Special Economic Zone–SEZ: Questionable Impact– Substantial Export Gain or Terrible Economic, Social, Environment Loss…

Special Economic Zone (SEZ) is a contained geographic region within a country, adopting liberal laws and economic policies to encourage foreign-invested manufacturing and services for export. They are widely used around the world as part of a country’s overall economic development strategy.

There are over 3500 special economic zones in over 135 countries, accounting for over 70 million direct jobs and over $600 billion of direct trade-related value added within the zones… Unfortunately, despite potentially positive effects of SEZ predicted by economic theory (due to presence of foreign direct investment) and strong convictions by policymakers, there is still lack of rigorous empirical understanding of the extent to which SEZ actually contribute to foreign direct investment (FDI) and how the resulting investment influences the local economy…

The concept of SEZ was largely pioneered by China, wherein the SEZ contributed up to 20% of the total FDI, also the SEZ model was successfully implemented in Poland and Philippines. In the former the SEZ contributed almost 35% of the FDI inflows. Shenzhen in China has been at the helm of rapid economic development, after growing by a staggering 28% for the last 25 years… China’s chief special economic zones are Shenzhen, Zhuhai, Shantou, Xiamen cities and the Hainan Province; and encompass more than 100 national economic and technological development zones, 15 national bonded areas, 14 border trade and co-operation regions in the broadest sense…

Successful SEZ have developed small villages into major industrialized centers, supporting populations of 10 to 20 million citizens with jobs… provided host countries with major economic growth… investors with substantial financial returns… stimulated emerging market developments with socially responsible projects… However, as evidence over last 10 years has shown, this single-minded pursuit of growth has lowered the efficiency and effectiveness of economic policies, besides incurring huge resource and environmental costs.

Globally the SEZ record is poor; only a handful of SEZs, of the hundreds that exist, have generated substantial exports, along with significant domestic spin-offs or technology upgrades. For each successful Shannon (Ireland) or Shenzhen (China), there are 10 failures– in the Philippines, Malaysia, Brazil, Mexico, Colombia, Sri Lanka, Bangladesh, India… The formation of such zones has also been criticized from a number of different perspectives, for example; potentially displaces populations, relaxation of environment and occupation health and safety laws…

The objectives for SEZs are usually explained as: (a) creating additional economic activity; (b) promoting exports of goods and services; (c) promoting investment from domestic and foreign sources; (d) creating employment opportunities; (e) developing infrastructure facilities…

Bottom-line the SEZ promise is; increased export and FDI (foreign direct investments) enabling increased public and private partnership and ultimately resulting in development of world-class infrastructure, boost economic growth, greater employment, increased standard of living…

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In the article What Is Special Economic Zone? by Megan Murray writes: Many countries employ their own variations of these special enclaves, and use their own terminology to describe them. For example, Mexico refers to its zones as ‘maquiladora’, Cameroon, Ghana, and Jordan have ‘industrial free zone’, Philippines calls its economic zone ‘special export processing zones’, and Russia has ‘free economic zone’...

Despite the differences in nomenclature, each SEZ operates to increase export trade throughout its respective region by offering special export trade incentives to stimulate local and foreign investment within the region… Despite the vast number of SEZs across the globe, the majority of SEZs are concentrated in just a few countries: China has been the most successful in implementing SEZs and the most profitable in their operation.

Most of China’s SEZs are very large and specialize in a narrow range of products and services– those most conducive to a mass-production environment; notably labor intensive, assembly oriented products… The regulatory procedures of SEZs have changed since original inception. Some incentives offered by many SEZ programs include; provisions for commercial and professional activities, allow zone developers to supply utilities to the zone, allow for private instead of public development, and relax minimum export requirements, labor and environmental laws…

There is no one best way to establish an effective and financially profitable SEZ. Many countries have developed their own unique trade units to capitalize on their own laws, customs, resources and trade practices. Some of these developments have been successful, like the Shenzhen Village SEZ in China. However, others like those in Namibia have failed because they were not financially sustainable or social, environmental, political costs impeded their overall success.

These successful and unsuccessful SEZs should serve as models for host countries seeking to develop new SEZs. The complexities involved with development and management of SEZ require that a host country thoroughly understand all risks and rewards before implementation. SEZs can provide great investment benefits by luring companies with tax incentives and new technologies, but some of these benefits might now be outweighed by the economic, social, and environmental costs…

In the article Special Economic Zones by Thomas Farole,  Gokhan  Akinci write: For countries as diverse as China and Mauritius; special economic zones (SEZs) have been a powerful tool to attract foreign investment, promote export-oriented growth, and generate employment; but for many others the results have been less than encouraging. While the benefits and limitations of zones will no doubt continue to be debated, what is clear is policymakers are increasingly attracted to them as an instrument of trade, investment, industrial, and spatial policy.

Since the mid 1980s, the number of newly established zones has grown rapidly in almost all regions, with dramatic growth in developing countries. In parallel with this growth and in the evolving context of global trade and investment, zones are also undergoing significant change in both their form and function with traditional export processing zones (EPZs) are increasingly giving way to larger and more flexible SEZ model. This new context will bring significant opportunities for developing countries to take advantage of SEZs, but will also raise new challenges to their successful design and implementation…

In the article Special Economic Zones: What Have We Learned? by Thomas Farole writes: It’s more than 50 years since the establishment of the first modern special economic zones, but it’s only relatively recently, particularly since the 1990s, that their popularity as a policy instrument has taken off. The International Labor Organization‘s database of special economic zones reported 176 zones in 47 countries in 1986; by 2006 this had risen to 3,500 zones in 130 countries.

Traditional export-processing zones (EPZs) were designed to attract investment by enabling countries to better exploit a key source of comparative advantage – low-cost labor – which was otherwise under-utilized because of low-levels of domestic investment and barriers (e.g., regulatory, infrastructure…) preventing foreign direct investment (FDI). These EPZs have operated under simple principles, for example: Allow investors to import and export free of duties and exchange controls; Facilitate licensing and other regulatory processes, which usually frees firms from obligations to pay corporate taxes, VAT, or other local taxes…

Indeed, recent research shows that on a global basis infrastructure reliability has a strong association with special economic zone success, while incentives have no measurable effect. In contrast, the generally unsuccessful experience of zones to date highlights some important lessons in zone development, for example:

  • It’s important to separate political support from political objectives in zone projects. Projects must be carefully designed based on clear strategic plans– the commercial case must be there.
  • Success is almost fully entwined with the competitiveness of the national economy and the national investment environment. Many special economic zones are operating in an environment of poor national competitiveness. And regardless of what is done inside zones, they face challenges in linking the zones and global markets, including critical infrastructure challenges– ports, roads, electricity…
  • Clear and transparent legal and regulatory framework codifies the project strategy and establishes the ‘rules of the game’ for all stakeholders, but de facto implementation is of equal importance. In many special economic zones, the authority responsible for developing, promoting, regulating the project; lacks the resources, capacity, authority to carry out its mandate.

For economic zones to be a success in the long-term, they must contribute to structural transformation of the country’s economy, including; diversification, economic upgrade… Indeed, this is the classic case of China’s special economic zones, which were used as a vehicle to test liberal economic reforms, and introduce them to the wider economy in a gradual way

One of the main differences between zone projects that have been successful and sustainable and those that have either failed to take off or have become stagnant enclaves is the degree to which they have been integrated in the broader economic policy framework of the country…

According to Linda Ensor; a bold paradigm shift is required in the design of the planned special economic zones (SEZs), if they are to contribute to economic growth and job creation. Special economic zones must be special; they need to offer investors a better value proposition… SEZs must offer tailored solutions to problems faced by businesses trying to compete and establish zones, such that labor-intensive countries can compete globally…

Achieving success with zone projects in the future will require adopting a more flexible approach to using the instruments of special economic zones in the most effective way to make the most of the country’s sources of comparative advantage. Most fundamentally this requires a change in mindset away from traditional reliance on fiscal incentives and wage restraint, and instead focus on facilitating a more effective business environment to foster company-level competitiveness, local economic integration, innovation, and social and environmental sustainability…