The Fastest Path to African Prosperity (another start-up/founder mythology, with EEZ and Law!)
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Startup Cities Bypass Difficult Legal Reforms
Export processing zones and special economic zones have a long and mixed history in the 20th century, with some succeeding and some failing. But in the 21st century, we are seeing significant learning with respect to the key features of success. Perhaps one of the most important facets is independent law and governance of special economic zones, in addition to reduced taxes and regulations. In other words, “startup cities.”
The first model of such zones is the Dubai International Financial Centre, which established a common law jurisdiction in the midst of the United Arab Emirates’ Sharia law starting in 2004. It has since made Dubai a top global financial center. The model was partially copied in Kuwait and directly copied in Abu Dhabi. Since then, we have seen common law zones established in Honduras, Kazakhstan, Rwanda, and Colombia. Interestingly, the common law zone in Colombia is being co-designed and developed by the Dubai Multi Commodities Centre (DMCC). Dubai is thus transferring its common law zone expertise to other nations.
The biggest promise for African nations lies in zones with significant legal and regulatory autonomy. There are multiple reasons for this. To begin with, the current legal landscape requires a massive overall change. When most African nations have hundreds of laws that result in their business environments being ranked among the worst in the world, it is a very long, hard, sustained legislative and administrative slog to move to the top. Another challenge of piecemeal reforms is that changing any particular law is unlikely to have a significant impact on economic growth. Thus reformers are stuck in the challenging position of changing hundreds of laws to improve the business environment over perhaps decades.
Insofar as most of these changes are likely to be invisible to the people, while also not having immediately visible impact, it is hard to sustain long-term political support for such a reform agenda. If it were the case that political leaders, elites, and citizens largely shared a long-term vision for pro-market legal reforms, perhaps such change could be sustained. But that does not currently seem likely in Africa.
Moreover, it is not just the types of laws that must be changed, but the system of laws itself. Most observers would agree that a common law legal system is more favorable to business than are civil law legal systems. For instance, in most common law legal systems, a notary public is simply a clerk who certifies that a signature is official. In the United States, the cost of getting a documented notarized is typically $25 or less, often free. In civil law countries, a notary public is an attorney who charges hefty fees, often $1,000 or more. In low-income nations, insofar as notaries are required to start a business—which they usually are—the cost of a notarization alone prohibits all but the elites from being able to open a legal business.
In general, the premise of common law is that two or more parties are free to make the agreements they find mutually beneficial. They can look to case law to learn how their contracts are likely to be decided in case there is a dispute. But insofar as parties have extensive freedom to design arrangements suited to particular situations, the system is flexible and open to innovations. By contrast, the premise of civil law is that that which is not permitted, is forbidden. Statutes define the law, and if a statute does not permit an arrangement, it is unlawful. As a consequence, business in civil law countries has considerably less flexibility and may inadvertently forbid valuable innovations. The influence of common law is especially significant in commercial law, which is most critical for investment. It is not an accident that the leading tech hubs of Africa are all Anglophone: South Africa, Nigeria, Kenya, and Ghana. Botswana also uses common law.
Rwanda, originally using civil law, began shifting towards common law in 2001, with more progress in recent years. The Kigali Financial Center, launched in 2018, uses a common law framework to position itself as a world class financial center. Meanwhile, former French, Portuguese, Belgian, and Spanish colonies are burdened with civil law systems that reduce their attractiveness for investment and business creation. After their civil law colonizers left, the newly-independent nations preserved the legal systems of their colonizers. But there is no reason why any African should feel any loyalty to a particular inherited colonial legal system, especially if there are better systems that lead to greater prosperity.
Such charter cities should also reduce the incentive for unproductive conflict and unstable politics. Right now, insofar as natural resource revenues and foreign aid dominate national budgets, there is an ongoing incentive for ethnic conflict as every group wants to capture the central government and reward their partisans and ethnic allies with the legal and illegal capture of government revenues. Such conflicts can turn very bloody. In oil-rich southeastern Nigeria, the Igbos attempted to secede into the nation-state of Biafra in the 1970s, resulting in a civil war—and many say a genocide—that ultimately left millions dead. A zone on empty land in which the only source of revenue is manufacturing or services, which will only continue to bring in revenue if properly managed, avoids the natural resource and foreign aid curse.
Attracting capital investment and talent is a key ingredient to market-based growth. One of the challenges in attracting capital is that long-term investors need to be confident that their investment will not be compromised by means of confiscation, either directly or through confiscatory taxes or regulations. They need to know that if they invest $50 million in a factory, that they will be able to recover their investment decades into the future. They can’t survive in an environment in which labor costs may be arbitrarily increased without warning, tariffs for essential components coming in or products being exported might change dramatically, and so forth.
At a minimum, of course, the nation needs to be stable enough to avoid civil wars or coups over a long time horizon. Not all African nations are at present even that stable. But even those with relative political stability may be subject to dramatic changes in policy or political landscape, inflation, and other disruption to the business environment. In nations in which changes in political leadership bring about abrupt changes in who has access to what, or what is regarded as legal, it is impossible to build businesses. In some nations, a change in leadership results in previous legal business being confiscated.
One of the disadvantages of informality is that while friendly powers reign, the government won’t crack down on grey market economic activity. But when, for whatever reason, the new regime is less friendly, all of a sudden they may prosecute their enemy’s violations of law with a vengeance, or demand bribes to be allowed to escape such prosecutions. This dynamic slowly incentivizes all economic activity to become extractive by making social proximity to powerful government officials the most important factor for long-term business success. Cities or special economic zones with sufficient legal autonomy that they are explicitly separate from routine executive, administrative, or legislative decisions solve this problem. But such startup cities are not just geared to overcome typically African disadvantages, but also to unleash uniquely African advantages.
(more)
https://www.palladiummag.com/2024/06/07/the-fastest-path-to-african-prosperity/
