in Zambia.  

A point not made in the article relates to the economic impact of MFEZs themselves and how the rationale for MFEZs is established. Though MFEZs hold some potential there's very little analysis presented by government that demonstrate that their current policy provides a strong economic underpinning. We touch on these issues under Government Policy on MFEZs and Economic Impact of MFEZs. 

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