Opportunities and Impact

At a Glance
  • Common policy objectives informing the establishment of SEZs include: attracting foreign direct investment(FDI); creating employment; supporting a wider economic reform strategy; and developing experimental laboratories for the application of new policies and approaches.

SEZs are normally established with the aim of achieving one or more of the following four policy objectives:[1]

  1. To attract foreign direct investment (FDI): Virtually all SEZ programs aim to attract FDI. Attracting FDI can have several advantages. There is knowledge transfer to local firms (mainly suppliers) and employees (training and learning on the job). The knowledge effect can have a substantial impact on the local economy through higher productivity and greater competitiveness (but this depends on the economy’s capacity to absorb knowledge transfers). Attracting investment into a specific area also allows for agglomeration benefits and allows potential clusters to develop. Recent studies in Cambodia, Ethiopia, Tunisia, and Vietnam found strong evidence for productivity spillovers associated with agglomeration.[2]
  2. To create employment: Although job creation is often seen as a tool to reduce poverty and inequality, it does have wider effects (e.g. health and education outcomes). SEZ programs in Tunisia and the Dominican Republic are frequently cited as examples of programs that have not catalyzed dramatic structural economic change but have nevertheless continued to create jobs.
  3. In support of a wider economic reform strategy: SEZs can support a country to develop and diversify exports. Zones can reduce anti-export bias while keeping protective barriers intact. The SEZs in China, South Korea, Mauritius, and Taiwan, follow this pattern. This can be particularly important for countries that depend on oil or mineral exports and aim to leverage their competitive advantage to move into upstream or downstream industries as well as diversification of exports. Diversification makes the economy more resilient to shocks and gives it greater growth potential. Mauritius used their SEZ regime over several decades as a bulwark for reform, introducing labor reforms and gradually shifting the economy’s focus from import substitution to export promotion.

As experimental laboratories for the application of new policies and approaches: Testing policies means that ineffective policies can be avoided or adapted, and successful policies within the SEZ build a strong case for wider reforms. China’s large-scale SEZs are classic examples. FDI, legal, land, labor, and even pricing policies were introduced and tested first within the SEZs before being extended to the rest of the economy.

View footnotes

[1] Gokhan Akinci and James Crittle, Special economic zones: performance, lessons learned, and implication for zone development, (Washington, DC: World Bank, 2008) 

[2]  See: United Nations University UNU- WIDER, Brookings Institute, and the African Development Bank. “Learning to Compete-accelerating industrial development in Africa”, https://www.wider.unu.edu/project/learning-compete-l2c-accelerating-industrial-development-africa

Key Resources

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