Lessons for Nigeria’s free-trade zone
Thursday, September 2, 2010
The news that China and Nigeria are partnering to form a 16,500 hectare free trade zone near Lagos could be a boon for potential investors and the Nigerian economy. But, the devil lies in the details: success depends on implementation. Similar “free trade” or “enterprise” zones have been tried before and have produced mixed results. Nigeria can look across Africa to the Mauritian experience to see that trading zones are not a “silver-bullet” but they can help promote lasting change if other pro-growth policies are pursued.
The idea in Nigeria is to create a free trade area that will allow foreign businesses to invest in Nigeria by circumventing the wide array of existing government imposed barriers. The need for a streamlined system of investment in Nigeria cannot be overstated. The World Bank reports that it currently takes over a month to satisfy the eight procedures in order to start a business at a cost of three quarters of a year’s average wages. In the new free trade zone this procedure is expected to take less than a week.
A similar country-wide Export Processing Zone was launched in Mauritius in 1970, allowing traders to import duty-free “inputs” (e.g. products used in exports) to circumvent vertiginous tariff barriers that crippled the rest of the economy. Yet success for the EPZs in Mauritius did not come until further liberalisation took place almost a decade later. A series of economic reforms launched in the late 1970’s, including reducing (eventually abolishing) the minimum wage (which had contributed to record levels of unemployment in the 1970s) and simplifying import licensing restrictions enabled the EPZ firms to develop and prosper, along with the wider economy. Since the mid 1980s the volume of imports and exports has grown, on average, by 8.7 per cent and 5.4 per cent respectively each year. At its peak, in 1999, EPZ firms contributed 12.5 per cent to total GDP and accounted for up to 75 per cent of all exports. And yet even these figures still do not fully account for the value of investment, migration and trade in goods and services that Mauritius’ EPZ garnered for the country’s wider economy.
The underlying point, that the government must listen to the needs of its businesses and investors, was essential to overcoming initial difficulties for the EPZs in Mauritius. The original reforms in 1970 needed to be bolstered by further reforms, which have helped the EPZs and the wider economy boom. This is essential to the success of the Nigerian experiment. Nigerian politicians should abandon their historical scepticism towards trade and allow their businesses and consumers to enjoy the expertise, investment and opportunities that opening up to the global economy will bring.
A free trade island surrounded by a fortress of protectionism is a good start. Let’s hope the free trade zone provides a beacon for the reforms so badly needed across the economy at large.