Special Economic Zones

Since the establishment of the original export processing zone in Kaohsiung, Taipei,China, in 1965, much hope has been invested in special economic zones (SEZ) (or their equivalents such as the existing free ports of Hong Kong, Singapore, and Penang in Malaysia) as ways of bypassing the constraints of poor infrastructure and weak governance in many Asian-Pacific countries (Kuchiki, 2006; ESCAP, 2007). Although Penang lost its free port status in 1969, free-trade zones were established there in 1971 following a Malaysian trade mission to Taipei,China and subsequently dispersed throughout the country. In particular, these Malaysian export enclaves, like those in Taipei,China, were used not only to compensate for infrastructure deficiencies but also to adopt flexible policies targeting multinational companies in the electronics industry (Table 5 [ PDF 13.5KB | 1 page ]). Since the 1980s, SEZs, typified by Shenzhen in PRC, have proliferated in Asia as catalysts for economic reform and alleviating poverty. While fostered by local or provincial governments, they have been subject to central government intervention to attract multinational anchor firms. Now these SEZ-style policies are being promoted as an instrument to strengthen the impact of crossborder transport and communications infrastructure, particularly in the Greater Mekong Subregion, together with the construction of domestic transport infrastructure and agricultural development.

Some SEZs in Asia have achieved rapid employment growth, especially for women, increased exports, and boosted skills and technology transfer.⁸ However, SEZs are not a panacea for all problems as there have been failures manifest in low net exports, poor linkages, unclear cost/benefit structures, administrative barriers and social issues (including providing a cover for corrupt and illegal business practices).⁹ Akinci (2006) has attributed these failures to public sector development, uncompetitive policies, lack of integrated development procedures and controls, and inadequate institutional infrastructure (see also World Bank Group, 2008). The importance of location as an independent variable was not considered in evaluating the mixed track record of SEZs.

The most profitable locations for SEZs in Asia have been found in the immediate hinterlands of global gateways (Figure 5 [ PDF 132.9KB | 1 page ]).¹⁰ Proximity to gateways has been a key factor in the efficiency and effectiveness of SEZs in the Pearl River Delta; the Indonesia-Malaysia-Singapore Growth Triangle (IMS-GT) linking Singapore with the Indonesian provinces of West Sumatra and Riau and the Malaysian state of Johor; the Lower Yangtze ‘economic zone'; and the emerging Seoul-Incheon-Gaesung triangle. Usually, gateway cities are also the most valuable component of the national market; the largest market for skilled labour; have the most frequent national and international transport connections; have the most accessible information and the cheapest search costs (Rimmer and Dick, 2009). All these factors generate externalities leading to increasing returns to scale.

New special economic mega-zones (SEMZ) are emerging to overcome the traditional enclave-like character of SEZs and accommodate the trend towards global production networks.¹¹ Their emergence as logistics hubs makes proximity to global gateways an even more fundamental locational criterion. Featuring integrated mixed land use activities, these satellite mega-zones combine airport, seaport, new town, tourism, utilities, industrial park and commerce under a single authority (Rimmer, 2004a). Employing either public-private partnerships or private developer approaches, the mega-zones, typified by Incheon FEZ (Rimmer 2004b) and Dubai Logistics City (DLC), are set within a revamped regulatory framework offering investors supply chain competitiveness and superior locational advantages, plus government compliance with World Trade Organization (WTO) rules and International Labour Organization (ILO) commitments.¹²

The archetypal SEZ, on which the special economic mega-zone is based, is not Kaohsiung's pure economic platform but Shenzhen, which owed its initial location to proximity to the global gateway of Hong Kong, China. The subsequent success of Shenzhen, with a current population of around 9 million (including floating residents), allowed the SEZ to open up its own container port terminals (Yantian, Chiwan, and Shekou) and Shenzhen Bao'an International Airport. Although Shenzhen is fourth in the world league of container ports, the second ranking Hong Kong, China continues to serve as the main global gateway. Moreover, Hong Kong, China with Guangzhou fulfils this role in relation to other zones in the Pearl River Delta. Shenzhen was not chosen in isolation but selected to maximize its locational advantages. In drawing lessons from Shenzhen and its PRC counterparts for India, Chee Kian Leong (2007) attributes the resultant increased economic growth not to the sheer number of SEZs, but to the greater scale of liberalization.

In Southeast Asia, unlike PRC, most countries have only one international gateway. There is really no choice as to where SEZs are located due to inefficient inland freight distribution in the Asian-Pacific Region. Unlike the West Coast of North America, where an efficient inland distribution system permits the dispersion of equivalent activities to new and larger cities, the quality of economic space in Asia decays rapidly as one moves beyond the metropolitan region. As reflected in Thailand, 80% of the country's 50 industrial estates/parks/zones are within 150 minutes of Bangkok (BOI, 2008); similarly in Viet Nam there is a proliferation of SEZs in and around Ho Chi Minh City (Runckel, 2008). However, the real issue is not where to locate a SEZ but how to make the mega-cities more efficient in themselves. This is the challenge of both infrastructure and governance. In terms of optimal investment, the highest yielding returns are in relieving the constraints of urban infrastructure. Otherwise, improved national and international infrastructure links are simply delivering more traffic faster into a worsening bottleneck. The real SEZs are the cities themselves and that is where the focus should be.

In contrast, some non-gateway locations (inland industrial clusters) identified in Figure 6 [ PDF 31KB | 1 page ] are being earmarked for SEZs and some inland logistics parks developed as components of regional development strategies to bolster the impact of transport infrastructure development in the border areas of Cambodia, Laos, Myanmar, Thailand, and Viet Nam (Table 6 [ PDF 12KB | 1 page ]).¹³ The reduction of institutional barriers through the GMS Cross-Border Transport Agreement (CBTA) are projected “to induce the growth of local traffic along border crossing routes as well as demand shifts from air and maritime transport” (JICA, 2007: 8).¹⁴ Nevertheless, some non-gateway locations are likely to impose higher overall unit costs for non-agricultural and non-resource developments, place some SEZ firms at a competitive disadvantage, and provide serious obstacles to dreams of efficient decentralized locations.

The apparent need for cross-border infrastructure may in large part be a product of the artificial ‘distortions' created by national policy regimes. Genuine economic integration has occurred in the Indonesia-Malaysia-Singapore Growth Triangle (IMS-GT) where ‘Greater' Singapore forms an urban hub, constituting a cross-border connection in a central location. While Batam and Bintan Islands in Indonesia provide both labour for manufacturing firms and land for golf, there is nevertheless, at the same time, a thriving business attracting cross-border patrons for gambling, prostitution and cheaper liquor.

A range of identical or similar activities, according to Andrew Walker (1999), underpin the apparent economic potential of cross-border, twin-town SEZs and may, in large part, be a function of cumbersome and distorting policy regimes (e.g., counterfeiting, gemstones, illegal migration, logging and ‘smuggling'). For example, in the case of SEZs on the Myanmar- Thailand ‘border', the likely outcomes are that refugee Burmese labour ends up on the Thai side and firms on the Myanmar side engage in activities that are illegal in Thailand. If the aim of cross-border SEZs is to by-pass irksome regulations this is a good way of undermining national policy. However, Harry G. Johnson (1965) argued forcefully that distortions should be tackled at source. Over time liberalization and harmonization of ASEAN policy regimes should gradually whittle away distortions. In well-functioning economies industrial clustering occurs within proximity of hubs. Second- or third-best policy cross-border SEZs are a way of accommodating distortions not addressing them.

In the Pacific Islands, the equivalent of the SEZs are the tourist resorts. There are no agglomerations of cheap labour and, because of the low volumes of cargo, there are no competitive sea and air freight rates compared with what is offered to business in PRC and Southeast Asia. Thus, SEZs cannot be expected to play a key role in the Pacific Islands.

Nevertheless, the preoccupation with SEZs has arguably distracted attention from the gross inefficiencies of the large cities with which they are linked or in which they are embedded. In many Asian cities the poor quality of infrastructure is the main obstacle to the movement of people and goods around the city and in and out of the metropolitan region, whether to the rest of the nation or to the wider region. And it is not just a matter of transport and communications. The interlocked problems of water supply, drainage and sewerage constitute a potentially catastrophic failure of public investment that may cause many coastal cities to become dysfunctional as global warming magnifies existing crises. Jakarta and Surabaya, Bangkok and Yangon are some of the most obvious examples. How to make national gateways more efficient is therefore an urban, a national, and a regional challenge.

An interesting policy question is why some cities have established themselves as better gateway locations than others. Singapore; Hong Kong, China; and Shanghai, for example, have had much more success in developing critical infrastructure than Jakarta, Manila, or Ho Chi Minh City. The obvious answer is that Singapore and Hong Kong, China are rich, while Shanghai has mobilised massive funds for modernisation of its infrastructure. Other cities, by contrast, appear short of money and reliant upon capital flows, which are not necessarily attracted into social infrastructure. This lack of money is true only in a narrow sense. In all these countries the tax base is concentrated in the capital cities. In relative terms the problem is not the availability of funds but their distribution and allocation, as testified by booms in real estate and shopping malls. The challenge is one of mobilising funds from the local tax base for investment in large-scale projects. Although it is a somewhat trite observation: governance matters. Shanghai has risen to the challenge, as did Tokyo and Seoul at a time when Japan and the Republic of Korea were not yet prosperous countries. Other cities are hampered by weak urban governance and lack of concern—even indifference—from national governments. Endemic and worsening congestion, pollution, power failures, and flooding are the consequence.

There is a well-grounded concern that the reallocation of scarce investment funds to very expensive urban infrastructure will further starve rural and up-country districts of muchneeded investment. This is the old argument of ‘urban bias'. In this context it is an unhelpful perspective because it suggests a false trade-off. A proper calculus of national investment priorities would suggest that more funds need to be spent on both urban and rural infrastructure. The modest amounts needed for most individual rural projects can potentially be funded from higher domestic taxation. The many billions of dollars required for urban infrastructure is a much greater challenge. While higher taxation of the urban rich and middle class offers part of the solution—those who will be the greatest beneficiaries of these investments can reasonably be expected to pay for them—large urban infrastructure projects also justify borrowing against the income stream of future generations, who will also be the beneficiaries. Here there are technical financial problems to be resolved, especially with regard to private investment. So far more success has been had in attracting private equity into power stations and water supply than into public transport, drainage, and sewerage projects.

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