From Singapore to Shenzhen, Special Economic Zones—SEZs for short—have helped underpin the rapid export-oriented growth of East Asia. In an effort to replicate these sleepy-fishing-village-turn-thriving-metropolis success stories, many countries in the developing world have created economic zones of their own—and their growth has been dramatic. In 1986 the International Labor Organization’s SEZ database reported 176 zones in 47 countries; twenty years later in 2006, there were more than 3,500 zones in 130 countries.
Various policy objectives have motivated the creation—and exponential expansion—of SEZs around the world. Generally, governments have created these zones to attract foreign direct investment, to alleviate large-scale unemployment, to support wider economic reform strategies, or to experiment with the application of new policies. The model has been extremely successful in many countries—in the Dominican Republic, for example, it allowed for the creation of more than 100,000 manufacturing jobs. However, such successes have not been universal or without controversy in the past, nor are they guaranteed in the future. In a post-crisis world with a changing macroeconomic and regulatory environment, new challenges have emerged, and some of the principles underlying traditional economic zones are no longer sustainable.
In the newest edition of the Economic Premise series, World Bank Senior Economist Thomas Farole argues that it is not the existence of a SEZ regime, a compelling master plan, or even a fully developed infrastructure that will make the difference in attracting investment, creating jobs, and generating economic spillovers to the local economy. Rather, the success, or failure, of SEZs is based upon the relevance of the programs in the specific context in which they are introduced, as well as the effectiveness with which they are designed, implemented and managed. For example, while the zone program in Bangladesh was initially aimed at attracting high-technology investment, it only took off when it targeted the garment sector, which allowed it to leverage Bangladesh’s comparative advantage in labor.
As posited in “Special Economic Zones: What Have We Learned,” policy makers need to consider how to make economic zones successful in attracting firms that create jobs, how to ensure that zones are economically sustainable and deliver positive spillovers, and how to foster sustainability from institutional, social, and environmental perspectives as well.
Learning from past lessons will help point policymakers in the right direction going forward, especially as SEZ programs continue to proliferate in the developing world. As new zones are created, flexibility will be needed to effectively leverage a country’s comparative advantage, and more attention will need to be focused on fostering firm-level competitiveness, local economic integration, innovation, and social and environmental sustainability. Only by implementing innovative, dynamic, and country-specific approaches will policy makers ensure that SEZs remain effective tools for future economic development.
First appeared at World Bank Growth and Crisis blog