Sanjeev Sabhlok's blog

Thoughts on economics and liberty

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Why special economic zones, opportunity zones and such “planned” centres are a bad idea

Broadly speaking there are two types of “special” treatment for industry: (1) Industry Precincts and (2) Special Economic Zones/opportunity zones

In the former, there is generally a more liberal planning regime for commercial and industrial development and some special investment in infrastructure. In the latter, the first two are ensured but also special tax exemptions and less onerous laws

TYPE 1: ZONING AND INFRASTRUCTURE

Urban renewal precincts: These are rezoned areas for more intense or new development. These are likely to fail since they are often generated by a government intervention.

Innovation clusters/ business clusters: Harvard Business School’s Michael Porter, one of the leading thinkers on industry clusters, has documented that the creation and maintenance of competitive advantage hinges most critically on clusters of highly competitive firms in a wide variety of industries in every country. [Sanjeev: In principle, one can have nothing against such clusters if they evolve organically. Conscious efforts by governments to “develop” them are likely to be wasted. – this view is confirmed by Muro and Katz below]

Brookings Institution thought leaders Mark Muro and Bruce Katz (2010) notes: “Don’t try to create clusters. Clusters can’t be created out of nothing, and cluster initiatives should only be attempted where resources and capabilities already exist. The pre-existence of a cluster means that an industry hotspot has passed the market test. By contrast, efforts at wholesale invention will likely be fraught with selection issues, inefficiency, and probable failure and waste.”

(Muro, M. & Katz, B., 2010. The New “Cluster Moment”: How Regional Innovation Clusters Can Foster the Next Economy.)

 

TYPE 2: TAX EXEMPTIONS AND LESS ONEROUS LAWS

Special economic zones: SEZs are “demarcated geographic areas contained within a country’s national boundaries where the rules of business are different from those that prevail in the national territory. These differential rules principally deal with investment conditions, international trade and customs, taxation, and the regulatory environment; whereby the zone is given a business environment that is intended to be more liberal from a policy perspective and more effective from an administrative perspective than that of the national territory”. [Source]

By definition, the idea of SEZ is inimical to the rule of law. The rule of law must apply uniformly across an entire country, but in Third World countries such capability does not generally exist and they therefore apply special rules to special areas.

As a general rule, an entire country should be a SEZ, with the best possible rules and regulations for all. The best examples are probably Singapore and Hong Kong, where the entire country operates under a liberal regime, and everyone benefits.

India has a number of SEZs. The only question to be asked is why are the rules that apply to these SEZs not applicable to the whole of India.

ASSESSMENT OF SEZs BY WORLD BANK

Anecdotal evidence turns up many examples of investments in zone infrastructure resulting in “white elephants,” or zones that largely have resulted in an industry taking advantage of tax breaks without producing substantial employment or export earnings. Moreover, many of the traditional EPZ programs have been successful in attracting investment and creating employment in the short term, but have failed to remain sustainable when labor costs have risen or when preferential trade access no longer offers a sufficient advantage.

Many economists, however, still view zones as a second- or even third-best solution to competitiveness, whose success is restricted to specific conditions over a limited time frame (Hamada 1974; Madani 1999; World Bank 1992). [Source]

ASSESSMENT OF INDIA’S SEZs

SEZs are not need to follow environmental regulations. In the construction stage and later in production process SEZs use huge amount of water resource. Labour laws are also not applicable in these enclaves. [Source]

Help the Rich, Hurt the Poor: Case of Special Economic Zones by EAS Sarma

OPPORTUNITY ZONES

Why Opportunity Zones Won’t Work

Key points: “To attract new residents and new investors, neighborhoods need certain fundamentals: safe streets and low crime, good schools, and attractive parks and amenities. Low property taxes help, too. Absent these advantages, investment incentives may succeed in gilding the ghetto but will not lead to truly healthy communities.”

Further: “No substitutes exist for aspiration, agency, and education. Crowded Chinese and South Asian neighborhoods have proved that poor physical conditions are no barrier to advancement. That’s a lesson that government planners have yet to learn: self-help institutions flourished in many of the African-American neighborhoods leveled for public housing.”

KEYWORDS

export processing zones, business clusters,

 

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Help the Rich, Hurt the Poor: Case of Special Economic Zones by EAS Sarma

Note: I agree with much of what EAS Sarma is saying here. However, I don’t agree with his defence of labour laws.

(Extracts from Economic and Political Weekly May 26, 2007)

In a country where more than 100 million people in the rural areas have no land of their own and another 80 million house­holds own agricultural holdings less than five acres, it is unfortunate that the central and the state governments should rush into forcibly acquiring hundreds of thousands of hectares of arable lands in huge chunks and dole them out to powerful industrial houses and real estate dealers at throw-away prices.

Central to the SEZ scheme is the facile assumption that handing over thousands of hectares of land cheaply to promoters of industry and relaxing the laws of the land, including those that relate to the welfare of the industrial workers, protection of the environment, taxation, etc, would automatically promote industrialisation and solve the m1gging unemployment problem of the country overnight. Similar doles were tried out in the past, with not much success. What our rulers fail to recognise is that it is bad governance that lies behind many of our failures on the development front.

SEZ Impact
The basic principles of good governance are to involve the people in decision-making, enhance transparency in the functioning of the government, create a competitive environment, provide greater choice for the citizen in offering public services, minimise the element of discretion and ensure non-discriminatory treatment to all. Government’s policies should be in the direction of creating competitive markets, rather than promote private monopolies. Unfortunately, none of these essential requirements of good governance find place in the recent policies. On the other hand, many so-called “reforms” during the last few years have openly gone against these basic tenets. The case of the SEZs is an excellent example of this.

Decision-making on SEZs has generally been non-transparent. SEZs are imposed on the local people without any prior consultation. Whenever the displaced persons opposed the location of an SEZ, their dissent had been termed “anti-devel­opment” and crushed mercilessly with the iron hand of the state.

The process of selection of the pro­moters of SEZs is in itself highly non­transparent. There is not a single case of SEZ in which the promoter is selected through well-established competitive bidding procedures. This has provided enormous scope for corruption and political patronage.

SEZs displace people on a large scale. The displacement is both physical and occupational. In coastal states like Andhra Pradesh, some SEZs are located along the sea coast, cutting off fishermen’s access to the sea from which the latter eke out their livelihood. In many places, small agriculturists are thrown out of their home­lands and, along with them, those that depend on agriculture, such as artisans and rural workers have also lost their livelihood. The latter do not figure at all among the beneficiaries of the rehabilitation packages.

Government’s Stand
In the case of the SEZs and a host of other similar industrialisation schemes, it is strange to find the government reversing its role and acting as a broker on behalf of the industry. In this role, the government has not even hesitated to invoke its “right of eminent domain” and forcibly acquire land for the SEZs. In the past, the land acquisition law, which is indeed a draconian one, had been used to acquire lands for genuine public purposes such as schools, hospitals, etc. It had rarely been used to further private interest, as is the case now.

The rehabilitation packages announced by the states lack credibility, as there are thousands of families displaced by pre­vious projects still awaiting compensation payments. In some cases, those displaced in early 1970s are yet to receive compen­sation. In many cases, the true beneficia­ries are the absentee landlords, interme­diaries and touts that collude with the government agencies. The Andhra Pradesh experience has shown that the poor that were assigned government land were the ones that were deprived of those lands to benefit the SEZ promoters.

India’s SEZ Scheme
While China has followed a step-by-step approach and set up only six SEZs during the last several years, India has already set up 19 SEZs, approved another 234, accorded “in prin­ciple” approval for 162 and notified 19. China’s SEZs are larger in size, whereas the extent of an Indian SEZ seems to depend on the political clout that the promoter wields and the leverage he is able to achieve with bureaucrats and politicians. China has a well thought-out land-use policy that seeks to protect its arable land. India has no such policy.

SEZs are given open-ended tax conces­sions. The experience so far in the country with tax holidays for industry has not been sanguine. Apart from the direct revenue losses they have resulted in, they also have led to an uneconomic location of industrial units.

The labour laws applicable to the rest of the country have been relaxed for the SEZs. The existing laws are well ­intentioned and they promote worker wel­fare [Sanjeev: disagree – these laws need to be revised to ensure greater liberty of contracting]. Relaxing such laws exclusively for the SEZs shows the government’s lack of conviction in its own commitment to social justice. In going along with this, for the first time, the government has openly accepted the untenable contention that social justice inhibits economic develop­ment and, therefore, it could be conve­niently jettisoned off its agenda.

In some SEZs, the state governments are joint venture partners. In the case of some, special incentives by way of concessional electri­city and water tariffs have been offered. In almost all cases, valuable lands have been given away at concessional prices. In return for all these sops that run into thousands of crores, the promoters of SEZs are not willing to assume any kind of social responsibility. For example, they have no intention to reserve jobs for SCs/STs.

The employment opportunities that the SEZs would create are limited, compared to the number of poor farmers uprooted. The promise of jobs for the displaced is a hollow one, as none of the displaced families would be able to find even one of its members having the right kind of skills and qualifications required for such jobs. Even if we assume that SEZs do create some job opportunities, the benefit of such limited employment would get more than offset by the number of rural families permanently deprived of their livelihoods.

In the recent years, the industry has been lobbying for relaxations in the procedures for environmental clearances. The SEZ policy has some elements that relate to this. In the case of many SEZs already ap­proved, no detailed environmental impact assessment has been attempted. For ex­ample, the industrial units in an SEZ would not only drain surface and groundwater resources at the expense of the local com­munities, but also their affluents could pollute the local water bodies.

Conclusion
Forc­ible acquisition of land should be done away with. Decisions that involve displace­ment of people should not be taken with­out prior consultation with the local com­munities. Models of development with minimal dislocation need to be adopted in preference to those that indiscriminately displace people. The existing rehabilitation policy of the government is flawed, as it does not allow the displaced people to have the status of shareholders of projects. The government should recognise the inherent rights of the local communities to resources such as land, water, minerals, forest wealth, etc. All these call for a paradigm change in the attitude of the government.

Economic development, growth and industrialisation are the outcomes of good governance, not policies based on sops, subsidies and political patronage.

 

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Rupert Darwall’s works

Came across this author’s work through a video:

Turns out he writes on many issues that interest me.

Some of his works:

Essay: A Veneer of Certainty Stoking Climate Alarm (2017) PDF available

The Age of Global Warming: A History – PDF available

THE ANTI-DEVELOPMENT BANK The World Bank’s regressive energy policies – 2017 PDF

A longish podcast.

Excerpt: Exposing the totalitarian roots of the climate industrial complex

Some discussion of his works

The Nazi Roots Of The Global Warming Scare

Book review, ‘Green Tyranny’ by Rupert Darwall

Review at Independent Institute.

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