Paper short abstract:

With a focus on SEZ/EPZs in Tanzania, we unpack 'the political economy of specialism' - that is, the need for recognising firms´ heterogeneity and intrinsic incentives in compliance when special fiscal rules are designed. This improves rules enforceability in adverse political settlements.

Paper long abstract:

A variety of special economic and export promotion zone regimes (SEZ/EPZs) have been widely used and celebrated for accelerating catching up, industrial agglomeration and competitiveness, especially in East Asia. Looking at these cases, governments across Africa have experimented with SEZ/EPZs to attract foreign investors (especially in manufacturing) to develop export capabilities. Unfortunately, evidence on the different forms, functions and effectiveness of these institutions across Africa remains scattered. Self-reported data from SEZ/EPZ authorities is opaque, while studies often conflate different types of SEZs and EPZs. More critically, it is often assumed that 'investors' are always attracted by the formal incentives they offer, instead of the informal rents opportunities entailed in 'special fiscal regimes'. Building on two years field research in Tanzania, we unpack what we call 'the political economy of specialism' - that is, the need for recognising firms´ heterogeneity and intrinsic incentives in compliance when special fiscal rules are designed. This improves rules enforceability in adverse political settlements. We find new evidence on the conflicting dynamics of rents allocation under Tanzania's special fiscal regime and the influence of the East African Community. We also find that the enforceability of special fiscal regimes often does not result from ex post vertical enforcement. Corruption vulnerabilities are too many along the value chain and 'production formula' type-rules run the risk of crowding out good investors. Instead we advance another approach: Selecting firms with ex ante access to foreign market. We find this to be the key for making enforceability possible.