Special Economic Zones

At a Glance
  • A popular policy instrument used by governments to attract investment, create jobs, and promote trade, a Special Economic Zones (SEZ) is a dedicated geographical area where the rules of business differ from those in the wider national territory.
  • Firms operating in SEZS are typically supported through infrastructure, lower taxes or other fiscal incentives, specialized customs regimes, and streamlined regulations.
  • SEZs have a mixed record of success: in East Asia they have often played an important part in changing economies and improving the lives of its citizens. In Africa, by contrast, SEZs have so far largely failed to deliver significant economic benefit for local populations.
  • Where SEZs are developed around the petroleum industry, they are generally used to leverage competitive advantages in upstream suppliers (backward linkages) or downstream beneficiation (forward linkages).
  • To make an informed decision about whether or not an SEZ is the appropriate policy instrument for a given economy, it is necessary to compare the potential of SEZs to the constraints and risks that many SEZs face.
  • While highly detailed and sophisticated planning should determine the implementation of an SEZ, the final design needs to offer investors a strong value proposition, and ensure long term sustainability.  

A Special Economic Zone (SEZ) is a dedicated geographical area where the rules of business are different from those in the national territory. SEZs are a popular policy instrument used by governments to attract investment, create jobs, promote trade, support a specific industry, or to test regulatory changes.

Firms operating in SEZS are supported through infrastructure (e.g. serviced land, buildings, and utilities), lower taxes or other fiscal incentives, a special customs regime (e.g. duty-free access to imports), or a streamlined regulatory regime (e.g. improved procedures to start a company, invest, or obtain licenses).

SEZs have a mixed record of success. In China, South Korea, and Singapore, SEZs played an important part in changing the economies and improving the lives of its citizens. However, there are many more cases where the infrastructure is unused, or worse, where SEZs has harmed the economy by creating poor incentives for investment firms to integrate into the local economy. Economic zones in Africa, for example, have by and large failed to deliver significant benefits to date.[1]

Most SEZs do not have a specific focus on promoting extractive industry local content, although in countries with sizeable oil and gas exploration and development activities an SEZ could be used as a tool to attract investment and develop economies of scale. When considerable capital investment and equipment import is required, local content efforts may focus on creating an environment that enables joint ventures, local partnering, local maintenance and repair, and hiring local labor (some of which may be suited to an SEZ environment). On the other hand, in countries with a mature to declining petroleum production, the quality of the resource generally drives investor decisions, and the applicable mining or oil and gas conventions or codes are the typical instruments to provide incentives. As part of these agreements, in places where infrastructure and government budgets are more limited, foreign investors may develop - and in some cases operate - infrastructure as part of their agreements. Furthermore, some countries with a high dependency on minerals or oil and gas tend to use SEZs as a tool to foster economic diversification into other areas that use similar skills or processes, such as manufacturing and logistics.

Where SEZs were developed around the petroleum industry, they were generally used to leverage competitive advantages in upstream suppliers (backward linkages) or downstream beneficiation (forward linkages).  For example, the free zone in Port Harcourt – located in the oil-rich Nigerian Delta – was designed to reduce upstream costs, and attract investment into the upstream supply sector, and now employs more than 20,000 workers.[2]

Policymakers need to carefully consider whether SEZ is the right policy instrument. To make an informed decision it is necessary to compare the potential of SEZs to the constraints and risks that many SEZs face. These strengths and weaknesses need to be applied to the local context. Next, policymakers must consider the various strategic choices available to SEZs, including the type of SEZ, the scope of SEZs, ownership models, and how the location is selected. Finally, detailed planning and design should determine the implementation of an SEZ. The final design of an SEZ needs to offer investors a strong value proposition, but also ensure long term sustainability.  

Leading Institutions:

  • The World Bank provides research and advisory services to governments and finances projects aimed at increasing local manufacturing and service capacity.
  • World Economic Processing Zones Association (WEPZA) is an association of leading experts and practitioners engaged in evaluating, developing, promoting, and improving SEZs globally.  Their site hosts a knowledge-sharing platform that provides resource materials regarding SEZs.
  • The Organization for Economic Cooperation and Development (OECD) assists governments in understanding markets and policy design.
  • The Columbia Centre for Sustainable Investment (CCSI) conducts and applies research focused on analyzing topical policy-oriented issues and works with stakeholders to construct and implement practical investment frameworks that promote sustainable development.
View footnotes

[1] See for example: Thomas Farole, Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience, (Washington, DC: World Bank, 2011)

[2] Farole, Special Economic Zones in Africa

Key Resources

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