SEZs and economic development

During the decade of the 1980s a paradigm shift took place in the minds of economic policy makers; the movement in thought process was rooted in the idea that economic development must be led by having in place an export-oriented economy. This became a recipe of economic success for many countries of North East Asia and South East Asia.

Political leadership of East Asia adopted the strategy of promoting exports of their countries; notably the economic managers of South Korea, Taiwan, Thailand and Singapore tasted the benefits of an export-led strategy.

The experience of these countries was replicated with resounding success by Hong Kong and People’s Republic of China.

The vehicle to achievement was based on creating Special Economic Zones (SEZs).

Special Economic Zones are designated areas where the government institutes business-friendly policies to attract both domestic and foreign investment. These Special Zones provide wide and comprehensive incentives to encourage and promote industrialisation, export diversification and an environment for economic growth.

In these designated Zones, emphasis is on promoting a wide range of industries, including manufacturing, logistics and services; local and international trade is given impetus.

The benefits to entrepreneurs are that the tax structure is built around incentives of tax holidays, reduced corporate taxes, VAT exemptions, duty-free import of machinery and raw materials. Through the SEZ access is available to usually state of the art facilities like industrial parks, ports and transportation networks. SEZs offer and create job opportunities.

The enlightened leadership of East Asia recognised the need to create exportable surpluses beyond the available. For this purpose policies were designed to attract investment in industries that were given attractive concessions to produce/manufacture goods and services, only for export purposes.

Malaysia was amongst the first countries to export Japanese brands that were manufactured locally. Sony TV sets were exported by Malaysia. This transformation of creating the ability to export goods of foreign origin, but produced locally gave an impressive momentum to economic growth via exports.

SZEs were in vogue earlier too, but Asian countries gave them a new meaning and dimension. The first SEZ were established in industrialised countries during the 1950s. These were designed to attract from MNCs capital and technology know-how. The first SEZ is believed to be in Shannon Airport in Clare County, Ireland.

The designation of an area as SEZ is to offer to overseas investors unique and different trade and business rules/regulations. The primary objective is being to attract overseas investment to set up export-oriented industries. Today the largest SEZ is the JAFZA in the UAE, which is home to more than 11,000 companies from over 100 countries. JAFZA has helped the UAE economy to diversify from oil alone to major logistics, trade and financial hub.

The business generated during year 2023 was $168 billion in trade value. Today the guesstimate of all SEZ operating globally is over 7000 billion in 149 countries of the world. The last estimates available indicate that SEZs and Free-Trade Zones ( FTZs) alone are responsible for exporting goods/ services worth over $ 4 trillion; almost 22 % of global trade. There are some fine differences between SEZ, FTZ, EPZ, Industrial Parks and Specialised Zones.

The opening of China’s economy began at a snail’s speed in 1978, once the Gang of Four was consigned to history. Deng Xiao Ping introduced economic and market reforms that saw momentum in the early part of the 1980s. It began with the creation of Four Special Economic Zones and identification of 13, now 14, Coastal cities for gradual economic freedom.

Deng described China’s SEZs as “social and economic laboratories where foreign technologies and managerial skills could be observed”. He coined a phrase, ‘one country, two systems’; the idea being to see these SEZs as test-tube laboratories for introduction of capitalism in a Socialist society.

Since their inception, SEZs have contributed 22% of China’s GDP, 45% of total national foreign direct investment and 60% of exports. SEZs are estimated to have created 30 million jobs, increased the income of participating farmers by 30% and accelerated economic growth.

The four Special Economic Zones were designated after much thought – the cities weren’t randomly chosen but a deep thought went behind into designating the geographic areas. The central idea was to attract capital investment from rich and neighbouring capitalist countries. Shenzhen was created facing Hong Kong; Zhuhai faces Macau (then a Portuguese territory), Shantaou and Xiamen are facing is Hong Kong and Taiwan, respectively.

Soon in view of the varied incentives and facilities of cheap labour and generally depressed overhead costs, businesses from Hong Kong began to move their production facilities across the border to Shenzhen. The re-export market of Hong Kong swelled to the massive advantage of China.

Shenzhen has been showcased since late 1980s by China as the success of the concept of having a Special Economic Zone. I first visited Shenzhen in 1983; it was then a sleeping fishing village in the backyard of a vibrant Hong Kong, as a coastal city of Guangdong province of China. Since then, I have been visiting Shenzhen quite frequently. Today it is a different city, akin more to New York’s Manhattan than a sleeping village.

Shenzhen is a classic example of meticulous economic planning through adequate policy framework put in place to facilitate export business. The city is also known as “Pengcheng” or the “City of Giant Eagle”, which got designated as SEZ in 1980.

It is endowed with geographical advantages that make it a critical node for the BRI and has a significant transport hub in the Asia-Pacific region. It has a well-developed highway network connecting Shenzhen to other cities of the Pearl River Delta. It has an active airport both for passengers and cargoes. The four pillars of Shenzhen are advanced technology, modern logistics, financial services and cultural industry.

Shenzhen’s container throughput reached 30 million TEUs, consistently ranking among the top four in the world.

The total import and export volume of goods in 2022 stood at 3.7 trillion yuan. Innovation is a part of Shenzhen’s DNA. It is home to a large number of high tech companies such as Huawei, ZTE, Tencent, BYD, and DJI; it is rightfully dubbed as “Silicon Delta” by the Economist. The number of high-tech companies is over 23,000.

The average age of Shenzhen residents is 32.5 years. The GDP of the Zone stood at 3.24 trillion Yuan in 2022. It has 3.94 million commercial entities.

How did this economic miracle happen?

The answer is simple: a will to achieve. The Shenzhen Municipal People’s Government is one of the most efficient local governments in China, advocating the construction of a law-abiding government, a service-oriented government and a clean government. Leveraging its SEZ legislative power, Shenzhen has created a fair, transparent and relaxed environment for businesses.

In 1988, Hainan became the fifth SEZ. I visited its capital Haiku in 1990, a dull city with signs to grow; today it is part of the Chinese showcase. In 1990, the Pudong District in Shanghai became the sixth SEZ. I saw Pudong for the first time in 1987 from across the Huangpu River standing on the Bund of Shanghai side.

Little did I know that when I would visit Pudong in 2004 it would have skyscrapers jetting into the clouds with buildings sporting 100 or more floors. The transition has been magical and phenomenal. How did this happen? Efficient and willing government machinery whose primary objective was to make it a functional Special Economic Zone. It is another Manhattan in the East, spell binding and unbelievable.

I have be-laboured the Chinese experience only to ask our economic planners and managers if the Chinese can do it, why can’t we do it too?

The successful experience of SEZ operations in China led many other countries to establish similar facilities within their geographic domain. We witnessed the growth of Bangladesh economy based on export growth, and countries like Vietnam, Cambodia and Laos also greatly benefitted through export-led growth.

Pakistan too has been flirting with this economic idea for a long time without much success. This scribe since the nineties through the columns of this very newspaper has been lamenting about the inertia and criminal neglect of the EPZ, adjacent to Karachi; we have reduced it to a market of second-hand clothing only. No industry worth the mention has been set up. An unpardonable lapse on the part of policymakers and the multiple governments that have come and gone.

The SEZ Act was promulgated in September, 2012 along with the SEZ Rules. The functions and powers of SEZ authorities as per the Act are well defined and described but without making any difference to the economy. The needle hasn’t moved. The identified SEZs are 22, inclusive of industrial parks and economic zones, but the performance is dismal.

The setting up of a target of exports of mere $ 30 billion is an insult to the nation of 250-odd million people whose youthful population is almost 65% of the total population. We could do better. We have an excellent relationship with People’s Republic of China; why can’t we ask them to set up an SEZ for us on either BOO or BOT terms.

If we are incapable, let’s be at intelligent and wise to seek help from those who know how to do it; make the SEZ. There is a need to breath fresh life into our SEZs.

It is recommended that the Prime minister must appoint a Chief Executive Officer for each Special Economic Zone, who must be empowered like the Shenzhen Mayor is under the Shenzhen Municipal government, to approve and administer all business activities.

Such an individual should be no less than a Grade- 22 officer, and if chosen from the private sector, the candidate must have to his/her credit, a minimum of ten years of experience as a CEO, President or Managing Director of a large organisation. The Red tape must be cut entirely.

The process of registration and approval must be seamless and licence to commence business should be issued within 48 hours of application. A duty (responsibility) with authority must be assigned to the CEO of the SEZ to make available all the resources required to make the SEZ function.

It is ’ never too late’ says the Italian idiom. Let’s give it a serious try.

Copyright Business Recorder, 2025