Approaching optimal SEZs - II

Pakistan is indeed fortunate to be a part of one of the main projects in the shape of CPEC (China Pakistan Economic Corridor) under the overall Belt and Road Initiative (BRI); especially in terms of evolving special economic zones (SEZs). This is because China, in order to attract foreign investment, started developing SEZs way back in 1979 where it established four SEZs on its south-eastern coastal region, and since then has had a long, fruitful experience in developing SEZs both within and outside of China.

In 1984, China designated 14 of its coastal cities as industrial and technological development zones; where many of these cities focused on a particular industry while evolving industrial clusters. Currently, more than one hundred such zones have been established in China where manufacturing is incentivized through establishing world-class infrastructure, and special low-tax regimes. While China applied the phenomenon of SEZs as one of the main instruments to develop its economy so rapidly over a short period of time, it is important that Pakistan learns from China's experience in relation to SEZs. It will require the government to provide all the support in the realization of SEZs in the country, which is important to attract both domestic investors and influx of industry and investment from China.

At the same time, Pakistan could learn from China's experience of establishing SEZs abroad. Basically, it was in mid-1990s that China decided to go global or 'going out' as it was called then in China (as zou chuqu), as against a time of around 20 years before then of 'bringing in' (yin jinlai) foreign investment with its skills, investment and technology to 'finding new markets for Chinese goods and services, building up Chinese brand names, and ratcheting up China's own foreign investment' as pointed out in a book chapter (2011) 'China's investment in Special Economic Zones in Africa', by Deborah Brautigam and Tang Xiaoyang.

It was under this policy that China started developing SEZs overseas; where for example in 1999 '...Chinese government signed an agreement with Egypt to assist in the establishment of an industrial zone in the Suez economic area'. Ultimately in 2006, the country made a policy decision to establish 50 SEZs globally. Under the 'going global' initiative, China's Ministry of Commerce, for example, approved seven SEZs in Africa, one each in Mauritius, Zambia, Egypt, Ethiopia, and Algeria, and two in Nigeria. Pakistan could also learn from the experience of these countries with regard to SEZs; especially as it embarks on developing a similar partnership with China in evolving SEZs here.

For instance, Pakistan has huge copper reserves in Balochistan where it could learn from the experience of 'Zambia-China economic and trade cooperation zone/Chambishi multi-facility economic zone'. In this regard, the planning began in 2003 by China Nonferrous Mining Co. (CNMC Group) for establishing the zone in Chambishi '...to open a zone for mineral processing and related industries... to make full use of the Chambishi copper mine'. Other examples from Africa include a) Egypt Suez Economic and Trade Cooperation Zone; b) Ethiopia Eastern Industrial Park; and c) Mauritius Jinfei Economic and Trade Cooperation Zone.

These and other experiences with regard to SEZs, overall, present understanding in terms of gains and challenges. Moreover, the benefits of SEZs have been mostly reached in places where '[a] high-level commitment and active management from host governments... [for instance]... assigning specific individuals, preferably Mandarin-speaking, to work with Chinese development teams can help, as can high-level participation on boards; [b] ensuring the provision of quality off-site infrastructure... (power, roads, water, sanitation)... [and including]... involving the local private sector, in addition to the Chinese investors, will be critical; [c] communicating and enforcing standards... [where]... governments enforcing existing standards and regulations... [along with having]... these translated into Mandarin, as Mozambique has done for labour regulations; [d] implementing programmes to promote domestic market linkages... [where for instance]... supplier development programmes and initiative to facilitate local companies to set up inside the zones can play an important role in creating these linkages; [e] transparency and community relations... [in terms of]... contracts and agreements for these... zones.... [since]... to be sustainable, they need to have buy-in from local communities who understand the nature of the agreements'.

A very successful experience for Pakistan to learn from is the 'China-Singapore Suzhou Industrial Park (SIP)'. A remarkable example of joint economic zone development, this industrial park was developed during the early 1990s 'attracting US$17 billion in FDI and supporting more than 500,000 jobs... [in turn, becoming] a major driving force of the Suzhou economy, achieving an annual average economic growth of 30 percent [during 1994-2008]'.

Three important areas of learning for Pakistan from the SIP experience pertain to firstly, the development of partnership structure overseeing the park, where for overall governance a China-Singapore Joint Steering Council (JSC) was formed, with a high-level representation provided in the shape of JSC being co-chaired by the Chinese vice premier and the Singapore deputy Prime Minister, and included ministerial chiefs, senior officials of related municipal governments and head of Jurong Town Corporation (JTC). This should serve as an example of involving ownership from the highest level and then horizontally to cover all needed bases, and to the grass-roots level to ensure all stakeholders are on board.

Secondly, a mechanism of knowledge-sharing was put in place to learn from each other's development experience and acumen. This helped in transfer of knowledge from each country for the overall benefit of the other, and also for improving the functioning of SIP in the light of that. Similar mechanisms should be evolved in the case of Pakistan and China economic collaboration and in particular with regard to evolving SEZs under this collaboration. In fact, Pakistan should also approach Singapore to learn from their successful experience in evolving SEZs as China approached them back in the day and perhaps also inviting them as additional partners in evolving SEZs in Pakistan. With regard to knowledge-sharing, in the particular case of SIP, 'the Chinese side established an Adapting Singapore Experience Office under the SIPAC [Suzhou Industrial Park Administrative Committee], and the Singapore side set up a counterpart - the Software Project Office (SPO) affiliated with the JTC'.

The third area of learning, and which received a lot of international recognition, was with regard to urban planning where 'right before the construction of the of SIP and with the strong emphasis of the Singaporean side, experts from China and Singapore drafted a sophisticated urban plan, which Chinese officials marked as far-sighted'; indeed something important for Pakistan to learn from as it struggles to improve its expertise in urban planning.

It is a detailed master plan and includes more than 300 professional plans, catering to many functions, including living, trade, and industry. Among other benefits of this plan and something which should be a guiding principle in evolving SEZs by Pakistan, it 'helped to build a philosophy among Chinese officials of (1) planning before construction; and (2) constructing underground works before works above ground'.

In addition to the SEZs where China was involved, Pakistan could also indeed learn from other successful examples, like from Honduras, which as pointed out by Michael Engman in a book chapter (2011) 'Success and Stasis in Honduras' Free Zones', being 'a small, unremarkable Central American country with a turbulent political past... manage(d) to become a leading exporter of clothing and apparel to the United States, and, in doing so, create(d) in excess of 100,000 new job'.

This is all the more important for Pakistan, which needs to improve the quantity and quality of textile-related exports - its main exporting sector - if it wishes to achieve its exporting potential and if it aspires to remain competitive with regional giants like India, Bangladesh and Thailand. Hence, Pakistan could learn some very valuable lessons from the experience of Honduras' free zone experience during the last four decades or so; including its first free zone law that the country enacted in 1976 and subsequent important pieces of legislation such as the 1987 Export Processing Law.

For instance, some of the fiscal incentives provided by the government of Honduras over the years to free trade and export processing zones include a) 100 percent exemption on imported duties on (i) raw materials, components; (ii) export taxes; (iii) local sales and excise taxes; (iv) taxes on net assets; (v) taxes on profits; (vi) municipal taxes and obligations/duties; and (vii) taxes on profits repatriation; b) unrestricted access with regard to currency conversion; c) customs cleared on site; d) 'five percent of total production paying customs duties' on sales to local market in the case of free trade zone, and 'only paying customs duties authorized by the Secretariat of Industry and Trade' on sales to local market in the case of export processing zone; and e) eligibility requirements for free trade and export processing zones being 'industrial and commercial companies can be established'.

Overall, a number of factors allowed the success of free zone programme in Honduras, and include 'a willingness to evolve the legal framework for the programme; effective use of preferential trade agreements; government support to develop the necessary infrastructure and support services for the zone; support for agglomeration; effective institutional support, particularly in marketing and promotion; and, most important, a dynamic entrepreneurial domestic private sector. But what appears most critical to this success is that all these factors came together at the same time'.

Likewise Pakistan, Honduras also belongs to the group of countries falling beyond the 100 mark on the World Bank's Doing Business Index, yet through the efficient functioning of 'zone operators' its zones received a significant boost in attracting domestic and foreign investment. Here, in particular, the zone operators' plans, called the 'shelter plans' with regard to footloose companies, indeed proved very helpful. This should underline the importance of zone operators in Pakistan, as the country plans to actively embark on establishing special economic zones.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund. He tweets @omerjaved7)