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What are Special Economic Zones?

Over the last fifty years, China has turned itself from an economic backwater into a global industrial powerhouse.

What allowed China to become the factory of the world during that time?

Surprisingly, it was an idea that got its start near a rural airport in western Ireland in the late 1950s: Special Economic Zones (SEZs).

Since then, SEZs been adopted by China and dozens of other countries around the world as a way of encouraging economic development and attracting foreign investment.

The idea behind SEZs is simple: create an area within your country with special rules and regulations aimed at attracting companies and capital.

This could include:

• Reduction or elimination of corporate taxes

• Grants to encourage research & development

• Special rules to attract migrant workers

• Government-funded infrastructure for corporate projects or giving companies the opportunity to design & build their own infrastructure

The SEZ idea is closely related to another similar concept: Export Processing Zones (EPZs).

EPZs are essentially the same thing, but with a particular focus on labor-intensive industries like the garment trade in undeveloped countries.

The idea was introduced in the 1970s and 1980s around the world. By 2003, more than 43 million people were employed across EPZs in 116 different countries.

Populous countries like India, Brazil, Nigeria, Bangladesh, and China have all experimented with FTZs, as have smaller nations like Cambodia and El Salvador. Today, there are more than 5,400 SEZs around the world.

SEZ History: Shannon to Shenzhen

The world's first modern SEZ was created near Ireland's Shannon Airport in 1959.

Until that time, the airport in western Ireland relied on transatlantic flights that needed to refuel.

Technological advances (notably the use of jet engines in commercial aircraft) meant that planes would no longer need to stop in Shannon for fuel, and airport director Brendan O’Regan came up with the idea of a special economic zone near the airport as a way of keeping planes coming into Shannon.

O’Regan, who famously created the first duty-free shop in Shannon in 1948, said that Shannon Airport would need to find a way to “pull airplanes out of the sky” to survive and thrive economically.

The creation of the Shannon Free Zone brought a unique manufacturing district with tax incentives (notably a 0% corporate tax rate) and tariff reductions aimed at attracting international firms and investment into the area.

The program was a resounding success, and a second SEZ was opened next to Shannon to accommodate the firms that were coming to the area.

Sixty years later, there are over a hundred international firms still operating in the area.

READ MORE: Check out The Guardian’s history of the Shannon Free Zone.

Word of the Shannon Free Zone’s success spread around the world in the years that followed. During the 1960s and 1970s, Irish consultants from Shannon helped establish SEZs in Taiwan, Egypt, Malaysia, and Sri Lanka.

Chinese leaders who sought to move their nation beyond the failed communist model of Chairman Mao Zedong saw the SEZ model as the perfect way to address stagnant economic growth and a lack of foreign direct investment.

China established its first SEZs in 1980. The best-known of China’s SEZs is in the previously sleepy fishing village city of Shenzhen.

Shenzhen only had 310,000 residents when it became a special economic zone in 1980. Twenty years later, in 2000, it had a population of 4.3 million and a labor force of 3.1 million. As of 2020, the booming industrial hub has over 17.5 million residents and a GDP of $429 billion.

Do SEZs work?

Starting in the 1980s, the World Bank began encouraging developing economies to create SEZs in order to industrialize and attract foreign direct investment.

SEZs have generally proved effective at helping countries to achieve these goals, albeit with different models. Some countries allow private firms to take the lead in setting up SEZs, while others have launched public-private ventures that allow for more government input into the SEZs.

Critics of the SEZ model have raised concerns about a number of factors. SEZs can make a country reliant on foreign firms, both for the capital and the technology they bring to a country. Labor rights are often limited within SEZs, with workers typically being barred from unionizing. There are also concerns about environmental damage wrought by foreign industrial firms with little interest in preserving local ecosystems or environments.

Researchers have noted that there were allegations of human rights abuses and labor law violations by Chinese companies in SEZs in Cambodia, Laos, Thailand, and Myanmar.

Despite these criticisms, the SEZs are here to stay. We benefit from them indirectly through cheaper consumer goods (particularly cheap clothing made in SEZs in South-East Asia), while American and European firms reap greater profits thanks to the cheaper labor to be found in developing countries.

It remains to be seen whether SEZs will become less popular if we are truly in an era of de-globalization, as some experts argue.

ART OF THE DAY

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Yours,
Dan