The idea of special economic zones
Friday, 13 July 2007
Syed Ishtiaque Reza
LAST week a group of World Bank high officials were in Dhaka to address top government officials, business leaders and media about the usefulness of the Special Economic Zones (SEZs). Amidst the general discussion on foreign direct investment (FDI) in Bangladesh and the concern about its smaller size, there are many discussions about setting up of SEZs.
During the immediate past regime it was heard that SEZ will be developed in the country with a US 200 million dollar foreign grant to create opportunities exclusively for the local investors to share the boom-time bonanza in export trade worldwide.
The special zones are being created as prospective investors could not be accommodated in the existing Export Processing Zones around the frontline Dhaka-Chittagong economic corridor.
Businessmen of different sectors -- BTMA, BGMEA, BKMEA and pharmaceutical industry in particular -- have long been pushing the government to allocate lands with utility services so that they can set up their production facilities in a specified area like EPZs.
The query that comes in mind is what is the special benefits of the SEZ?
Started as a bold experiment nearly 30 years ago in the high noon of the licence regime and fiscal controls, the EPZs (export promotion zones) in Bangladesh are poor cousins of their counterparts in some Asian countries. It is believed that the SEZs in the far-east countries and China rocketed their growth.
EPZs has been in the country as the most fashionable and successful vehicle for export-oriented growth. No more than the woolly-headed aims of value addition, employment generation and all such considerations. The sole purpose of the EPZs is to export goods and services and earn foreign exchange.
The EPZ Act provides tax exemptions, and many other special benefits which are not available outside the zones. It lays emphasis on providing good infrastructure at low cost for industrial units and basic inputs needed to achieve that end at lower duties. The Act is also mindful of the need for uninterrupted and cheap power, water and gas.
EPZs are supposed to develop backward and forward linkages. Presumably, that means ripple effects on job work and technology transfer to non-EPZ areas, the hinterland. But one of the prominently highlighted attractions is the complete freedom to subcontract, even abroad.
Now the question is what kind of special economic zones are required? And unlike the EPZs of the caution and control era, special economic zones today can engage in manufacturing, trading or service activities. Foreign investors will be permitted to develop townships within the zones with residential areas, markets, play-grounds, clubs, recreation spaces and the like.
But in a country bogged down by various forms of backwardness that are basically hostile to market-driven growth, the best bet is to create small areas of free enterprise for exports using cheap local labour, with a liberal tax regime and allowing unfettered entry and exit of capital to attract multinationals.
With two successive quarters posting six per cent growth in GDP, and a strong export growth what magic can the special economic zones pull off that the rest of the economy, without those special order privileges, cannot?
Employment, as a measure of expansion, grew in the private sector despite a sluggish trend in the government jobs. The average annual growth rate in employment, however, shrank continuously. Productive efficiency is a better indicator of export growth than simple employment size.
Foreign exchange earnings are the most important benefits to be expected from the EPZs. In absolute terms, the export earnings look very impressive. It is when you look at the rate of growth that the picture gets bleaker with the figure actually declining.
While a new Act will confer a more liberal dispensation on the Special Economic Zones than what the old EPZs have enjoyed, the overall advantages of preferential treatment may be illusory. More pertinently, after decades of preferential treatment and economic reform, the record of the EPZs stands in contrast to the performance of the general economy.
For one, the rest of the country has always done better than EPZs without the privileges that the zones enjoyed. For another, economic reforms are turning fiscal incentives more universal in their application. Special economic zones, therefore, may not enjoy those advantages for too long.
In any case, preferential taxes may be actionable under the World Trading Organisation rules. The WTO rules permit broader tax adjustments, some duty drawbacks and exemptions but the management of these may prove difficult; lapses in bookkeeping, for instance, may attract countervailing duties under the WTO rules. A system of tax incentives contingent on export performance may prove to be unsustainable in fact and law.
LAST week a group of World Bank high officials were in Dhaka to address top government officials, business leaders and media about the usefulness of the Special Economic Zones (SEZs). Amidst the general discussion on foreign direct investment (FDI) in Bangladesh and the concern about its smaller size, there are many discussions about setting up of SEZs.
During the immediate past regime it was heard that SEZ will be developed in the country with a US 200 million dollar foreign grant to create opportunities exclusively for the local investors to share the boom-time bonanza in export trade worldwide.
The special zones are being created as prospective investors could not be accommodated in the existing Export Processing Zones around the frontline Dhaka-Chittagong economic corridor.
Businessmen of different sectors -- BTMA, BGMEA, BKMEA and pharmaceutical industry in particular -- have long been pushing the government to allocate lands with utility services so that they can set up their production facilities in a specified area like EPZs.
The query that comes in mind is what is the special benefits of the SEZ?
Started as a bold experiment nearly 30 years ago in the high noon of the licence regime and fiscal controls, the EPZs (export promotion zones) in Bangladesh are poor cousins of their counterparts in some Asian countries. It is believed that the SEZs in the far-east countries and China rocketed their growth.
EPZs has been in the country as the most fashionable and successful vehicle for export-oriented growth. No more than the woolly-headed aims of value addition, employment generation and all such considerations. The sole purpose of the EPZs is to export goods and services and earn foreign exchange.
The EPZ Act provides tax exemptions, and many other special benefits which are not available outside the zones. It lays emphasis on providing good infrastructure at low cost for industrial units and basic inputs needed to achieve that end at lower duties. The Act is also mindful of the need for uninterrupted and cheap power, water and gas.
EPZs are supposed to develop backward and forward linkages. Presumably, that means ripple effects on job work and technology transfer to non-EPZ areas, the hinterland. But one of the prominently highlighted attractions is the complete freedom to subcontract, even abroad.
Now the question is what kind of special economic zones are required? And unlike the EPZs of the caution and control era, special economic zones today can engage in manufacturing, trading or service activities. Foreign investors will be permitted to develop townships within the zones with residential areas, markets, play-grounds, clubs, recreation spaces and the like.
But in a country bogged down by various forms of backwardness that are basically hostile to market-driven growth, the best bet is to create small areas of free enterprise for exports using cheap local labour, with a liberal tax regime and allowing unfettered entry and exit of capital to attract multinationals.
With two successive quarters posting six per cent growth in GDP, and a strong export growth what magic can the special economic zones pull off that the rest of the economy, without those special order privileges, cannot?
Employment, as a measure of expansion, grew in the private sector despite a sluggish trend in the government jobs. The average annual growth rate in employment, however, shrank continuously. Productive efficiency is a better indicator of export growth than simple employment size.
Foreign exchange earnings are the most important benefits to be expected from the EPZs. In absolute terms, the export earnings look very impressive. It is when you look at the rate of growth that the picture gets bleaker with the figure actually declining.
While a new Act will confer a more liberal dispensation on the Special Economic Zones than what the old EPZs have enjoyed, the overall advantages of preferential treatment may be illusory. More pertinently, after decades of preferential treatment and economic reform, the record of the EPZs stands in contrast to the performance of the general economy.
For one, the rest of the country has always done better than EPZs without the privileges that the zones enjoyed. For another, economic reforms are turning fiscal incentives more universal in their application. Special economic zones, therefore, may not enjoy those advantages for too long.
In any case, preferential taxes may be actionable under the World Trading Organisation rules. The WTO rules permit broader tax adjustments, some duty drawbacks and exemptions but the management of these may prove difficult; lapses in bookkeeping, for instance, may attract countervailing duties under the WTO rules. A system of tax incentives contingent on export performance may prove to be unsustainable in fact and law.