The SEZ shift

The SEZ shift

Special economic zones can be a boon for a country, but only if they are part of a broader strategy of reform across the entire economy.

Amid the protracted global economic malaise, many countries have seen their exports sink in a weak international trade and investment environment. One of the few bright spots has been border trade, thanks to strengthened regional economic integration.

In part to stimulate cross-border trade, special economic zones (SEZs) by the dozens have sprung up across Southeast Asia, backed by tax incentives and investor-friendly regulations.

In greater Asia, India and China are in the advanced stages of SEZ development, with SEZs generating 46% of foreign direct investment (FDI) flows into the mainland. Globally, there are 4,500 SEZs in 140 countries, creating employment for 66 million people.

According to the Asian Development Bank (ADB), SEZs are legal, logistical and tax arrangements intended to help developing country attract export-oriented manufacturing investments. However, their impact is seen within a limited geographical area and they do not directly address the broader economic problems that a country may have.

SEZs are designed to reduce the costs associated with shortcomings commonly found in developing countries, such as poor infrastructure, security of investment, costly regulations and trade restrictions, said Jayant Menon, lead economist for trade and regional cooperation and director-general of the Economic Research and Regional Cooperation Department at the ADB.

Their short-term benefits include job creation at higher wages than unskilled workers can obtain in alternative employment such as farming. In the longer run, the success of an SEZ is usually judged by the ability of the enterprises operating there to establish effective links with the rest of the economy to improve its overall competitiveness, through supplier relations, transfers of technology and knowledge, and spurring policy reform.

"But these backward and forward linkages and other spillovers can take a considerable amount of time to happen," he told Asia Focus.

An ADB paper co-written last year by Mr Menon noted that SEZs could take up to 10 years to produce the large-scale employment benefits hoped for, even in the most successful ones in China and Malaysia.

"SEZs are most likely to produce benefits to the host country when they are part of the broad strategy of economic liberalisation extending to the entire economy," the paper said.

Investors normally look at many factors before deciding whether to commit to an SEZ, said Aat Pisanvanich, director of the Centre for International Trade Studies at the University of the Thai Chamber of Commerce (UTCC).

"Based on a 2013 study in Vietnam, the deciding factors for foreign investors are market size, per capita income, and infrastructure," Dr Aat told a recent forum held by the Commerce Ministry in Bangkok.

Vietnam, which is home to around 20 SEZs, ranks first in Asean in terms of worker efficiency, based on a Chinese study that also cited availability of funds, labour, ease of doing business, and infrastructure as other influencing factors, he added.

Singapore, Malaysia and Thailand, meanwhile, lead other Asean countries in terms of per capita income and infrastructure.

According to the United Nations Industrial Development Organization (Unido), Dr Aat continued, the top five out of 20 deciding factors for investors are political stability, the business environment, market access, infrastructure and access to skilled labour.

The first modern SEZ was established in Shannon, Ireland, in 1959, featuring an industrial zone created expressly for customs duty-free export-oriented manufacturing with regular industrial park facilities. The model was quickly adopted in developing countries such as Puerto Rico and Spain in the early 1960s.

In Asia, the pioneering Kandla SEZ in Gujarat state of India was followed by four SEZs in China including those in Shenzhen in Guangdong province, Xiamen in Fujian. In Asean, Iskandar in Malaysia's Johor state was first mooted in 2006 with support from the Singaporean government next door. Cambodia established its first SEZ in late 2005 and subsequent zones have attracted significant foreign investment and created 68,000 jobs, according to the ADB.

"A lesson from the Cambodian experience is that the government has left the establishment and management of the SEZs to private-sector developers, avoiding the large and sometimes wasteful public sector set-up costs associated with SEZ establishment in many other countries," said Mr Menon.

The need for good infrastructure suggests that proximity to a city is generally important, while SEZs set up in less developed, rural areas have mostly tended to fail, he noted.

"Some border SEZs have succeeded not because of good access to infrastructure but availability of lower-cost inputs across the border, such as labour and electricity," he said. "When governments set up an SEZ in the hope that it will help a rural region develop, rather than developing a rural region before setting up an SEZ, it usually leads to failure. In some cases, the rights to establish an SEZ are abused and used purely for land speculation."

Myanmar, meanwhile, has  three SEZs under development -- Dawei on the southeastern coast along the Andaman Sea, Thilawa near Yangon and Kyaukpyu in Rakhine state on the western coast.

SLOW START

In Thailand, the National Council for Peace and Order (NCPO) announced plans for new SEZs in 10 border provinces in two phases of five each. The 10 provinces generate 90% of Thailand's border trade.

"It is a win-win policy initiated by [Prime Minister Prayut Chan-o-cha] for Thailand to expand economic growth together with neighbouring countries," said Duangporn Rodphaya, director-general of the Foreign Trade Department.

With demand squeezed in the markets such as the US, Europe and Africa, Thailand's trade with neighbouring countries has continued to grow continuously. Border trade was worth 1 trillion baht last year and is expected to reach 1.5 trillion baht this year.

The first SEZs will be developed in Tak province (bordering Myanmar), Sa Kaeo and Trat provinces (bordering Cambodia), Mukdahan (bordering Laos) and Songkhla (bordering Malaysia). The second-phase targets Chiang Rai (bordering Myanmar and Laos), Nong Khai and Nakhon Phanom (bordering Laos), and Narathiwat (bordering Malaysia).

Each SEZ location has unique features. For instance, Tak and Mukdahan are on the East-West Economic Corridor and could be connected to Far East markets such as Japan, Korea and Taiwan. The Sa Kaeo SEZ is on the Greater Mekong Subregion (GMS) Southern Economic Corridor while the Aranyaprathet border checkpoint in Sa Kaeo generates the highest Thailand-Cambodia border trade.

Songkhla, meanwhile, is the centre of Thailand's southern region and part of an economic cooperation zone that includes Indonesia and Malaysia. The Chiang Rai SEZ is on the North-South Economic Corridor that can connect to Yunnan in southern China by land and the Mekong River, while the SEZ in Nakhon Phanom offers good overland access to a seaport in Vietnam and onward to the Far East.

Kanchanaburi in the west is located on the link between Thailand's Eastern Seaboard and Dawei, with great potential for shipments via the Indian Ocean to the Middle East and Europe, and for shipments through Laem Chabang to Pacific countries at the eastern end.

Initial investments required for infrastructure and customs checkpoints including transport infrastructure, industrial estates and public utilities are estimated at around 10.4 billion baht during 2015 and 2016. A new Office of Special Economic Zones will oversee the programme.

The Board of Investment (BoI) has announced 23 business groups and a total of 72 sub-groups that will receive support for investing in SEZs including agriculture and fisheries, ceramic products; textiles, clothing and leather goods; household furniture; jewellery and accessories, medical equipment; motor vehicles, machinery and parts; electrical appliances; chemicals and plastics, medicine manufacture; and logistics.

UTCC's Dr Aat said that for the Thai SEZs to attract investors, they need to stress their advantageous location, while offering well developed infrastructure and innovation.

"If Thailand competes with Suvannakhet SEZ (in Laos), we are going to die because we cannot compete in terms of wages and availability of labour," he told Asia Focus.

"We have to do something unique and complement [zones already operating in neighbouring countries], for instance, a logistics SEZ. For sectors such as agricultural processing, textiles and electrical appliances, which are already operated in SEZs in neighbouring countries, we should find some complementary activities but not directly compete with them.

"We have to differentiate ourselves from them but based on the current strategies, [the Thai SEZs] look quite similar to what the others are doing."

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