16th September 2019
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]
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.”
export processing zones, business clusters,