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A Look Back at Special Economic Zones

SEZ africa

Washington DC, August 29, 2011 -- Few economic transformations have been lauded as much as China’s rise over the last three decades. And few policy tools have been so credited with China’s success as the Special Economic Zone (SEZ), an experiment that underpinned the country’s export-oriented growth strategy. China’s government created these zones – where taxes are low and infrastructure is reliable – to encourage foreign investment and incubate an industrial base. But not all the countries that emulated China have succeeded.

In a new book edited by World Bank economists Thomas Farole and Gokhan Akinci, scholars and practitioners highlight triumphs and shortcomings among the world’s SEZs. The book, “Special Economic Zones: Progress, Emerging Challenges, and Future Directions,” released this month, includes case studies from Bangladesh to Mauritius to Honduras and asks questions about job-creation, sustainability, and the impact of SEZs on wages.

The book is an effort to better understand a tool that has been high-profile in policy circles and that countries often ask the World Bank for assistance in implementing, Farole said.

“This came out of a need to understand... What have we learned over the past 20 years?” he said.

The book covers a wide range of issues related to SEZs: one author describes how China is helping African countries create SEZs, another examines the gender dimension of SEZs, and a third questions how the zones will fit into greater regional integration. One of the problems with traditional EPZs based on inexpensive labor and incentives is that they only work if wages stay low or you give away more and more incentives, Farole said. The latter is not sustainable; the former is not a good strategy to improve its citizens’ welfare.

The editors define SEZs broadly as a geographic area where a government sets business rules that are different – generally more liberal – than the prevailing laws in the country.  They make a distinction between two types of SEZs: The first is Export-Processing Zones (EPZs), a traditional form of economic zone used around the world since the 1970s. These zones are walled-off from the rest of the country’s economy and harbor mostly foreign companies that do basic, low-skilled assembly work. The second – and more promising – form is large-scale SEZs such as those in China, which may include housing as well as commercial and industrial areas. These zones are usually more closely linked to the local economy. 

The book is structured around three main issues related to SEZs:

1.       How to make economic zones attract firms that create jobs. This section includes a chapter on the Bangladesh experience, where the garment industry took off. It also describes Honduras’ successful effort to attract investment in the garment sector.


2.      How to ensure that the zones are economically sustainable and deliver positive externalities, including catalyzing economic reforms. This section examines whether an SEZ can fundamentally change a country’s economic structure – by diversifying the country’s sources of income, for example, or by stimulating country-wide openness to trade. One chapter looks at the importance of innovation, using the examples of the Republic of Korea, Malaysia and of Shenzhen in China, where an SEZ helped transform a fishing village into a city of 14 million people. Another chapter addresses Mauritius, an African success-story, examining some of the economic and political reforms stimulated by its EPZ.


3.      How to ensure that economic zones are sustainable from an institutional, social and economic perspective. This section discusses some of the social phenomena that have accompanied SEZs or that face them in the future. One chapter examines the factors that lead to a female-dominated workforce in many SEZs, and the implications of that tendency. Another chapter explores the potential of SEZs to encourage environmentally-friendly business practices.

This book is part of a series of work, which also includes an in-depth study of SEZs’ effectiveness in Africa.  The next project in this program will be a guide for policymakers who are thinking about creating an SEZ in their country. It will be a framework for how policymakers should approach the topic and will include some of the questions they should ask about whether the tool is appropriate for their situation. As the case studies illustrate, the circumstances around success are often specific – to an individual country’s comparative advantage or to the macroeconomic context in which the SEZ starts.



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