Thursday, December 2, 2010

SMEs in SEZs

The role of SMEs in China’s growth is less well known, compared to the popularity of big manufacturing industries. But, SMEs have played a crucial role in growth in China’s success in light manufacturing success. A WB team visited industrial zones in China and Vietnam to study the success of SMEs there. They argue that facilities provided by the government in industrial zones led to the success of SMEs in China. The Chinese government provided market enabling conditions and encouraged firms to follow market-price signals. It, however, did not provide direct subsidies, thus avoiding inefficiencies and market distortions.

One spectacular example of China's success and the role played by zones is the Weihai Zipper Company in Zhejiang. Starting from virtually nothing, over a span of two decades, it now exports $15 million worth of zippers to about 60 countries. It currently employs 3000 workers with an estimated daily output of 4 million zippers. This company is part of a zipper industrial cluster which counts more than 500 companies (China has more than 75% of the world’s market share in zipper, with the industry employing more than a million workers). Weihai Zipper Company decided to move to an industrial zone because the government offered a great package of cheap and abundant land and a predictable supply of utilities, especially water and energy. The manufacturer said that moving to the industrial zone enabled the scale up of the company by providing more space for plant expansion and for workers’ dorms in the park.

China has more than 1000 industrial zones following a central government policy encouraging the development of such zones. Most cities and counties have followed the models set by the large zones developed by the central and provincial governments. The local governments are motivated to develop industrial zones to get tax revenues and revenues from selling land, as well as nice records of administrative performance. Of course, not all Chinese industrial zones have been successful; the better ones were built on existing or potential industrial strengths, in other words, local comparative advantages.  These industrial zones played a critical role in facilitating the growth of Chinese SMEs from family operations catering to the local market to global powerhouses. These zones not only provided Chinese SMEs with good basic infrastructure (e.g. roads, energy, water and sewage), security, streamlined government regulations (e.g. government service centers) and affordable industrial land, they also provided technical training, low cost standardized factory shells allowing Chinese entrepreneurs to "Plug and Play" as well as Chinese workers with free and decent housing accommodations right next to the plants. Hence they played a very critical role in helping Chinese small enterprises to grow into mid-size and large enterprises, avoiding the "Missing Middle" problems that other countries face.

These industrial "Plug and Play" zones considerably reduced the start up investment costs and risks for SMEs at a phase in their development where they are still too risky for bank loans. They also facilitated the development of industrial clusters allowing tremendous economies of scale and scope for Chinese industries (the emergence of clusters was further facilitated by the Chinese government's support for the development of input and output markets). In a nutshell, the Chinese government facilitated SME development through the efficient provision of public goods and market information about sellers and providers but not subsidies. For example, firms pay market prices for the use of utilities. Most importantly, competition between firms is intense. The government does not bail out failing firms. It should also be noted that most of these zones did not preselect particular light industries, letting market forces drive the organic development of specialized clusters.

Now, India is also going on the same lane with this kind of industrial zone.

“Improving infrastructure in the entire country will take a long time, so if you want to promote industry, you need to create more islands of excellence, which these SEZs are.

[…]About 100 zones have opened since 2006, attracting 1.6 trillion rupees in investment, 60 times the level four years earlier. That helped create more than half a million jobs, the Commerce Ministry said. About 478 more SEZs have been approved.

[…]The government-sponsored and private enclaves reduce red tape by offering a single office for environmental, tax and other government clearances. They also offer a way around power and water shortages in a nation that produces 10% less electricity than it needs. Companies operating in the zones get tax breaks for 15 years and don’t have to pay local excise or customs duties.”

Impact of Climate Change on MDGs

Here is how climate change will potentially affect MDGs. It is sourced from South Asia Climate Change Strategy, 2009, pp.105-106.

Eradicate extreme poverty and hunger (Goal 1)

  • Climate change is projected to reduce poor people’s livelihood assets such as health, access to water, homes, and infrastructure.
  • Climate change is expected to alter the path and rate of economic growth due to changes in natural systems and resources, infrastructure, and labor productivity. A reduction in economic growth directly impacts poverty through reduced income opportunities.
  • Climate change is projected to alter regional food security. In Africa, in particular, food security is expected to worsen.

Health-related goals (Goals 4, 5 and 6)

    • Combat major diseases
    • Reduce infant mortality
    • Improve maternal health
  • Direct effects of climate change include increases in heat related mortality and illness associated with heat waves (which may be balanced by less winter cold-related deaths in some regions).
  • Climate change may increase the prevalence of some vector-borne diseases (for example, malaria and dengue fever), and vulnerability to water-, food- or person-to-person borne diseases such as cholera and dysentery.
  • Children and pregnant women are particularly susceptible to vector- and water-borne diseases. Anemia – resulting from malaria – is responsible for a quarter of maternal mortality
  • Climate change will likely result in declining quantity and quality of drinking water, which is a prerequisite for good health, and it may also exacerbate malnutrition – an important cause of ill health among children – by reducing natural resource productivity and threatening food security, particularly in Sub-Saharan Africa.

Achieve universal primary education (Goal 2)

  • Links to climate change are less direct, but loss of livelihoods assets (social, natural, physical, human and financial capital) may reduce opportunities for full time education in numerous ways. Natural disasters and drought reduce children’s available time (which may be diverted to household tasks), while displacement and migration can reduce access to education opportunities.

Promote gender equality and empower women (Goal 3)

  • Climate change is expected to exacerbate current gender inequalities. Depletion of natural resources and decreasing agricultural productivity may place additional burdens on women’s health and reduce time available to participate in decision-making processes and income-generating activities.
  • Climate-related disasters have been found to impact more severely on female-headed households, particularly where they have fewer assets to start with.

Ensure environmental sustainability (Goal 7)

  • Climate change will alter the quality and productivity of natural resources and ecosystems, some of which may be irreversibly damaged, and these changes may also decrease biological diversity and compound existing environmental degradation.

Global partnerships

  • Global climate change is a global issue and response requires global cooperation, especially to help developing countries to adapt to the adverse impacts of climate change.