FE Today Logo

SEZs in Bangladesh's Development

A potential game changer

Professor Mustafizur Rahman | December 11, 2018 00:00:00

The model of Mirsarai Economic Zone

Whilst their origin goes back by many years, it is particularly over the past two decades that the special economic zones (SEZs) have come to attract heightened attention of both policymakers and development practitioners in developing countries. This owes largely to the positive narrative concerning the SEZs which is informed particularly by the Chinese experience of recent times. There are several factors which contributed to this: access to unencumbered land; infrastructure support; availability of one stop service facility; ease of doing business within the zone; employment generation; opportunities to develop horizontal and vertical production networks; availability of fiscal, financial and institutional incentives for domestic investors and FDI. Encouraged by favourable experience of China and some of the other early starters, many developing countries are at present pursuing proactive policies and undertaking energetic initiatives to set up SEZs; their numbers are growing at an exponential pace.

In the above context, the decision by the policymakers in Bangladesh to set up one hundred SEZs over the next decade should be viewed as a major step in terms of implementing the country's strategic trade and investment policies, with a view to taking the country forward in the twenty-first century.

As is well-known, a binding constraint that deter Bangladesh from attracting investment, both local and foreign, has been the lack of availability of adequate infrastructure. No doubt, the smart way to address this lacunae should be to attract investment to address this infrastructure deficit. SEZs are geared to addressing this in particular. From this vantage point, the decision to set up the SEZs, on a priority basis, ought to be appreciated as a timely step in the right direction.

As may be recalled, the Bangladesh Economic Zones Authority (BEZA) was established following the legislation of the Bangladesh Economic Zones Act in 2010. The governing Board spearheaded by the Hon'ble Prime Minister has already given permission to set up 82 SEZs. These include public (54); private (23); country-specific (4 - India, China and Japan); one SEZ has been allocated to BEPZA.

Four types of SEZs are envisaged in Bangladesh: (a) SEZs set up by the government (for leasing out to prospective investors); (b) SEZs set up on Public-Private Partnerships (PPPs) basis; (c) SEZs set up by private entrepreneurs (for investment as also for leasing out); (d) SEZs set up by foreign investors (e.g. Chinese and Indian SEZs which are to be developed by concerned countries for their investors). Excepting the first type, others are geared to attract overseas resources to develop the SEZ and build the infrastructure within the zone, thus freeing scarce domestic resources to address other pressing needs of the economy.

BEZA has given priority to setting up the Bangabandhu Sheikh Mujib industrial city (30 thousand acres in Mirsarai and Feni) and the Maheshkhali Economic Zone. Work is progressing well in the Srihatta Economic Zone (Maulavi Bazar where all land has been allocated), Mongla Economic Zone (Bagerhat) and the Indian, Chinese and Japanese SEZs (expected to go into production by 2021). According to the BEZA, the three public sector SEZs have, till now, received investment proposals worth more than 16 billion USD, predominantly from foreign investors. Land has been leased to a number of investors. Same is the case for private SEZs.

However, for the SEZs to generate the expected benefits, and for Bangladesh to gain from the expected dividends, the SEZ strategy will need to be smartly crafted and effectively executed. Attention ought to be given to addressing a number of attendant concerns.

NEW CHALLENGES: The need for designing a forward-looking SEZ strategy is especially important at the present juncture in view of Bangladesh undertaking the dual graduation journey - middle income graduation (the journey has started in 2015) and LDC graduation (the journey has started in March 2018 and will culminate with Bangladesh graduating out of the LDCs group in 2024). These twin journeys will be even more challenging also because Bangladesh is in the process of implementing the goals and targets of the 2030 Agenda (the sustainable development goals-SDGs).

Bangladesh's middle income graduation will entail that the cost of borrowings will go up significantly as Bangladesh transits from concessional, to blending, to non-concessional high cost borrowings. Bangladesh's LDC graduation will mean that the current preferential market access, international support mechanisms, flexible intellectual property rights and other special and differential treatment will not be available beyond 2024 (in some specific cases beyond 2027). Implementation of the SDGs will necessitate triangulation of the three pillars of sustainable development: economic growth, social inclusiveness and environmental sustainability. All these will no doubt pose formidable challenges for our country.

At the same time, Bangladesh's dual graduation and its commendable success in attaining the MDGs reflect our country's remarkable performance record in terms of socio-economic indicators and speak of the competitive strength of the economy. This is a good foundation to build on in order to carve out the journey that the country will need to undertake in future. However, the future, as is often said, is not what it used to be. Bangladesh's future journey is unlikely to be a mere extension of its past track record. There will be new and manifold challenges facing the country as it undertakes its twenty-first century journey - the required shift from factor-driven to productivity-driven economy, transition from traditional economy to new economy, shifts in the labour market favouring formal employment as against the now-predominant informal employment, reaping the potential benefits of demographic dividends by tackling the spectre of jobless growth and by creating more decent jobs, triangulation of the three pillars of the SDGs, ensuring equitable growth and moving towards a more just society.

Implementation of the SEZ strategy could contribute importantly in addressing some of the above challenges. The strategy needs to be appropriately aligned with Bangladesh's initiatives to address the challenges associated with the above-mentioned twin graduation journey. Indeed, Bangladesh's strategies in this regard should be integral to realising her aspirations to be a developed country as is articulated in the Vision 2041 document.

CRAFTING A SMART SEZ STRATEGY: The SEZ strategy will, thus, need to be appropriately crafted and implemented. This is particularly important because available evidence suggests that the global experience concerning SEZs has been at best a mixed one. Some countries and some SEZs have been successful; others have failed to live up to their initial expectations and enthusiasm. Bangladesh will need to pay need to the learnings and draw appropriate lessons in designing its SEZ strategy in order to be able to emulate the best case scenarios in this connection.

In pursuing her SEZ strategy, Bangladesh should take cognisance of the followings:

First, it is to be reckoned that SEZs entail significant investment on the part of the government - on account of land acquisition, incentives provided, taxes foregone, expenditure on account of infrastructure development and the services provided. The results generated downstream through resource creation, employment generation and earnings mobilisation ought to give decent returns on the significant investment.

Second, locational advantage should be given highest priority in setting up the SEZs. Availability and access to labour force, raw materials and good connectivity should be given due importance in this context. At the same time, zoning strategies should be pursued to align SEZs with Bangladesh's spatial development so that these could serve and service the needs of development with equity, fairness, demands of spatial dimension of development and developmental needs of the lagging regions of Bangladesh. Locational considerations should be well-integrated into Bangladesh's medium to long term development strategies e.g. economic corridors, both national, and multi-national such as the BCIM-Economic Corridor and Bangladesh's involvement in initiatives such as transport connectivity with India, BBIN-Motor Vehicle Agreement and the Belt and Road Initiative.

Third, enterprises in the SEZs can be competitive only if these have good connectivity with ports and markets. Thus, fast and efficient transport connectivity to ports and other international gateways such as airports and land ports, and digital outreach to overseas markets, must be of high quality if the enterprises in the SEZs are to be competitive and are able to operate with reduced lead time.

Fourth, evidence and experience from other countries point to the need for designing SEZs in such a manner that there is a transfer of knowledge, knowhow and technology from the SEZs to the domestic tariff area.

Fifth, SEZs must not be allowed to be used for land speculation. There should be appropriate laws, rules and regulations in place so that enterprises within the SEZs are set up in a time-bound manner.

Sixth, environmentally sustainable and eco-friendly development of the SEZs should be supported with legal measures and targeted incentives. Public-private partnerships could be a good way to ameliorate the negative externalities in this context. As a matter of fact, SEZs could turn out to be the test case for implementing SDGs-oriented industrialization and development praxis in Bangladesh.

Seventh, efficient running of SEZs will also critically hinge on institutional-regulatory support enjoyed by the investors. The national regulatory eco-system within which the SEZs are to operate is of high relevance in this context. Successful enforcement of legal-regulatory - dispute settlement systems will owe, to a large extent, to the overall good governance at the national level which should be geared to ensure effective and efficient functioning of the SEZs.

Eighth, SEZs should act as a role model for rest of the country by encouraging and incentivising environment-friendly production processes and decent labour practices, and by putting in place appropriate regulations favouring good working environment and enforcement of living wages and labour rights.

Finally, to run the SEZs in an efficient manner, and to generate and ensure the expected positive outcomes, Bangladesh must take targeted initiatives to develop the needed human resources, technical personnel, management specialists, and put in places appropriate institutions for human capacity building and skills upgradation. Good interface with academic institutions, professional bodies and business associations, particularly keeping in the purview the demands of the 'new economy' (as against the 'traditional economy'), will be important in this context.

CONCLUDING REMARKS: No doubt, the SEZs have opened up a new window of opportunity for Bangladesh to move forward in realising its aspirations. By contributing to export-orientation and import-substitution, by helping strengthened global integration of the Bangladesh economy and by catering to the growing needs of the domestic market, the SEZs could make an important contribution to Bangladesh's developmental journey in the twenty-first century. Success of SEZs will, however, hinge, to a large extent, on how smartly crafted the design of Bangladesh SEZ strategy is. If we can get it right, SEZs could indeed prove to be a game changer and could potentially play a crucial role in attaining our aspirations for an economically developed, socially inclusive and environmentally sustainable Bangladesh.

Professor Mustafizur Rahman is a Distinguished Fellow, Centre for Policy Dialogue (CPD), Dhaka. mustafiz@cpd.org.bd

Share if you like