A nice review (by Thomas Farole) of what we have learned from special economics zones (SEZs) in the past 50 years. SEZs are primarily aimed at attracting FDI, to increase employment, to support wider economic reform strategy, and to test application of new policies and approaches to industrial growth. SEZs have been increasingly becoming popular in developing countries after its success in East Asia, which enjoyed a favorable export-led growth. Its number has grown rapidly: from 176 zones in 47 countries in 1986 to 3500 zones in 130 countries in 2006.
Traditionally, EPZs were designed to attract FDI by allowing companies to exploit low-cost labor and other relaxed barriers to investment (regulatory, infrastructure, tax, exchange controls, licensing). Mauritius, Malaysia, South Korea, China, Taiwan, Honduras, El Salvador, Madagascar, Bangladesh, Vietnam and Dominican Republic successfully operated SEZs and created thousands of jobs in manufacturing sector and bring about structural transformation. Typically most of the industries in SEZs are labor intensive and assembly-oriented activities, including light manufacture goods such as textiles, apparel, leather, and light electrical and electronic goods.
However, this model is reaching its limit due to changed macroeconomic and regulatory environment in the global economy. Now, the relevance of SEZs will depend on “the effectiveness with which they are designed, implemented, and managed on an ongoing basis that will determine success or failure.” Just attracting investment, creating jobs, and generating spillovers to local economy, and adopting a compelling master plan will not suffice. Since Nepal is ready to enact a SEZ bill and is preparing to build SEZs, it will have to learn from SEZs experience in the past and how effective it will be in the rapidly changing global markets and demand.
Lesson learnt as outlined by Farole:
- Some countries have been more successful in attracting FDI, encourage export-oriented production, and create jobs than others.
- SEZs should be designed to leverage country’s comparative advantage. For instance, Bangladesh used its low-wage labor factor to take off to be a successful garment exporter. It initially focused on attracting high-tech investment but was only successful when it adjusted SEZs design and incentives to suits its comparative advantage, i.e. low-wage labor. Bangladesh provided good incentives such as serviced industrial land infrastructure and relatively reliable supply of power. Infrastructure reliability is an important aspect on SEZ success.
- The incubation period is might be high. It took 5 to 10 years to build momentum in China and Malaysia.
- Private sector involvement is key. For instance, Honduras’s success is led by local entrepreneurs and private sector, who were allowed to developed zones. The government focused on providing regulatory framework, supplied critical infrastructure and services and on-site customs services.
- Failure of SEZs in Africa is primarily linked to the political interference, mainly the failure to separate political support from political objectives in zone projects. Zones are for commercial success, not a political tool. Furthermore, the success depends on how entwined SEZs are with competitiveness of national economy and national investment environment. Critical infrastructure should be adequately supplied so that zones are linked to ports and markets. There should be clear legal and regulatory frameworks.
- Small countries should look to exploit potential for using zones to link up regional suppliers and leverage economies of scale in production.
- For dynamic economic benefits, domestic firms should be encouraged to locate inside zones, strengthen forward and backward links, support business and facilitate movement of skilled labor and entrepreneurs between the zones and the domestic economy. There should be continual training of human resources. This helps in bring structural transformation.
- Sustainability should also be a top priority. It means gender balance, environment conscious activities, clear standards, and effective monitoring and evaluation. SEZs can also be seen as an opportunity to experiment with policy innovations.