The SEZ Boom: A New Wave of Industrial Policies

Special economic zones (SEZs) are spreading rapidly around the world. That's according to UN's World Investment Report (2019). These are geographically delimited areas within which governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support.

The most common types of SEZs are variations on free zones. Essentially, separate customs territories. In addition to relief from customs duties and tariffs, most zones also offer fiscal incentives. Others include: business-friendly regulations with respect to land access; permits and licenses; employment rules; administrative streamlining and facilitation; and infrastructure support. In return, governments expect investors operating in SEZs to create jobs, boost exports, diversify the economy and build productive capacity.

There are nearly 5,400 SEZs today. More than 1,000 were established in the last five years. At least 500 more zones have been announced and are expected to open in the coming years.

Figure 1: Historical trend in SEZs (Source: UNCTAD)

Many new types of SEZs and innovative zone development programmes are emerging. Some focus on new industries, such as high-tech, financial services, or tourism. This is beyond the trade and labour-intensive manufacturing activities of traditional SEZs. Others focus on environmental performance, science commercialization, regional development or urban regeneration.

Zones developed with a foreign partner are increasingly common. Despite the attention that government-to-government partnership zones have attracted, the majority are built with international private zone-development firms. There is no formal agreements with a foreign government.

However, the performance of many zones remains below expectations. Where they lift economic growth, the stimulus tends to be temporary. After the build-up period, most zones grow at the same rate as the national economy. And too many zones operate as enclaves with limited impact beyond their confines. In addition, it is important to consider the social and environmental impacts of SEZs.

The sustainable development imperative is arguably the most urgent challenge. The 2030 Agenda to achieve the Sustainable Development Goals (SDGs) provides an opportunity for the development of an entirely new type of SEZ: the SDG model zone. Such zones would aim to attract investment in SDG-relevant activities, adopt the highest levels of ESG standards and compliance, and promote inclusive growth through linkages and spillovers.

SDG model zones could act as catalysts to transform the “race to the bottom” for the attraction of investment (through lower taxes, fewer rules and lower standards) into a race to the top – making sustainable development impact a locational advantage.

Reference:

United Nations, World Investment Report 2019 – Special Economic Zones