Problems SEZs can Help Solve

At a Glance
  • SEZs can be an applicable policy tool when an economy is faced with specific problems like lack of access to land and suitable infrastructure, weak integration with international markets, low employment levels, low levels of investment, pent-up local demand, and a high administrative burden.
  • SEZs are more likely to be effective when many of these constraints are present in the economy.
  • Governments should take a disciplined approach by deploying SEZs for narrow and clearly defined purposes, because while they work well in overcoming multiple constraints, SEZs cannot contribute to all national economic objectives.
  • While clear objectives inform the strategic decisions and design of an SEZ, well-defined targets and metrics are needed for monitoring and evaluation once zones are underway.

SEZs can be an applicable policy tool when an economy is faced with a specific set of problems. These include a lack of access to land and suitable infrastructure, weak integration with international markets, low employment levels, low levels of investment, pent-up local demand, and a high administrative burden. However, SEZs are more likely to be the appropriate solution when many of these constraints are present in the economy.

The provision of land and factory shells played an important role in the success of the Bangladesh SEZ program as Bangladeshi land titling issues presented a major constraint to industrial development. But the SEZ also faced other obstacles, such as the provision of electricity and gas, and red tape. Power was a major problem and most companies relied on their own generators, which was addressed within the SEZ. The operating entity, Bangladesh Export Processing Zone Authority (BEPZA), was also able to improve the bureaucratic environment in terms of obtaining licenses and approvals. As a result, the SEZ employed over 200,000 people in 2009 and accounted for a substantial share of national exports and investment. However, it is important to note that while the SEZ infrastructure and support offerings were important, the most important factor for the success of the zones were wages, market size, and market access.[1]

While SEZs work well in overcoming multiple constraints, they cannot contribute to all national economic objectives. Therefore, a government should take a disciplined approach by deploying zones for narrow and clearly defined purposes. Well-defined targets and metrics will help in monitoring and evaluation once zones are underway, but clear objectives inform the strategic decisions and design of an SEZ. For example, the Royal Commission for Jubail and Yanbu (RCJY) cities in Saudi Arabia was established in 1975 to develop the Saudi manufacturing sector based on advantages in the petrochemical sector. The cities have been effective in part because the Royal Commission clearly defined the cities’ strategic focus and goals at an early stage: cities were developed specifically to leverage the Kingdom’s natural resources—especially oil and gas—into higher value petrochemical and related sectors that employ skilled Saudi labor.[2]

View footnotes

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

[2] Kurt Dassel and Kim Eckermann, Economic Security and Competitiveness: Using Special Economic Zones to Drive Job Creation in MENA, (Deloitte, 2012)

Key Resources