Special Economic Zones

At a Glance 

  • A special economic zone (SEZ) is a dedicated geographical area where the rules of business differ from those in the wider national territory. Governments set up SEZs to attract investment, create jobs, and promote trade.
  • SEZs have a mixed record of success. In East Asia, they have played an important role in changing economies and improving lives. By contrast, SEZs in Africa have so far largely failed to deliver significant economic benefits for local populations.
  • To decide if an SEZ is appropriate for a given economy, its potential benefits should be weighed against the associated constraints and risks.

Key Resources

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Mining FDI and Urban Economies in Sub-Saharan Africa: Exploring the Possible Linkages

This article explores some recent research that considers connections between mineral and urban economic trajectories with reference to ...

Special Economic Zones: An Operational Review of Their Impacts

The purpose of this review is to inform and identify lessons from special economic zone (SEZ) policies across countries and across the World ...

Special Economic Zones: Performance, Lessons Learned, and Implication for Zone Development

This resource provides a useful introduction to the performance drivers of special economic zones (SEZs). The reader is presented with ...

Special Economic Zones: Progress, Emerging Challenges, and Future Directions

This resource explores the creation and use of special economic zones including the challenges that emerge and the solutions created. It ...

The Case for Special Economic Zones in Africa

This resource provides an overview of special economic zones (SEZs) operating in Africa and provides information on their incentive ...

Impact of Special Economic Zones

This resource offers an overview of the efficacy and overall economic impact of special economic zones (SEZs) through an analysis of ...

Topic Briefing

A special economic zone (SEZ) is a dedicated geographical area where the rules of business differ from those otherwise applied in the national territory. SEZs are popular policy instruments used by governments to attract investment, create jobs, facilitate trade, support a specific industry, or test regulatory changes.

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Firms operating in SEZs are supported through infrastructure (e.g., serviced land, buildings, and utilities), fiscal incentives (e.g., reduced taxes), 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. They have played an important role in boosting economic growth and improving lives in China, the Republic of Korea, and Singapore. However, in many more cases they have resulted in unused (or underused) infrastructure, or even economic harm stemming from misdirected incentives that failed to motivate beneficiary firms to integrate into the local economy. SEZs in Africa, for example, have largely failed to deliver significant benefits to date.[1]

Most SEZs do not focus specifically on supplying the extractive industry value chain. However, in countries with major oil and gas or mineral exploration and development activities, an SEZ can be a useful means to attract investment and to develop economies of scale. When considerable capital investment and equipment imports are required, efforts to foster local content tend to focus on creating an environment that enables joint ventures, local partnerships, local maintenance and repair, and local labor (some of which may be suited to an SEZ). On the other hand, in countries with mature or declining petroleum production, the quality of the resource generally drives investor decisions; typically, incentives are provided via the applicable mining or oil and gas conventions or codes. As part of these agreements, foreign investors may develop—and in some cases operate—infrastructure in places where infrastructure and government budgets are more limited. Furthermore, some countries that depend heavily on minerals or oil and gas tend to use SEZs to foster economic diversification into other areas that use similar skills or processes, such as manufacturing and logistics.

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

Policymakers need to carefully consider if an SEZ is the right policy instrument. To decide if an SEZ is appropriate for a given economy, policy makers would do well to weigh its potential benefits against the associated constraints and risks (which will be specific to the local context). Next, policymakers must consider the various strategic choices available, including the SEZ type, scope, ownership model, and how the location is selected. Finally, detailed planning and design should guide 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.

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[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