Special economic zones, a driving force for increased trade in Asia: ADB

Dec 14, 2015 (LBO) – Special economic zones (SEZs) can be a driving force for increased trade, investment, and economic reform in Asia as it experiences a slowdown in trade, provided the right business environments and policies are put in place, a new Asian Development Bank (ADB) report said.

“The expansion in the number of SEZs from about 500 in 1995 to over 4,300 in 2015 shows the strong and rising interest to this form of policy experiment, though the success record is somewhat mixed,” Shang-Jin Wei, chief economist said.

“If designed right, SEZs can become drivers for increased trade, foreign direct investment (FDI), and better economic policymaking and reforms. Moreover, as countries develop, areas with SEZs can be transformed from mere manufacturing sites to hubs for innovation and modern services.”

The report says that the number of SEZs in an economy is positively related to overall export performance in Asia.

“In developing Asia, countries with SEZs attract significantly more FDI, with the existence of SEZs corresponding to 82 percent greater FDI levels.”

However, the report says that there have also been failures, with a lack of strategic focus and regulatory and governance gaps undermining performance in some cases.

“SEZs that have done well have been able to diversify their production bases away from assembly of imported inputs, and increase sales of their own branded merchandise in domestic and global markets by building closer ties with the domestic economy.”

Putting in place fiscal incentives for initial investments and ensuring an adequate supply of labor, strategic locations, transport connectivity, and dependable judicial systems and institutions, such as independent governing authorities and enabling legal frameworks, are all key ingredients of successful zones, the report adds.

“For zones to become a major driver of development they must be made an integral part of a government’s national development strategy and industrial policy while also it requires the fostering of business enabling environments which encourage firms to move up the industrial value chain and to explore growing opportunities in logistics, information and communications technology, and other areas of high technology, knowledge and innovation.”

Data in the report shows that Asia’s income elasticity of trade declined from 2.69 before the global financial crisis to 1.30 afterwards and the value of Asia’s intermediate goods trade almost 60 percent of total trade contracted 2.6 percent in 2014.