KAMPALA, UGANDA-Uganda has signed a deal with ASB Group, a Turkish company, to establish a $300m special economic zone for beef production in Nakaseke district. Rwanda has developed a strategic plan for them. Kenya planned to construct a special economic zone in Mombasa

But studying history may give eager trade ministers pause. Special Economic Zones (SEZs)—enclaves in which exporters and other investors receive tax, tariff and regulatory incentives—create distortions within economies.

Other costs include required infrastructure investment and forgone tax revenues. The hope is that these are outweighed by the boost to jobs and trade. In reality, many SEZs fail.

Performance data are elusive because the effects of zones are hard to disentangle from other economic forces.

But anecdotal evidence suggests they fall into three broad categories: a few runaway successes, a larger number that come out marginally positive in cost-benefit assessments, and a long tail of failed zones that either never got going, were poorly run, or where investors gladly took tax breaks without producing substantial employment or export earnings.

Perhaps, that is why Uganda’s finance Minister Matia Kasaija noted that the recently established Uganda Free Zones Authority (UFZA) is expected to carry out proper due diligence on all prospective investors, both local and foreign, in order to prevent speculators from acquiring licenses.

In addition, more prosaic problems pop up with the establishment of the zones. Bureaucracy can be excessive, and the bureaucrats underfunded—sometimes at the same time.

But Minister Kasaija cautioned the board of directors he inaugurated recently that “if Uganda is to successfully attract sustainable investmentsinto the Free Zones, we need to be more innovative and provide an environment free of long bureaucratic processes.”

Already under the ASB agreement, Uganda has provided an 18 square mile site at Kaweweta in Nakaseke.

He revealed that last financial year’, Uganda’s value of exports of goods and services was projected to be US$ 5.4 billion compared to the total import bill of US$ 7.9 billion.“As a result, Uganda’s trade deficit stood at $2.5 billion in 2013/14. Thisfinancial year, we have committed to enhancing our Export Strategy thatwould maximize demand for our products and services above and beyond local effective demand,” the Minister said

But SEZs have a long pedigree: the first free-trade zones were in ancientPhoenicia. The first modern one was set up at Shannon airport in Irelandin 1959, but the idea took off in the 1980s after China embraced them. There are now more than 4,000 SEZs in China.

A study conducted in 2008 estimated that 68m people worked in them. They come in many forms, from basic “export processing zones” to “charter cities”, urban zones that set their own regulations in all sorts of areas that affect business. The biggest success story is China, whose decision in 1980 to create a zone in Shenzhen transformed the city into an export powerhouse. Dozens of SEZs have since popped up across the country.

This is the very reason why most economists agree that SEZs catalysed liberalisation in China, which used them to test reforms that were seen astoo hard to unveil nationwide. In the Dominican Republic they helped create a sizeable manufacturing sector in an economy previously reliant on agriculture.

In Tanzania, the special economic zones scheme was established in 2006within the framework of Tanzania Mini-Tiger plan 2020, to promote export earnings and employment creation as well as attracting Foreign and Domestic Direct Investments. Since then, the Authority has welcomed 63 factories with a total capital of USD 770 million which exported USD 500 Million to date. Direct employment reached about 17,000 while indirect employment 65,000.following the enactment of the Export Processing Zones Act, 2002.

A paper published in 2014 by economists at Paris-Dauphine University found that, for a given level of tariff protection, SEZs increase exports for the countries they are in and for other countries that provide intermediate goods or components.

This helps explain why the World Trade Organisation generally toleratesSEZs, even though many breach its subsidy rules. However, the paper also concluded that zones sometimes give countries an excuse to retain protectionist barriers around the rest of the economy.

A paper published in 2014 by economists at Paris-Dauphine University found that, for a given level of tariff protection, SEZs increase exports for the countries they are in and for other countries that provide intermediate goods or components. This helps explain why the World Trade Organisation generally toleratesSEZs, even though many breach its subsidy rules. However, the paper also concluded that zones sometimes give countries an excuse to retain protectionist barriers around the rest of the economy.

“The zone will open up a ready market for the wider African continent and thus spur numerous economic activities for the country,” the Cabinetsaid in a memo.I believe that the setting up of Free Zones will be a step in the right direction. It will result into reduction of the Current Account deficit,” said Uganda finance minister Kasaija.

Board Chairman, Eng. Dr. Fredrick Kiwanuka adds that they need to draw from the expertise of the Board members in diverse areas, to createan attractive enabling environment for the establishment of Free Zones in Uganda.He explained that the benefits to the Ugandan economy in setting up the free zones include, export growth and export diversification, direct employment creation, foreign exchange earnings foreign direct investment, and greater utilization of local materials.

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