Why The Design Of Special Economic Zones Matter

A new study by the Asian Development Bank (ADB) says that “SEZs (special economic zones) can be a driving force for increased trade, investment, and economic reform in Asia at a time the region is experiencing a slowdown in trade, provided the right business environments and policies are put in place.” This is true to a great extent but there have been cases of SEZs not successful across the world. The track record of many SEZs in African countries and many developing countries is quite poor.

From 1995 to 2015, the number of SEZs in Asian countries have grown from 500 to 4,300. But, ADB points out, the success of the experiment has been negative and that if done well, SEZs can help the world recover from the present sluggishness in growth.

Economist Paul Romer proposes a fairly simple strategy to ensure that special economic zones (SEZs) are successful: if an SEZ implements reforms that can be carried out throughout the country without any repercussions, it would surely be successful. In other words, policy measures implemented in SEZs should not be concessions, but reforms. The policies implemented in an SEZ should work regardless of where these policies are implemented. Moreover, such policies in SEZs should trigger broad-based reforms throughout the country, and throughout the world.

While it is better to reform existing cities than to create new SEZs, implementing radical reforms in an SEZ is much easier than in a large city. If the government plans to implement such reforms in, say, Delhi, it would involve time-consuming and costly negotiations among state government, local authorities, central government and various other stakeholders.

ADB also pointed out that the number of SEZs that were formed in Asian countries was positively correlated with the performance of the export sector in these countries. Successful SEZs like China's Shenzhen are export-oriented and implement policy measures that are economically informed reforms, and not concessions. In Asian countries, the existence of SEZs leads to 82 per cent from foreign direct investment (FDI) . Many SEZs in Asia failed because of the lack of civic infrastructure, transportation network and lack of integration into the national policy.

ADB's findings are not unique. It has long been known that SEZs in Asian and African countries often failed because:

Those areas were not well-served by infrastructure or transportation networks. Lack of complementary infrastructure and poor nation governance were among the biggest reasons why these SEZs failed

Policy measures implemented in these SEZs were short-sighted and were harmful to the countries as a whole

Firms which operate in SEZs and local and state governments often seek concessions at the expense of the rest of the country

SEZs like Hong Kong and Shenzhen did extraordinarily well because these were either under strong leadership or were under foreign governments for long. Countries that were under foreign governance (Hong Kong in this case) adopt policies of foreign countries, and in effect, import foreign governance. As governance matters more than almost any other element in making a country prosperous, city-states like Hong Kong became immensely prosperous.