Impact of Special Economic Zones on international BusinessIs it positive or negative ?

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What is SEZ ?Special Economic Zone (SEZ) – These are an extension of the Export Processing Zone scheme with added benefits and fewer bureaucratic hassles. But these zones do not restrict themselves to export promotion only . They provide all facilities and infrastructure necessary for the development of the industries in the region. They are normally huge in size and hence are suitable for mass-production of commodities, which can be sold domestically, as well as internationally. For Example: Shenzhen Special Economic Zone (Shenzhen SEZ), China

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Brief History of SEZSEZ:Geographically Delimited areasDifferent incentives to businesses

First established by the Peoples Republic of China in 1980 in Guangdong Province.(Yeung, Lee, and Kee, 2009)

Shenzhen

Zhuhai

Shantou

Support government’s efforts to:Promote Investment

Create Employment

Generate Export

Fundamentals of SEZsSEZs (special economic zones) are

fundamentally different from the traditional free zones.

They are much larger in size; offer broader range of activities such as

a single-window management, streamlined procedures, duty-free privileges, also access to the domestic market on a duty-paid

basis.

Main objectives of the SEZ

generation of additional economic activity;

promotion of exports of goods and services;

promotion of investment from domestic and foreign sources;

creation of employment opportunities;

development of infrastructure facilities

Strategic LocationEasily

accessible by land, air and sea. Practically half of the world’s container fleet passes by its doorway.

Example : Subic Bay Freeport Philippines

Subic Bay

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Brief History of SEZ

The World Bank databases (2009):3000 kinds of zones in 135 countries $500 billion of direct trade industry.

Figure 1: Foreign direct investment’s increase in China from 1978 to 2008 (Wang, 2009 )

As a result:

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Economic impacts of SEZ: positive effectsDirect Employment Impact of Special Economic Zones

Direct employment (millions people)

Percentage of national employment

Global 68.441 0.21

Asia and the Pacific 61.089 2.3%

Americas 3.084 1.15%

Western Europe .179

Central and East Europe and Central Asia

1.590 0.001%

Middle East and North Africa

1.458 1.59%

Sub-Saharan Africa 1.040 0.20%

• Employment generation

• One of the key objectives for zone development

Table 1: Direct Employment Impact of Special Economic Zones Adapted from FIAS, 2008.

Employment in the Dominican Republic’s industrial free zones rose from 500 in 1970 to almost 200,000 today. (FIAS, 2008)

The share of zone employment of national employment in the Arab Emirates 25% (FIAS, 2008)

Impact of zone on export (US$ millions) of Exports

percentage of export

Asia and the Pacific 5,10,666 41.00%

Americas 72,636 39.00%

Central and East Europe and Central Asia 89,666 38.70%

Middle East and North Africa 1,69,459 36.40%

Sub-Saharan Africa 8,605 48.70%

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Direct Employment Impact of Special Economic Zones

 Employment

Percentage of Employment National (millions)

Global 68.441 0.21%

Asia and the Pacific 61.089 2.30%

Americas 3.084 1.15%

Western Europe 0.179 

Central and East Europeand Central Asia 1.59 0.00%

Middle East and North Africa 1.458 1.59%

Sub-Saharan Africa 1.04 0.20%

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In the Philippines the share of FDI flows going to the country’s eco-zones increased from 30 percent in 1997 to over 81 percent in 2000 (UNCTAD, 2003). In Bangladesh, $103 million of the $328 million of FDI inflows were registered in EPZs.

In Mexico, the share of annual FDI accounted for by maquiladora operations increased from 6 percent in 1994 to 23 percent in 2000 (Sadni-Jallab and Blanco de Armas, 2002). And in China, SEZs account for over 80 percent of cumulative FDI.

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Economic impacts of SEZ: positive effectsEmployment generation

Philippine eco-zones’ direct employment

91,8601994

2008 608,387

2004 406,752

Figure 2. Adapted from Lima, 2009

Economic impacts of SEZ: positive effectsExport developmentMajor share of exports in 2005:

Americas: • Nicaragua (79.4 %); • the Dominican Republic(77%); • Panama (67 %). (FIAS, 2008)

Asia and the Pacific: • Bangladesh (75.6 %); • Sri Lanka (67.1 %); • the Philippines (78.2 %); • Pakistan (50.3 %).(FIAS, 2008)Middle East and North Africa: • Lebanon (36.3 %); • Bahrain (68.9 %); • Morocco (61 %). (FIAS, 2008)

Sub-Saharan Africa: • Ghana (22.4 %); • Madagascar (80 %); • Mauritius (34.4 %).(FIAS,2008)

in the Philippines the eco-zones’ share of national merchandise exports increased from 22 % in 1995 to 78.2 % in 2005 (FIAS, 2008)

in Kenya the share increased from 3.5 % in 1997 to 19.3 % in 2003(FIAS, 2008)

Economic impacts of SEZ: positive effectsForeign direct

investment

In the Philippines, for example, the share of FDI flows going to the country’s eco-zones increased from 30 percent in 1997 to over 81 percent in 2000 (UNCTAD, 2003).

In Mexico, the share of annual FDI accounted for by maquiladora operations increased from 6 percent in 1994 to 23 percent in 2000 (Sadni-Jallab and Blanco de Armas, 2002).

In China, SEZs account for over 80 % of cumulative FDI.

PEZA 1995 - 2008

$ 30 T

EPZA1981 –1994

$778 B

EPZA1981 –1994

$778 B

38TimesBigger

14-YEAR ECONOMIC ZONE INVESTMENTS IN PHILIPPINES

Source Lima, 2009

Economic impacts of SEZ: negative effects

Suppression of labor standards and core labor rights

The International Labor Organization improved labor policies and practices within zones, nevertheless, significant issues remain with some countries:Restrictions on the freedom of association and collective

bargaining (in Bangladesh, the Dominican Republic, Nigeria, Pakistan, Panama, Sri lanka, Egypt)

Bans on the right to strike (in Bangladesh, Namibia, Zimbabwe, Nigeria, Panama, Turkey)

Non-observance of national labor legislation within zones (in Islamic Republic of Iran, Sudan). (FIAS, 2008 )

SWOT Analysis for Indian SEZs

: Strengths

Skilled Manpower – knows English Worldwide acceptance of capabilities in fields like

Pharmaceutical manufacturing & research Clinical trials Manufacturing auto parts Engineering designing & consultancy, IT & ITES Entertainment etc etc

Financial & other institutional Networks like Stock Exchanges, Insurance Companies, Educational Institutes

Attraction of a large ‘Indian’ market: growing middle class with purchase power

SWOT Analysis for Indian SEZs▪ Weakness:

▪ Infrastructure bottlenecks –connecting infrastructure like Roads leading to SEZs.

▪ Political changes(political risk)

▪ Convertibility of Currency on Capital A/c

▪ Labour reforms

▪ Zones by & large are still zones not smart cities.

▪ Inappropriate locations

▪ Long gestation period 4 to 5 years in absence of infrastructure development.

SWOT Analysis for Indian SEZs▪ Opportunities:

▪ An alternative manufacturing base, particularly compared to Chinese SEZs.

▪ Services SEZs do not require movement of input and output physically and hence, surrounding infrastructure may not matter much.

▪ For multi-product SEZs, almost 23 ports are available. Most of them are likely to be EDI compliant.

▪ New small ports & airports are also being developed keeping SEZ concept in mind.

SWOT Analysis for Indian SEZs

▪ Threats:

▪ Loosing edge of low labour costs - many countries are competing.

▪ Formation of economic blocks, Effect on Government Revenues.

▪ Negotiations for FTAs with many countries may erode competitiveness.

▪ The pattern of buying & selling may not continue. With relocations of industries in other third world countries, new competitors will emerge.

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Conclusion

Positive effects:

Creation of employment opportunities

Export development

Promotion of foreign direct investment

Negative effects:

Suppression of labor standards and core labor rights

Economic impact of Special Economic Zones can be as positive as negative.

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Conclusion

o Positive effects outweigh negative ones.o Negative effects are caused only by

employment generation.o Suppression of labor standards and core

labor rights was met only in some countries.

Therefore, economic impact of Special Economic Zones is positive.

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Reference listAggarwal, A. 2007. Impact of Special Economic Zones on Employment, Poverty and Human

development. Indian council for research on international economic relations (194): 7-9. EBSCOhost database. http://www.ebscohost.com (accessed March 25).

FIAS. 2008. Special Economic Zones: performance, lessons learned, and implications for zone development. EBSCOhost database. http://www.ebscohost.com (accessed March 25).

Jahan, S. 2003. Reorienting development: Towards an Engendered Employment Strategy. Gender Poverty Summit. Quoted in Aggarwal, 2007, 9.

Lima, L. 2009. PEZA. Department of International Development Working Paper No. 49, University of Oxford. Quoted in FIAS, 2008, 37.

Sadni-Jallab, M. and E. B. Armas. 2002. A Review of the Role and Impact of Export Processing Zones in World Trade: The Case of Mexico. Institute of Development Studies, Brighton. Quoted in FIAS, 2008, 64.

Wang, J. 2009. The economic impact of Special Economic Zones: Evidence from Chinese Municipalities. Job Market Paper. EBSCOhost database. http://www.ebscohost.com (accessed March 25).

Wong, K. 1987. China’s Special Economic Zone Experiment: An Appraisal. Geografiska Annaler Series B, Human Geography 69 (1):27-40. Quoted in Yeung, Lee, and Kee, 2009, 223.

World Bank. 2009. The World Bank. http://search.worldbank.org/data?qterm=special+economic+zone+worldwide&language=EN&format=html (accessed March 22, 2011).

Yeung, Y., J. Lee, and G. Kee. 2009. China's Special Economic Zones at 30. Eurasian Geography and Economics 50 (2): 222-240. EBSCOhost database. http://www.ebscohost.com (accessed March 25).

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