Special Economic Zones – Their role in driving economic development

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Special Economic Zones – Their role in driving economic development

Special Economic Zones (SEZs) have become a major feature of many national economic plans. In 1986, the International Labour Organisation (ILO) reported 176 such zones in 47 countries. Today, nearly 4,000 such zones exist in > 130 countries. According to International Development Ireland (IDI) a leading SEZ developer and operator, SEZs in one form or another today account for approximately 40% of global export earnings ($851 billion p.a.) and sixty-eight million direct jobs.
It may be argued that SEZs represent a compromise and that economy-wide liberalisation of trade and investment policies would be better. Where socio-political and other realities prevent that though, SEZs can be an effective way of enhancing economic growth and diversity and especially encouraging exports and foreign direct investment (FDI) while allowing policies in the broader host economy to evolve more slowly. SEZs have even been used as test-cases, for instance in China, to trial new approaches to business and investment policy in a controlled environment, before rolling them out to the broader host economy. These have included approaches to allowing access to foreign workers, attracting FDI and to tax.

The ‘typical’ SEZ is a formally delineated zone where a set of investment, trade and operating conditions exist that are more investor-friendly (especially to foreign direct investment) than elsewhere in the host economy. SEZs are frequently isolated from their host economies, to prevent leakage of goods and services into those economies without payment of taxes and other levies due. Some Middle Eastern countries have used SEZs as the core drivers of their economic policies. In Dubai, for instance, the Jafza free zone (located between the Jebel Ali container port and the Al Maktoum International Airport) accounts for roughly 21% of the Emirate’s GDP. The model of container port + airport + SEZ has been emulated in many other parts of the world but few (if any) have so far achieved the remarkable success that has Jafza.

The time to buy is when there’s blood in the streets, even when it’s your own.

Baron Nathan Rothschild (1777-1836)
As value chains have globalised and become more digital, other models of SEZ have emerged. In Mauritius and the Mexican maquiladoras, for instance, SEZ status is not necessarily applied to a specific geographic area. Specific companies or individual buildings can be designated as such. SEZs have become useful tools for attracting highly mobile knowledge-based businesses. In the Cayman Islands, the successful knowledge SEZs of the Middle East (e.g. Dubai Media City, Internet City, Multi Commodities Centre, Silicon Oasis and DuBioTech) are being emulated with Cayman Enterprise City. This project promises owners of knowledge-intensive businesses tax-free island living with easy access to North and Latin America, the ability to easily hire talent out of global markets, quick business license and immigration approvals and a light regulatory touch.

As the 4th Industrial Revolution gathers pace, we expect such SEZs to become an increasingly attractive value proposition to businesses that can operate anywhere that has good internet connectivity, transport links and lifestyle options that its talent finds attractive. For host economies, economic benefits that successful SEZs induce far outweigh costs. Besides better employment prospects with businesses within the SEZs, demand for more retail, service, tourism / recreation and other businesses in the surrounding areas and also for real estate, creates opportunities for local entrepreneurs, including to employ more local people. Cambridge Strategy Group and its business partners have advised Governments and other SEZ owners and operators in the Caribbean, Africa, emerging Europe and the Middle East. Our approach is heavily outcomes-based. We do not simply deliver consulting reports but work closely with the leaders of the SEZs and the agencies responsible for them, developing actionable plans and supporting these closely as they are implemented and results delivered.