Fragmenting Commercial Governance: The Political Economy of Place-Based Industrial Policy in Africa

Abstract

Why are governments across emerging markets and developing economies increasingly adopting place-based industrial policies like special economic zones (SEZs)? We argue that SEZs provide an institutional shortcut to efficient commercial governance, especially in countries where market-supporting institutions, such as the rule of law, are lacking. Based on two original panel datasets covering the establishment of over 500 SEZs across Africa, as well as over 100 national laws governing them, we show that countries with weak institutions tend to build more zones and delegate zone governance to more private-sector entities. Moreover, zone development increases the complexity of a country’s export profile most where national institutions are weakest. Our paper implies that the innovative design of industrial policy may reduce the incentives leaders face to invest in broad-based liberal reform, an institutional factor assumed to be a necessity of global capitalism.