Special Economic Zones
In the past few decades, Special Economic Zones (SEZs) have become a popular instrument of industrial policy. There are different types of SEZs, including free trade zones, export-processing zones (EPZs) and hybrid types, but Thomas Farole and Gokhan Akinci note that the most relevant for developing country governments are export-processing zones (EPZs) and large-scale SEZs combining residential, commercial, and industrial functions, such as those successfully used by China.
SEZs can exert five functions:
- Attracting FDI, which brings in new capabilities to the host economy.
- Increasing export earnings.
- Alleviating large-scale unemployment.
- As instruments for kickstarting a ‘dual-track’ economic reform process.
- An experimental role in testing policies to be later expanded to the entire economy.
SEZs can not only provide short-term benefits for the host economy, as they can be a platform for facilitating industrial upgrading. However, this is no easy task. At initial stages, the challenge consists of creating inviting conditions for foreign investors, particularly with regards to the affordability and reliability of infrastructure, the ease of business regulations, and a sufficiently productive labour force. Fiscal incentives, while helpful, are less important than these factors, and are not a sustainable way of continuing to attract investors.
From a longer-term perspective, the dynamic benefits of SEZs depend on the ability of the host economy to create linkages with the zones, allowing them to learn from international firms’ best practices and enabling the host economy to upgrade into higher-value added activities. It also requires a trained labour force to which skills can be transferred.
For low-income African countries with little industrial tradition, SEZs can be a convenient way of kickstarting the industrialization process, while avoiding some of the difficulties posed by the domestic business environment. As usual, the devil is in the details, and the design of an effective SEZ programme requires political commitment at the highest levels, as well as an institutionalized way of planning the programme and dealing with the obstacles that will inevitably arise. Perhaps more importantly, the government must be able to overcome entrenched interests and provide for the needs of foreign investors.
 Thomas Farole and Gokhan Akinci (2011) – “Introduction” in Thomas Farole and Gokhan Akinci (eds.), Special Economic Zones: Progress, Emerging Challenges, and Future Directions, Washington, DC: World Bank