7 administrative controls and procedures, facilitated access to foreign exchange and relatively low income tax rates. Export-oriented SEZs are generally intended to ―convey ̳free trade status‘ to export manufacturers, enabling them to compete in global markets and counterbalance the antiexport bias of trade policies.‖ (FIAS 2008: 12) Unfortunately, most countries that have created SEZs have not gained the expected benefits. African countries in particular have faced two main constraints that have prevented private sector development to take place through SEZs: high factor costs and high transaction costs (often compounded by political capture and rent seeking). The good news is that careful analysis of previous SEZs experiences and lessons from economic history and economic theory can shed light on the reasons for failure. Taking these lessons into account, African policymakers can rethink the way they design and operate SEZs and derive big gains from them.

High factor costs can be addressed only if economic development strategies are fully consistent with a country‘s comparative advantage so that the factor which is in relative abundance is used extensively. This requires that the industries selected and attracted into SEZs are primarily those that make good use of low-skill labor, are competitive, and quickly establish effective backwards linkages with the rest of the domestic economy.<sup>4</sup> The removal of the second constraint—high transaction costs—necessitates the development of large numbers of firms in industries where economies of scale, intra-industry knowledge spillovers, ―forward and backward‖ linkages,<sup>5</sup> good supply chain/ logistics, and other agglomeration effects can be achieved. In other words, the development of cluster-based industrial parks (CBIPs) in particular can yield big economic and social payoffs to African and other developing countries, assuming all the other constraints, such as those that led to high factor costs, have been removed.

The reasons for that can be found in both economic theory and empirical analyses. Clusters or industrial agglomeration arise in situations where there are industry-specific and local externalities (the so-called Marshallian externalities), which may justify policy interventions (Rodriguez-Clare 2005; Harrison and Rodriguez-Clare 2010). Empirical studies of economic diversification also provide important insights for the development of CBIPs. Recent research has shown that poor economies with more diversified economies tend to have higher levels of income per capita. Sectoral _diversification_ in early stages of development is generally accompanied by geographic _agglomeration_ . In the words of Imbs and Wacziarg (2003), the range of industries expands and factors are allocated increasingly equally across sectors. At the same time, new sectors tend to localize in specific regions. Regions become increasingly different. Such trends typically hold until countries reach an income level of approximately US$9,000 per capita, after which higher levels of income per capita are then associated with increased specialization. In fact, sectoral concentration in later stages of development is accompanied by geographic de-agglomeration. The range of activities produced across all regions is reduced and the location of economic activities seems to matter much less.

> 4 That did not happen in the previous rounds of industrial and SEZs policies for several reasons discussed in Section 4 below.

> 5 Backward linkages can be defined as the various channels through which money, goods, services, and information flow between a firm and its suppliers and create a network of interdependence and mutually beneficial business opportunities. Forward linkages are similar connections between a firm and its customers.