Special Economic Zones: The pros and cons

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The government has announced plans to introduce Special Economic Zones (SEZs) to attract direct investment, alleviate large-scale unemployment, develop and diversify the economy.

Prosper chitambara

SEZs however are not an entirely new concept as government once established Export Promotion Zones (EPZs) in the 1990s with more or less the same objectives. The purpose of this article is to inform the readership on SEZs and what role FDI can play in Zimbabwe’s development trajectory as well as to flag out lessons from other countries.

A SEZ is a geographical region that has economic and other laws that are more free-market-oriented than a country’s typical or national laws. “Nationwide” laws may be suspended inside a special economic zone. The category “SEZ” covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others.

Usually the goal of a structure is to increase foreign direct investment by foreign investors, typically an international business or a multinational corporation (MNC).

In the People’s Republic of China, SEZ were established by the central government under Deng Xiaoping in the early 1980s as part of its “open the door, change the system” policy. The most successful SEZ in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years. India has also played a significant role in the founding and establishment of SEZ. It has the largest outsourcing industry in Asia.

Following the Chinese examples, SEZs have been established in several countries, including Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland, South Korea, Russia, Ukraine, United Arab Emirates, Cambodia and North Korea. A single SEZ can contain multiple ‘specific’ zones within its boundaries. The most prominent examples of this layered approach are Subic Bay Freeport Zone in the Philippines, the Aqaba SEZ Authority in Jordan, Sricity Multi-product SEZ and Mundra SEZ in India.

According to the World Bank, there are more than 3 000 projects taking place in SEZs in 135 countries worldwide creating more than 68 million direct jobs and US$500 billion of trade-related value-add.

SEZs have been implemented using a variety of institutional structures across the world ranging from fully public (government operator, government developer, government regulator) to “fully” private (private operator, private developer, public regulator).

In many cases, public sector operators and developers act as quasi-government agencies in that they have a pseudo-corporate institutional structure and have budgetary autonomy.

SEZs are often developed under a public-private partnership arrangement, in which the public sector provides some level of support (provision of off-site infrastructure, equity investment, soft loans, bond issues, etc.) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels).

Many SEZs have been spectacularly successful and have transformed the economies of their host countries. But many others have failed to set themselves apart from the rest of the economy, to create sufficiently attractive business environments, or to compete internationally.

These diverse experiences should not obscure the fact that SEZs are a key platform for export-oriented industries, contributing significantly to global trade, attracting vast flows of FDI, and employing millions of people.

International experience shows that the “demonstration effect” of successful SEZs facilitates wider economic reform. This has certainly been the case in China, where Deng Xiaoping’s initiatives in the 1980s and 1990s to attract FDI and expand exports through SEZs led to accelerated nationwide economic reform.

The same is true of Mauritius, Costa Rica, the Philippines and elsewhere. This potential for positive policy spill-overs into the rest of the economy is the greatest promise held by SEZs.

For SEZs to be economically successful, countries need to be competitive and able to differentiate their SEZs from those in other countries.

SEZs have been used to attract foreign investment, promote export manufacture, increase foreign exchange earnings and create employment.

Enterprises in the zones are subject to varying degrees of preferential economic regulations and incentives designed to lower their operating costs. Zones are designed to insulate businesses within them from costs faced by firms operating in the local economy.

The zones themselves need to be seen as business enterprises that attract investors by offering them competitive advantages. Each zone competes with all of the others based in the home country as well as in other countries.

Government does have a very important role to play and that is to provide appropriate, clear and transparent policy, regulatory and incentive frameworks that encourage business rather than deter it. It must also provide the necessary infrastructure for businesses to operate competitively, and uphold the rule of law.

The key for government policy is to ensure that whatever constraints limit the growth of industry elsewhere in the economy are addressed, eg if unskilled workers are the problem, enable training programmes, if administrative and licensing inefficiencies are the problem, set up one-stop shop administration functions, if onerous labour laws are the problem, liberalise them, and if rules and regulations hamper business, eliminate them.

There should be no restrictions for businesses entering a SEZ so that competition is intensified and everyone is free to take advantage of the privileges and to contribute to the growth of the economy.

Although typical SEZs are demarcated spatial enclaves, the extent to which they can function effectively and benefit the host economy as a whole depends on wider economic conditions.

The more business friendly and competitive the surrounding environment, the more potential a SEZ has to stimulate economic activity both within and outside of the zone.

International evidence indicates that SEZs are most successful when they are targeted toward particular industries and offer concrete solutions to the challenges faced by those industries.

On the negative, there has also been rampant exploitation of workers and loss of government revenue as a result of the creation of SEZs.
SEZs in some countries have also been criticised for negative socio-economic impacts, particularly in relation to the role of women, labor, and working conditions in zones (ILO, 1998).

These include: exploitation of women—lower wage levels, lack of training or skill upgrading, use of trainees to lower wage costs; suppression of labour standards and core labour rights including trade unionisation poor employment conditions (work hours, health and safety); lax environmental standards.

Prosper Chitambara is a PhD (Economics) candidate at Wits University and Economist with the Labour & Economic Development Institute Zimbabwe. These articles are coordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society. Email; kadenge.zes@gmail.com, cell +263 772 382 852

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