The relationship between free trade and poverty reduction is an inverse one. The higher the level of free trade, the higher the poverty reduction. Free trade has reduced global poverty by accelerating the quantity and quality of employment opportunities in developing countries by stimulating economic growth. Developing countries now comprise 48 percent of world trade and the number of developing countries participating in trade corresponds with an equally dramatic decline in extreme global poverty. This statistic reflects a nearly 1.5 percent increase since 2000. If free trade is thus essential to the development and the reduction of poverty, why do governments protect specific industries at the expense of the rest of the economy? The explanation to the above contrast is that many developing countries are not experiencing the promised benefits of free trade due to their lack of fairness(competitiveness) in global markets.
Special Economic Zones in Africa allow for a more competitive environment by providing reduced labor costs and less stringent environmental regulations as incentives for FDIs. Despite their merits, these design features have been met with resistance and unduly restricted by political processes. In the specific case of Africa, landlocked developing countries and the most remote areas are often left out of the benefits that are promised by free trade agreements. Seemingly more restrictive labor laws and environmental regulations among other things continue to be a limit on growth and export competitiveness. To ensure more equitable gains from trade, it is important to reevaluate both the type of free trade facilitated by SEZs as well as how to ensure that opportunities for growth and development for all African nations in SEZs are realized.
Since the beginning of the twenty-first century, the rise in global economic competition has been stark. It is widely known that nations need to compete in global markets and exports are a key source of income in this regard. Cross-border free trade agreements have been created to facilitate this process between these nations. However, it is essential that domestic economies remain competitive when participating in such agreements; otherwise, they will still largely contribute to poverty and inequality throughout the world. The effective use of SEZs by developing countries has become an important part of this goal as they allow for reduced labor costs and less stringent environmental regulations as incentives for foreign investment. By providing these incentives, participating countries are able to provide more competitive products and services, thus increasing exports and creating jobs. However, it is also important to note who benefits from these agreements and how.
Countries that are landlocked and have a limited hinterland have often found themselves on the losing end of free trade agreements. This is because such countries usually rely more heavily on exporting goods to their immediate neighbors than to other countries, making free trade agreements that include a wider geographic expanse disadvantageous for them. As a result, these countries find themselves at an economic disadvantage when participating in free trade agreements because they do not benefit from the presence of SEZs in their regions since geography renders them less competitive.
Mali is an example of this issue, as the country and its rural population have often found themselves economically disadvantaged by free trade agreements such as Cotonou and the EU-Africa trade agreement which both include the Malian hinterland. Over time, it has become clear that this disparity will not change unless joint development projects are created in Africa that takes into account some of these issues and deal with them in a more proactive manner.
One of the biggest challenges to development in Africa has been to establish a mechanism for adequate market access for African goods on international markets. Trade barriers as well as poor infrastructure have hindered many African countries from becoming successful exporters on international markets. However, the lack of growth in African countries is also to a certain extent due to the fact that they often produce goods that are less competitive on global markets. When exporting these less competitive products to the rest of the world, countries run the risk of having their exports categorized as “unfair” trade practices by countries that are part of free trade agreements. This can create economic penalties on a country’s exports and result in it losing business on international markets.
After the Second World War, development in Africa began to rely heavily on international trade with Europe and the US. However, exports from most African countries over this time period were primarily labor intensive and thus were not able to keep up with the changing ecosystems of these two regions. At the same time, many African countries were forced to rely on highly restrictive import regimes engineered by colonial powers in an effort to maintain a favorable trade balance. Upon independence, all of these countries found themselves ill-equipped at trying to deal with this new form of free trade and some tried more aggressive approaches such as import substitution industrialization which generally led these countries into continuous economic crises. The most successful development in Africa over this time period was generally associated with those countries that avoided direct participation in the international economy, such as Ethiopia and Mauritius.
Even today, African countries find themselves in a position where they need to compete with other countries and impress their potential customers while also dealing with weak infrastructure and a massive supply of unemployed labor due to the devastation of post-colonial economies. SEZs allow for the creation of a more competitive environment that can help developing countries achieve this goal. By allowing for reduced labor costs, SEZs are an important part of international trade agreements between countries as they will have a greater incentive as well as the ability to compete in these agreements once restrictions are removed.
For this reason, it is important that SEZs are economically beneficial for both the host and participating countries. For the host countries, higher levels of exports will lead to greater growth and stability in their economy. In addition to this, participating countries can be assured that by reducing labor costs and environmental regulations, they will be able to compete in global markets while also providing a more favorable environment for domestic businesses such as small and micro-enterprises. By creating conditions that are more conducive to development in these nations, SEZs provide an important tool for economic growth by ensuring that exporting industries grow at a faster rate than those developed within the nation.
However, the quality of growth is a question that should always be considered when dealing with SEZs. One of the primary concerns regarding SEZs is that they will cause massive amounts of growth at an unsustainable rate if the economic opportunities that they provide only benefit a small number of individuals within the population. If this occurs, SEZs could actually lead to greater poverty and inequality by concentrating wealth in the hands of a few whiles creating systemic failures in other areas such as education and health. However, if SEZs are properly managed and not just used as tax havens for foreign investors, they can ensure that development is maintained on all levels by providing more employment opportunities and focusing on grassroots development projects before making large-scale investments into infrastructure.
SEZs and Free Trade Agreements have become a very prominent feature of the global economy. These zones are often utilized as an additional benefit for participating countries in these deals. Free trade agreements such as the African Continental Free Trade Agreement (AfCFTA) usually include SEZs as a part of their development scheme to incentivize trade and reduce manufacturing costs. To accomplish this, the agreements often include tax exemptions and reduced tariffs for goods to be exported from these zones as well as lower tax rates for businesses based in these zones.
Another benefit that SEZs provide for countries looking to participate in free trade agreements is their ability to leverage other resources that are available to them. While many of these agreements will create a favorable environment for nations within the zone, they are generally beneficial because of the benefits that will be experienced by both countries associated with this deal. For countries looking to diversify their economies and expand their trade with other nations, SEZs can be a useful tool in encouraging foreign investment and improving sovereign control over certain areas.
SEZs are a very attractive element of free trade agreements because they can provide both parties with additional benefits as well as a competitive advantage. By providing tax cuts and free trade agreements specific to these zones, these nations can develop their economies at a much faster rate in comparison to other nations around the world. This will allow these nations to more effectively compete with other countries while also reducing financing costs by eliminating foreign exchange risk. In sub-Saharan Africa, economic zones like the Dawa Industrial Zone in Ghana and Dire Dawa Industrial Park in Ethiopia are examples of the potential that SEZs can create by stimulating local economies and improving their ability to compete in the global marketplace.
Many of these agreements have resulted in positive benefits for participating companies as transportation costs are often reduced and there is a significant reduction in tariffs. These additional benefits make SEZs easier to adopt by international businesses, especially during a time period when financial resources are scarce and companies must invest more money into their workforces. By reducing costs in these areas, SEZs create an environment where companies can focus more of their resources on improving their business strategies and processes in order to compete with foreign competitors.
The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.