Constraints

At a Glance
  • SEZs face many of the same constraints present in the wider economy, where the size and capability of the local economy determine what types of investments are realistic.
  • There are also constraints specific to SEZs, of which overconfidence from policymakers and implementation partners is perhaps most common.
  • Governments must recognize that replicating the success stories of the Dominican Republic, Mauritius, and South Korean SEZ programs – leading to industrialization and job creation – may not be possible on the same scale and scope given the changing macroeconomic, technological, and regulatory environment in the global economy.
  • Clear and streamlined procedures within the SEZ will go a long way to reduce the administrative burden for investors if the SEZ can also streamline approvals that originate outside the zone. 

SEZs, despite their ‘special’ nature, face many of the same constraints present in the wider economy. The size and capability of the local economy will determine the type of realistic investments. The overall business climate may supersede any investment benefits available in the zones. Weak investment climates tend to force the use of ever-greater incentives to offset competitiveness gaps and investor risks. This is an expensive strategy and may not be sustainable in the long run. Extractive industry value chains are also prone to changes in commodity pricing which can result in sudden changes in investment levels. 

There are also constraints specific to SEZs. One of the largest is overconfidence from policymakers and implementation partners. There is often an unrealistic expectation that an SEZ project will turn into an immediate success which results in too much land being developed too quickly – immediately placing pressure on the SEZ’s financial viability. Replicating the success stories of the Dominican Republic, Mauritius, and the South Korea SEZ programs – leading to industrialization and job creation – may not be possible on the same scale and scope given the changing macroeconomic, technological, and regulatory environment in the global economy.[1] Overconfidence also often extends to the type of investments the SEZ can attract, leading to an overestimation on job creation, technology used, and linkages. Political and economic pressures also often mean that additional – often unsuitable– goals are attached to the SEZ program. A common goal is regional development to decrease spatial disparities, but the factors that explain the lag in regional growth (e.g. low productivity, poor access to markets) are also likely to negatively affect the SEZ program.

Land is often the main government contribution to an SEZ project and therefore what government owns or can access influences the location of the SEZ. This approach can lead to inappropriately-sized projects or/and poor location choices.

SEZs are meant to overcome administrative burdens faced in the wider economy, but the same lack of capacity or coordination among government entities that affect the general economy of a country can also become a constraint for the SEZ. Clear and streamlined procedures within the SEZ will go a long way to reduce the administrative burden for investors if the SEZ can also streamline approvals that originate outside the SEZ. For example, to overcome the problem of delays in approving SEZ licenses, Senegal adopted a law so that if the applicant receives no response within 30 days, authorization is granted by default.

 

View footnotes

[1] Thomas Farole and Gokhan Akinci. Special economic zones: progress, emerging challenges, and future directions (Washington, DC: World Bank, 2011)

Key Resources

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