Special economic zones (SEZs) or industrial parks are proliferating around the globe. The zones can be effective instruments to promote industrialization if implemented properly in the right context. Some emerging economies, especially those in East Asia, offer examples of success. However, such zones are expensive, risky endeavors that require careful planning. They can be a tool for political speculation rather than a tool for economic development, and some zones, the so-called “white elephants” fail entirely. This paper examines the zone phenomenon by looking at what is known about the conditions that tend to lead to success and failure of these endeavors.
The term “special economic zones” (SEZs) covers a broad range of zones, such as free-trade zones, export-processing zones, industrial parks, economic and technology-development zones, high-tech zones, science and technology parks, free ports, enterprise zones, and others. Table 1 shows the most common types that have been created in recent years.
Table 1. An Overview of Common Types of Special Economic Zones
Note: This is not an exhaustive list. Source: FIAS (2008), Zeng (2010) and author's research.
Though these zones differ from one another, they all share certain hallmarks. Broadly, four characteristics define the SEZ concept: (1) it is a geographically delineated area, usually physically secured; (2) it has a single management or administration; (3) it offers benefits for investors physically within the zone; and (4) it has a separate customs area (duty-free benefits) and streamlined procedures (FIAS, 2008).
Additionally, these zones share features that contribute to the “special” nature of the SEZ. These are: (1) a special regulatory regime: zones normally operate under more liberal economic laws than those that typically prevail, regarding issues such as labor, land use, and foreign investment; (2) public services: zones are normally serviced with efficient customs, fast-track registration and licensing, often through “one-stop-shop” services; (3) infrastructure: zones have much better and more reliable infrastructure such as roads, power, and water, compared to the domestic economic environment; and (4) fiscal incentives: the zone’s investors, particularly its anchor investors, often enjoy capital freedoms and certain levels of tax incentives and subsidies.
The first modern industrial SEZ was established in Shannon, Ireland in 1959. In the 1970s, East Asian and Latin American regions began establishing such zones - initially mostly in the form of export processing zones (EPZs) - to attract foreign direct investment in labor-intensive manufacturing sectors to encourage exports (Farole, 2011).
A zone represents a divergence from the traditional import-substitution policies. EPZs are normally fenced-in estates with strict customs controls and most of the products (normally over 80 percent) produced in these zones must be exported. This model was successful in many countries, such as the Republic of Korea, Taiwan, China, Vietnam, Bangladesh, Mauritius, the Dominican Republic, and El Salvador (Farole and Akinci, 2011). Many new EPZs have been created since. By 1986, according to the International Labour Organization (ILO), 176 EPZs were operating in 47 countries; and by 2015, their presence had grown to around 4,300 EPZs in over 130 countries (The Economist, 2015).
SEZs are typically established with the aim of achieving one or more of the following four policy objectives (Madani, 1999; Cling and Letilly, 2001; FIAS, 2008; Zeng, 2010; Farole and Akinci, 2011; Fuller and Romer, 2012): (1) attracting foreign direct investment and promoting exports and industrialization; (2) serving as “pressure valves” to alleviate large-scale unemployment; (3) supporting a wider economic reform strategy; and (4) acting as experimental laboratories for the application of new policies and approaches.
These are the broad aims for zones, but no universal standard formula exists to measure their success. Typically, “success” of a given program largely depends on whether it meets the objectives defined when it was established (generally for a time horizon of 10 to 15 years), and whether it is commercially viable in relation to the total investments in the endeavor. Such objectives are normally linked with quantitative measures of economic development outcomes, such as investment, employment, foreign exchange, and/or export generation; and in some cases, also linked with the economic and policy reforms, depending on the initial goals of the program. In order to keep track of its progress, a proper monitoring and evaluation system needs to be established to check whether the zone program is on the right track, and to determine whether any adjustment or remedial measures need to be taken. In addition, an exit mechanism may also be needed to stop an ill-designed program at an early stage. On the other hand, given that zones take time to generate impact, one should not declare its “success” or “failure” too early to avoid killing a zone program prematurely.
Many economists believe that SEZs can achieve industrial development in an efficient and effective way (Lin and Monga, 2010). In particular, investing in SEZs can: 1) provide a bundling of public services in a geographically concentrated area; 2) improve the efficiency of limited government funds/budgets for infrastructure; 3) facilitate cluster development, or agglomeration of certain industries; and 4) enhance urban development by providing facilities conducive to improved living conditions for both basic wage workers and highly skilled technical workers, taking advantage of economies of scale in provision of environmental services, such as water treatment plants and solid waste treatment plants. Thus, the SEZs can be conducive to both job creation and income generation, and potentially, to protecting the environment and promoting green growth and eco-friendly cities (Lin and Wang, 2014).
Nevertheless, it is important to note that special economic zones should only be used to address market failures or binding constraints that cannot be addressed through other options. If the constraints can be addressed through countrywide reforms, sector-wide incentives, or universal approaches, then zones might not be necessary.
