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Special economic zones need State support

National Treasury
The National Treasury in Nairobi. FILE PHOTO | NMG 

One of the key issues coming up in this week’s discussions between President Uhuru Kenyatta and Japanese Prime Minister Shinzo Abe was the proposed Dongo Kundu special economic zones. I found myself reflecting on the state of implementation of our special economic zones programme.

If there is an area where Mr Kenyatta’s administration has not done too well, it is in the pace of execution of our special economic zones programme.

Yet- in recent history- special economic zones are the main tool that emerging markets have employed to industrialise and restructure their economies.

Japan after World War II, China, South Korea, Thailand and Malaysia are good examples And, countries like Vietnam have been rolling out special economic zones at a very fast pace.

I read somewhere that in just ten years, Vietnam had managed to build 18 special economic zones. This is the level and pace of execution that we need here.

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Dongo Kundu has been on the cards for over 15 years. In my view, two main factors explain the slow pace in implementation of the special economic zones programme.

First, policy seems to be oscillating between supporting

privately-owned zones to publicly supported zones.

Indeed, one of the reasons why implementation of Dongo Kundu slowed down initially was because a Chinese company has been lobbying the government for the land where the special economic zones are to be erected.

It seems to me that powerful interests did not want Dongo Kundu to proceed in the way it was originally conceived, namely, a publicly sponsored economic cluster and zone implemented as part of the country’s industrial policy.

The influential Chinese company had wanted the land to build a privately-sponsored special economic zone — complete with a privately-owned port.

The second factor that explains the slow implementation of the country’ SEZ programme is the fact that many of our economists and policy makers in the government still have doubts about the whole concept of SEZ as a tool for industrialisation.

The impression you get is that key institutions within the government still harbour the Bretton Woods view that special economic zones are discriminatory investment regimes where selected winners are showered with privileges and tax exemptions.

Industrial policy, in terms of deliberately targeting and selecting a specific part of the manufacturing sector and giving it specific concessions to grow, has not been our strong point.

A Special Economic Zones Bill was drafted way back in 2015. But Bretton- Woods-school economists at the National Treasury have been opposed to the range and number of incentives that were in the Bill, including 10-year tax holidays and expedited work permit regulations.

In China, the special economic zones provide liberal facilities, including dormitories for workers, laboratories for certification facilities, and subsidised water and electricity services.

For us to succeed, our policy makers must address their doubts about economic zones. Indeed, SEZ’s have delivered wonders to the South East Asian countries. They are our best bet at achieving a truly robust manufacturing sector.

The fact that the SEZ programme does not enjoy full support, especially of the National Treasury, was demonstrated when in the run up to the 2017 budget, then Treasury secretary Henry Rotich came out of the blues and proposed to eliminate incentives for special economic zones.

As it turned out, the minister’s proposals were greeted with stiff opposition and Mr Rotich dropped the idea. Still, it was clear that the National Treasury was not fully convinced.

He promised to offer a special incentive framework arrangement for targeted investors, without specifying the sectors he intended to target.

It was clear that the National Treasury has uncritically swallowed the Washington Consensus that opposes special economic zones on the grounds that they cause discriminatory and differential incentives for investors. Yet we all know that special economic zones must by definition be discriminatory.

To succeed, the government must come to terms with its own lingering doubts.

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