IN the imagination of most Pakistanis, CPEC is a long-term energy and transport infrastructure development programme. In fact, that is just the enabling mechanism. The substantial economic component of CPEC is the special economic zones (SEZs) that are to be established.
In India, 192 SEZs big and small contribute to 25 per cent of the country’s exports. The Chinese city of Shenzhen is about the size of Lahore. Exports from its six SEZs equal one and a half times India’s. This city was the site of the Chinese experiment with limited capitalism in 1979, which was then rolled out across the entire economy. The staggering success opened the floodgates and SEZs started cropping up in every country; from Korea and Taiwan that were looking to rapidly develop export industries to others such as the Dominican Republic that were looking for ways to shift their economy dramatically away from reliance on agriculture.
Similar stories of industrialisation and job creation were seen in places as widespread as Mauritius, Honduras, El Salvador, and Madagascar, and lately in Bangladesh and Vietnam. Today, there are over 4,300 SEZs in operation globally, up from 500 two decades ago. Not all of them are successful. In fact, scattered around the world are more failures than success stories.
SEZs can be drivers of economic growth.
Citing this record of mixed success, some economists have argued against SEZs. They believe that risks outweigh the returns, and so it is better to concentrate on domestic reforms that create fewer distortions.
Nevertheless, SEZs can be drivers of economic growth, investment and capital formation, and of export competiveness and employment if thought out and executed well. But, sadly, from what I have seen there does not (at present) appear to be a strategy, and the little thinking there is, is elemental, disjointed and oftentimes incoherent.
All the clichés and platitudes we keep hearing about, skilled labour and local raw materials, proximity to Gulf markets and a ‘world-class’ legal framework, were also touted when a number of export-processing zones were established some decades ago. The government ought to first commission an impact assessment study to determine whether these zones were a success. To those findings we need to add the learnings from around the world and how we can apply those lessons to our upcoming nine SEZs. For our economic managers, a few major ones are worth noting:
It turns out the best-performing SEZs in the world are the ones that developed better linkages with the local economy. They were not stand-alone free ports inside tightly guarded enclaves, but an integral part of the region’s industrialisation. Apart from linking value chains, this mode also encourages technology transfer and skills development in the local industrial clusters that may be situated in areas around the zone. This builds the comparative advantage of both as they reinforce each other.
Second, SEZs need independent governing authorities and enabling legal frameworks. One reason for zones’ failures was a lack of a clear and transparent legal and regulatory framework. Another was that the institutional authority responsible for developing, promoting and regulating the programme lacked resources and capacity to carry out its mandate.
Third, low labour costs, trade preferences and tax incentives are necessary conditions but are not sufficient. These are points of parity with other comparable locations. Each zone needs to develop its own unique value proposition in a way that is a line extension of ‘Brand Pakistan’ and target it to a specific segment of investors. It must then hit that sweet spot with a compelling marketing and sales campaign.
Fourth, for economic zones to be a success in the long term, they should contribute to structural transformation of the economy, including diversification and economic upgrading. This includes investment by domestic firms into the zones, forward and backward linkages, business support, and the seamless movement of skilled labour and entrepreneurs between the zones and the domestic economy. There should be no confusion that a clear link to an economy’s development strategy increases the likelihood that SEZs will have widespread nationwide impact.
So where are we to go with these prescriptions? It may not sound urgent, but it is certainly a priority that the government now announce a policy for SEZs together with incentives and criteria. In parallel, a cost-benefit analysis of that policy must be undertaken, preferably by independent experts. Following that, the government would need to constitute autonomous regulatory authorities for these SEZs and appoint their developers under a transparent selection mechanism. Land acquisition, where it has not been done, can itself take years. Work on all these items must start early if the benefits of CPEC are to reach the four million Pakistanis that are entering the job market each year.
The writer is author of Putting Pakistan Right: Standpoints on the War on Terror, Energy, Transit Corridors & Economic Development.
Published in Dawn, April 30th, 2017