Maximizing trade, investment and development opportunities of emerging markets through free trade & special economic zones
[AS PREPARED FOR DELIVERY]
Mr. Keable, Group Managing Partner & Founder, KW Group,
Your Excellency, Mr. Juma Al Kait,
Assistant Undersecretary for Foreign Trade Affairs,
Ladies and Gentlemen,
It is a great pleasure for me to attend this 3rd Global Free Trade & Special Economic Zones Summit, and to share with you some of UNCTAD's thinking on how to maximize the trade, investment and development opportunities of special economic zones (SEZs).
Even since the first SEZs were established roughly fifty years ago, they have become an increasingly prominent feature of the world economy. According to the International Labour Organization (ILO), since the mid-1980s, the number of new zones has increased rapidly, particularly in developing countries. If in 1986 there were only 176 such zones recorded in 46 countries, today more than 3,000 SEZs are known to exist in some 135 countries. It is estimated that, collectively, they account for over $500 billion in global trade, and employ more than 70 million people.
Their popularity is not surprising. Among this audience, there is no need for me to restate the significant potential benefits that SEZs can bring in terms of: increasing foreign direct investment (FDI), generating employment opportunities, enhancing foreign exchange earnings, developing export-oriented industries, and boosting export growth, as well as expanding government revenue and economic growth. As we all know, SEZs can also support the emergence of industrial clusters, which are particularly beneficial in fostering technology transfer and innovation.
And the potential role of SEZs has been further enhanced by the spread of global value chains. In today's highly segmented value chains, success in world markets often depends as much on the capacity to import high-quality inputs, as on the capacity to export. Thus, efficient SEZs can facilitate the participation of developing countries in such global value chains, giving access to new markets.
It is to promote these significant benefits that now more than 130 countries have chosen to establish SEZs, providing special economic and regulatory concessions for companies operating inside them. The incentives offered by SEZs include tax exemptions, removal of import and export duties, absence of foreign exchange controls, facilitated licensing and other regulatory processes, enhanced infrastructure, and sometimes less stringent labour legislation.
However, while SEZs clearly hold great potential, in practice, the record has been more mixed. Of course, there have been successes. In particular, SEZs have been credited with underpinning the dramatic export-oriented growth of China and other East Asian countries. In the 1970s, China set up its first zones to promote and attract FDI and technology transfer. SEZs helped China develop industries to upgrade exports, and this later had a trickle-down effect on other domestic industries. Indeed, the "miracle of Shenzhen", in which a fishing village was transformed into a city of over 14 million inhabitants within 30 years of the establishment of a free zone, with GDP growing a hundredfold, is on everyone's mind.
However, the successes of some East Asian and Latin American countries in attracting and benefitting from FDI into their zones have been difficult to replicate everywhere, particularly in Africa. Indeed, many zones have failed, or have simply contributed to a relocation of existing business activities to facilities inside the zone, at the cost of public indebtedness (because building the zones and offering incentives is not cheap). The overall record of the impact of export processing zones on attraction of FDI is quite mixed: whereas in China, export processing zones or similar preferential zones account for some 80 per cent of total FDI inflows, in many other countries zones have played only a marginal role in FDI attraction and most investment is of domestic origin. In Bangladesh, for example, only 15 per cent of registered FDI was located in SEZs in 2011. And in Cambodia, its more than 20 SEZs only accounted for 3 per cent of approved FDI.
The record on employment creation is similarly mixed. Some countries have achieved significant gains. For example, in the Philippines, employment in economic zones increased from about 92,000 in 1994 to more than 600,000 in 2008. Many others, however, have been less successful. Indeed, less than a dozen countries account for the majority of zone employment and exports generated.
Why then have SEZs not lived up to expectations in the majority of countries? There are many reasons. However, some of the key reasons are as follows: First is the fact that the decision to establish an SEZ in a certain location is often driven more by political objectives (such as regional development) rather than actual locational advantages. In those cases, transnational corporations may not find these SEZs attractive for their investment. Second is the closely related point that the firms participating in SEZs are often chosen by governments in order to benefit from the zone's special advantages, yet they are not always the most competitive. A third problem relates to the lack of linkages with the rest of the economy. For example, participation in SEZs is often limited to foreign-owned firms only. Thus, the scope for spillovers of FDI would be limited. And these are only some of the reasons.
So, it is clear that policies matter. The effective design, implementation and management of SEZs, and the fostering of an enabling environment, are critical for their success. This is particularly so in the current post-crisis era, where trade growth is subdued by sluggish demand in the advanced economies.
Allow me therefore to address some of the key issues involved in ensuring that SEZs become a tool for trade, investment and development.
Firstly, we have seen that SEZs are more likely to be successful if they focus on industries where the country already has a competitive advantage. In the case of Bangladesh, its SEZ was initially designed to attract high-technology industries, but it only took off properly when the focus changed to industries leveraging its advantage in low-cost labour. The task is then to build on this initial success to create linkages and encourage upgrading to higher-value-added activities.
Secondly, policies to attract investments to zones should not be limited to providing investment and trade concessions, and exemptions to existing legislation, but should also include strategies to support skills, innovation and competitiveness. As the World Bank has rightly pointed out: "Zone programmes that fail to offer opportunities for quality employment and upward mobility for trained staff, that derive their competitive advantage from exploiting low-wage workers, and that neglect to ensure environmental sustainability, are unlikely to be successful in achieving the possible dynamic benefits, and are likely to be forced into a 'race to the bottom'."
In this context, we also have to address the concerns that have been raised over lax labour legislation in SEZs, leading to poor labour relations and working conditions and circumvention of workers' rights. ILO warns that too many of the SEZs continue to be hampered by a reputation for low wages, for poor working conditions and for underdeveloped labour relations systems. Rather than being a source of competitive advantage, such practices are increasingly becoming self-defeating. Most transnational corporations today have corporate social responsibility standards, and are keen to avoid reputational risk from association with weak labour standards along their supply chains. They are therefore viewing such practices with suspicion.
Thirdly, and most importantly, there is the issue of linkages. Ultimately, an SEZ will only bring wider developmental benefits if the technology, skills and employment opportunities attracted in the SEZ also spill over into the domestic economy, through skills and technology transfer, or through the creation of supplier industries. Here, we have learned that spillovers have been above average when the SEZ is not considered as an enclave or a special project but rather as an integral part of the nation's development policy. In such cases, domestic economic policy has encouraged linkages, including domestic investment, in the zone, and has promoted skills development, training and knowledge-sharing. Thus, SEZs can be a successful tool for spillovers and structural change if they are led and promoted by a developmental State, in cooperation with the private sector.
Finally, in order to integrate effectively into global value chains, SEZs require state-of-the-art trade logistics systems. As more and more intermediate inputs pass through multiple countries in the production process, efficient trade facilitation has grown in importance, both for imports and for exports. The issue of trade facilitation has been on UNCTAD's agenda for over four decades. Indeed, our largest technical assistance programme, the Automated System for Customs Data (ASYCUDA), is dedicated to the reform and modernization of border crossing formalities. ASYCUDA is now successfully running in more than 90 countries. For example, UNCTAD has been a central partner, and the ASYCUDA programme a crucial factor, in the development of the Aqaba Special Economic Zone created in Jordan in 2001. In this context, we stand ready to assist other countries in the implementation of their trade facilitation needs.
Ladies and Gentlemen,
These are just some of the key factors for making SEZs a success. I am sure that your deliberations will allow us to gain further insights into the policy frameworks necessary to make SEZs a tool to increase trade and investment, and to achieve inclusive development.
Thank you very much.