In 1991, Togo launched one of the first export processing zones (EPZs) in Africa to boost its economy in the global value chains. The Togo EPZ is located on an area of 107ha along the country’s Atlantic seaport.
The same year, the bestseller The Work of Nations was released, explaining how a Honda is more of an American car than those produced by General Motors or a Chrysler. The author, former US Secretary of Labor Robert Reich, wanted to raise awareness of the fact that “It’s not where a product is made, but the place where the value is added that counts”. He complained about the case of the “Pontiac Le Mans”, a symbol of American pride, but produced with less than 40% value added in US. What can we say about products from Togo EPZ? Are they Togolese products?
Togo’s EPZ accounts for more than half of exports from Togo, 80% of its products are sold in the Economic Community of West African States (ECOWAS) countries. Domestic value added in the Togo EPZ has declined over time. From 1991, the EPZ granted many benefits and privileges (tax, financial and administrative) to encourage companies to commit themselves to generate more employment and value added in the country. By 2001, domestic value added represented 51% of the turnover of companies located in the EPZ . Since then, this share has been declining, standing at 36% in 2008 and at merely 18% in 2012 , far less than the 40% which disturbed Reich in the case of US cars.
Second, employment in the Togo EPZ stands below what was expected in 1991. Togo’s modern (formal) sector today employs around 94,000 permanent employees, including 60,000 in public administration, 21,000 in the for-profit sector in the ‘customs territory’ (outside of the EPZ) and 13,000 in the EPZ. This is far below the figure of 100,000 new employees projected when the EPZ opened in 1991. The contribution of the EPZ to modern employment reached nearly 12% in 2013. The majority of the Togo EPZ companies do not comply with the law to use labour-intensive equipment in exchange for tax exemptions and other privileges. Manufacturing accounts for 88% of jobs in the EPZ, but its involvement in the creation of the overall added value is only 12%. This is a direct consequence of the low-skilled cheaper jobs in Togo manufacturing in the EPZ, as more than half of these jobs concern the production of synthetic hair, wigs, toupées and cosmetics.
Third, the EPZ was designed to attract foreign direct investment (FDI) and to value local intermediate goods. Success in raising foreign capital was not accompanied by consistent use of local products. In 2013, The EPZ had 62 companies, with a turnover of 250bn CFA francs. Out of these 40% had promoters from Asia; 30% from ECOWAS, with 25% from Togo; 27% from Europe; and 3% from America . But, intermediate consumption is most of the time imported. The share of local intermediate goods in the overall EPZ production fell from 32% in 2000 to 12% in 2012. Particularly in manufacturing, imports provided up to 94% of intermediate consumption. The EPZ companies didn’t comply with the commitment to using local intermediate goods.
Exemptions, benefits and privileges accorded to the Togo EPZ make it imperfectly competitive, leading to substantial speculation at all levels and to market distortions. Tax exemptions simply failed to boost the creation of greater domestic value added. From lessons learnt, it is explicitly the accumulation of knowledge and skills which positively correlates with the value added in the global market. Togo’s authorities have already started down this road by making investments in human resources, repositioning its EPZ, and opening the country to world competition spared from exemptions and privileges disturbance.
Carpophore Ntagungira is Principal Country Economist for Togo at the African Development Bank. This article was first published on the AfDB’s blog.