The Political Economy of SEZs

“For SEZs to be truly beneficial, they must solve political problems rather than economic ones. Thus, rather than seeking the optimal fiscal benefits, governments should focus on the rules and institutional setups of SEZs.” — Lotta Moberg

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In this work, Lotta Moberg provides a comprehensive analysis of political economy aspects of Special Economic Zones.

A political economy framework treats government officials as possessing imperfect knowledge and reacting to incentives like normal private individuals. From this insight comes the realization that policymakers face knowledge and incentive problems when implementing SEZs. They have trouble knowing the best course of action and may not want to implement it if it goes against their own interests.

The book explores measures which can help solve these problems to create more effective and corruption-free zone frameworks. These measures include increased decentralization, democratic accountability and higher private sector participation, such as private zone development.

Still, the author points out that even with good frameworks, SEZs provide only marginal benefits to the economy as a whole. The creation of SEZs induces a concentration of economic development and an opening of the economy only in certain spots. Although superior to total isolation, this arrangement is always inferior to broader reforms targeting the entire country.

Nevertheless, the book highlights that the most important benefits that SEZs can provide are not economical, but political. SEZs can serve as test-beds and showcases for new policies and, in certain contexts, steer the interests of the political elite away from protectionism and in the direction of broader nationwide liberalization. This is where SEZs really shine. Thus, to know if an SEZ is likely to benefit the country, one has to ask what the political alternative to them are. If zones are being used as a substitute for broader reforms, they are likely to be worse for the country than their alternative. However, if they are seen as a first step leading to bigger reforms, they can help set a country in the path towards development.

Moberg also analyzes the different existing kinds of SEZs. She views single factory zones as problematical, being hardly differentiable from a targeted tax break in most cases and not generating the potential political benefits that SEZs can bring. Instead, the author sees more potential for growth and triggering widespread reforms in larger, more dynamic zones including residents, where there is also more room for institutional improvements.

The book is divided in 3 parts consisting of 9 chapters, in which Moberg first analyzes the theory of zone politics, then presents SEZ implementation case studies, and lastly provides prospects on the future of SEZs.

Creators of zones and societies may refer to chapters 5–7 to understand the implementation process and outcomes of SEZs in India, China and the Dominican Republic.

Policymakers and analysts can go to chapters 8–9 for a quick rundown of lessons learned, best practices, and current and future trends for SEZs.

Scholars and experts should read chapters 1–4 for an in-depth analysis of the political economy, problems, benefits and ideal use cases of SEZs as a policy tool.

The book can be found here.

Written by: Francisco Litvay

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Institute for Competitive Governance

The Institute for Competitive Governance is a nonprofit institution which studies special jurisdictions throughout the world.