Free Trade Zones as White Elephants

 

Shenzhen, China. Image from wikipedia

[E]veryone seems to be an admirer of “special economic zones” (SEZs) that offer a combination of tax-and-tariff incentives, streamlined customs procedures and less regulation. Three out of every four countries have at least one. The world now counts about 4,300 SEZs, and more are being added all the time. Myanmar and Qatar have recently unveiled new ones; Indian officials call their SEZ ambitions “revolutionary”; Shinzo Abe, Japan’s prime minister, announced special strategic zones as part of his reform agenda.

Fans of SEZs can point to several success stories, none bigger than China’s zone near Hong Kong, set up in 1980 and since dubbed “the Miracle of Shenzhen”. ...[But]Popular as they are, SEZs are often flops. Africa is littered with white elephants. India has hundreds that failed to get going, including more than 60 in Maharashtra state alone in just the past few years.
Nor are these efforts cost-free. The incentives offered to attract investors mean forgone tax revenues (at least in the short term). They create distortions inside economies, one reason why nationwide liberalisation is always better than patchwork efforts. Zones are increasingly a haven for money-laundering through, for instance, the mis-invoicing of exports. To ensure that these costs are more than offset by jobs and investment, governments must learn from the failures.

First, offering nothing but fiscal incentives may help get a zone off the ground, but it does not make for a lasting project. The most successful zones are entwined with the domestic economy: South Korea, for example, has been good at fostering links with local suppliers. Zones need to be connected to global markets. Improving infrastructure for this purpose has a bigger impact on the success of zones than tax breaks do. This often requires public spending to upgrade roads, railways and ports to handle the extra freight. Lack of such investment has been the downfall of many an SEZ in Africa. Lots of the continent’s new zones will fail for lack of a reliable power supply or because they are too far from a port.

Excerpts from Special economic zones: Not so special, Economist,  Apr. 4, 2015, at 14

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