The Anatomy of Special Economic Zones

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1
The Anatomy of Maurits Ruis
Special Economic Zones
colloquial
Urban and Architectural
Research and Development
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Synopsis
Special Economic Zones (SEZs) are areas with a special status that offer special benefits
and a world class environment to get foreign companies to invest. There are currently
3,500 SEZs worldwide, operating in 130 countries, employing 66 million people, and adding over $500 billion of trade related value. SEZs can involve investments up to $900 million, are able to stimulate national economies, and lift millions of people out of poverty.
However, knowledge on what makes a SEZ successful is limited. ‘The Anatomy of Special Economic Zones’ looks at what makes SEZs successful, and is a primer for anyone
involved in their development. For this publication, comprehensive research has been
done of relevant scientific literature, business reports and newspaper articles.
London, November 2012
About the Author
2
Maurits Ruis MSc RIBA is an accomplished architect who has worked on building projects and masterplans for multi-disciplinary, award-winning architectural practices in the
United Kingdom and The Netherlands. His work across scales and sectors and his longtime interest in urban dynamics gave him insight into the requirements of cities on multiple levels. Maurits has an intimate knowledge of the European and Brazilian Markets and
has a strong sustainability background.
Copyright
The Anatomy of Special Economic Zones
Maurits Ruis
Copyright © 2012 by Maurits Ruis
All rights reserved. This publication contains material protected under international copyright laws and treaties. Any unauthorized reprint or use of this material is prohibited. No
part of this publication may be reproduced or transmitted in any form or by any means,
electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from the author / publisher.
Disclaimer
Although the author / publisher have made every effort to ensure that the information
in this publication was correct at press time, the author / publisher do not assume and
hereby disclaim any liability to any party for any loss, damage, or disruption caused by
errors or omissions, whether such errors or omissions result from negligence, accident,
or any other cause.
colloquial
Urban and Architectural
Research and Development
Author: Date: Website: Feedback: Maurits Ruis
November 2012
www.cllql.com
[email protected]
Contents
Introduction5
Definition
7
A Critical History
9
Urban Laboratories
9
Vehicles of Globalization
13
The Export Zone Exported
15
Geopolitical Implications
19
Trial and Error
23
Race to the Bottom
23
Infrastructure as Incentive
27
Comprehensive Clusters
29
Genius Loci
33
Typology
37
Functional I
37
Functional II
40
Organizational40
Political41
Conclusion43
China’s strategic use of Special Economic Zones
43
Special Economic Zones: Vehicles of Localism
47
References51
Bibliography51
Image Credits
55
3
4
Shanghai International Medical Zone (12 sq km). In 2011 more than 100 medical device and biomedical enterprises had settled including Siemens, Draeger, Analogic, Covance, Shanghai Pharma Group and Simcere.
Introduction
It is estimated that there are currently around 3,500 Special Economic
Zones (SEZs), operating in around 130 countries and territories worldwide,
employing around 66 million people, and adding over $500 billion of direct
trade related value (McCallum 2011, ILO 2008). Although these zones
have traditionally comprised single factories with an exempt legal status,
they increasingly comprise complete masterplan developments with $100
million to $900 million of involved investments that are part of a national
economic strategy. Since SEZS gained momentum in the 1980s, they have
become an important factor for local economies and international trade.
SEZs allow multinational corporations to benefit from lower labour costs
overseas and to remain cost-effective in a fiercely competitive international market. They also allow poor countries to industrialise and to take
part in international trade, thereby lifting local workers out of poverty.
An export-oriented growth strategy is often seen as the only remedy to
lagging economic growth, a position that for decades has been promoted
by the IMF, The World Bank, and powerful economists. For development
countries, SEZs offer a direct link to foreign markets and global production networks, and they offer an immediate way to soak up surplus labour
(McCallum 2011).
Not often do SEZs make the front pages, and when they do, it is often
in a negative context. They are often associated with Asian sweatshops
with excessive overtime, underpayment and poor working conditions
(Greenhouse, 2000). This has led to high numbers of employee suicides
in factories in Shenzhen, China, that produce electronic components for
iPads, among other products (Duhigg and Barboza 2012). There are also
the reports of fatal factory fires, such as when 300 workers were killed in a
factory that was locked from the outside in Karachi, Pakistan (Ur-Rehman
et al 2012).
5
6
Zhangjiang Hi-Tech Park (25 sq km), ‘Shanghai’s Silicon Valley’, with 110 research and development institutions,
100,000 workers, 3,600 companies including GSK, Roche, Eli Lily, Pfizer, Novartis, GE, AstraZeneca, HewlettPackard, Lenovo, Intel, Infineon, IBM, Citibank, eBay, Infosys, SAP AG, Wison Group, DSM, Henkel, Solvay, Dow,
Dupont, Asia-Pacific Software, Sony, Bearing Point, Kyocera, Cognizant, TCS China, Satyam, Applied Materials.
The modern SEZ is a relatively young concept that is following a steep
learning curve. Through the years, SEZs have developed into complex entities that include industries and services, and that are able to stimulate the
economies of entire regions. Getting involved in their development, as a
politician, investor, project developer, planner or architect, can be a daunting business. This publication will attempt to help all parties involved by
looking at the factors that make SEZs successful and by identifying best
practices. To achieve this, a comprehensive study has been undertaken of
scientific papers, business reports and newspaper articles.
China in particular has been very successful in the development and application of SEZs. Therefore much of the attention in this guide will therefore go to Chinese policies and practices. First we will have a look at the
modern history of the SEZ, and then we will look at the process of trial
and error that has added complexity to the SEZ concept throughout the
years. Then an overview will be provided of SEZ typologies, followed by a
conclusive chapter.
Definition
There are many types of SEZs nowadays, with diverging scopes and scales.
The features that all SEZs share is that they are geographically delimited
areas with an exempt legal status, that aim to attract foreign capital and
generate jobs by offering special incentives to foreign companies. The
zones are usually physically secured and have a single management or
administration. A SEZ normally operates under more liberal economic laws
than those typically prevailing in the host country (Zeng n.d.). In the case
of China, the SEZs also function as experiments for piloting the implementation of capitalist policies (Leong n.d.) and, as we shall see, they are also
applied for strategic purposes. Generally, the SEZ is seen as purely a political concept whose true purpose is the ‘creation of space’ rather than any
particular activity (Cowaloosur 2011). For the purpose of this document
we will speak of SEZs as the generic term that covers all different types of
zones.
7
Semiconductor Manufacturing Trends, 1960-2005
1960s-1980s: Assembly Abroad
Companies move assembly, testing, and packaging offshore.
A = Design B = Fabrication C = Assembly, Testing, Packaging
8
1980s-2000s: Factories Abroad
Companies began contracting with offshore fabrication plants
to produce components from designs.
2000s-2005: Design Abroad
Some design services are offshored, or a part of global teams
operating in many countries. Complex production chains
develop as designs are fabricated in different locations, and
components are then sent to still other locations for assembly,
testing, and packaging (GAO 2006). The history of semicondutor manufacturing clearly shows the tendency of host countries
to move up the value chain through time.
A Critical History
Special Economic Zones have existed in some way or another for hundreds
of years, but the modern SEZ developed significantly in the period after
the Second World War. In this period, the SEZ has been able to benefit
from growing international specialization, the expansion of the manufacturing activities of transnational corporations and an increasing orientation towards export (ILO 2008). The first known instance of a modern SEZ
was an industrial park set up in Puerto Rico in 1947 to attract investment
from the USA (Dohrmann 2008).
An important catalyst in the development of the modern SEZ was the
introduction of the standardized shipping container in 1956. The container
caused loading cost of cargo to drop from $5.86 per US ton to just under
16 cents (Poston 2006), which made it possible for firms to benefit from
lower labour cost overseas whilst remaining cost-effective. Illustrative
for the dependency of SEZs on shipping containers is the fact that nowadays there are very few landlocked countries that have adopted free zone
regimes (Bost 2011).
The first SEZs appeared in Asia in the 1960s, which would become the
nursery home for the modern SEZ in the years to follow. In these years,
The US semiconductor industry began offshoring intensive manufacturing activities such as assembly to Malaysia, Hong Kong and Taiwan. This
move allowed the semiconductor industry to remain cost-competitive as
new foreign rivals emerged in countries such as Japan (GAO 2006). At that
point, the only benefits for SEZ host countries were the creation of jobs
and income of foreign exchange generated by the exportation of products, but no further benefits to the local economy were provided (Cowaloosur 2011).
Urban Laboratories
Although the first SEZ in Asia was established in Kandla, India in 1965,
9
10
Top: One of China’s first Special Economic Zones: the French Concession in Shanghai
Bottom: One of China’s latest Special Economic Zones: Pudong Financial District, Shanghai
the history of the modern SEZ has very much turned out to be a Chinese
history. China has been instrumental in the development of the modern
SEZ, and has also been most successful in reaping its benefits, growing its
domestic economy significantly, and lifting millions out of poverty. When
India introduced its national SEZ policy in 2005, it was modeled closely
after the Chinese model (Leong n.d.).
Perhaps China’s success with SEZs is owed to the fact that China was not
unfamiliar with the concept of designated areas with an exceptional status. As early as 1557, Macau was rented to Portugal by the Chinese empire
as a trading port, and in 1842, the French, British and American concessions were granted in Shanghai following the 1839-42 Opium War. The
introduction of the modern SEZ in communist China was due to the decision of Deng Xiaoping in 1980 to start using SEZs to experiment with the
free market economy, a move he referred to as ‘crossing the river, feeling the stones one at a time’. To that end, Shenzhen, Zhuhai, Xiamen and
Shantou were given the status of Comprehensive Special Economic Zone
(CSEZ) (Leong n.d.).
These newly designated SEZs were deliberately located far from the
center of political power in Beijing to minimize both potential risks and
political interference. The choice of Shenzhen was especially strategic
because of its location across a narrow river from Hong Kong, the principal
area from which China would be able to learn capitalist modes of economic growth and modern management techniques from 1997 onwards,
when Hong Kong’s sovereignty would transfer from the United Kingdom
to China (Zeng n.d.). Ultimately, the SEZ status allowed Shenzhen to grow
from a fishing village with a population of 25,000 into a metropolis of 10
million, making it the largest, and most successful, SEZ in the world today
(Zeng n.d.).
As the Chinese SEZ experiment proved successful, a quick succession of
increasingly sophisticated SEZs followed; respectively 14 Economic and
Technological Development Zones (ETDZs) in 1984, 56 High-Tech Industry Demonstration Zones (HIDZs) in 1988, 15 Free Trade Zones (FTZs) in
1990, 14 National Border and Economic Cooperation Zones (BECZs), 12
National Tourist and Holiday Resorts (THRs) and 35 new ETDZs in 1992,
1 Agricultural High-Tech Industry Demonstration Zone (AHIDZ) in 1997
and 61 Export Processing Zones (EPZs) in 2000 (CADZ 2012). More details
on these different types are provided in the chapter Typology. Because
of their ability to stimulate progress, SEZs in China are nowadays also
used as a way to curb potential political unrest, such as in Lhasa, Tibet,
which acquired an ETDZ in 2001, and in Kashgar, Xinjiang province, which
acquired the status of CSEZ in 2010. Just one year before, Kashgar had
been the scene of ethnic unrest under the Ozgur minority population.
11
12
Shenzhen, one of China’s first Special Economic Zones, in the 1970s (top), and today (bottom)
The national and provincial SEZs in China have played an important role
in the Chinese economy and are regarded as the engine of growth in the
regions. Despite their limited areas, they have greatly contributed to FDI
inflows and trade, especially the processing trade and high-tech exports,
together with industrial output and GDP. They also account for the bulk of
employment provided by China’s foreign funded enterprises. In 2007, 27
years after the introduction of the first SEZs, the total GDP of the major
state-level SEZs in China accounted for roughly 21.8 percent of national
GDP. It has been estimated that the total utilized FDI from the major
national-level SEZs (excluding HIDZs) accounted for about 46 percent of
the national total in 2007. Added together, the total employment of the
seven SEZs , the ETDZs, and the HIDZs accounted for about 4 percent of
total national employment, or 770 million jobs (Zeng n.d.).
Vehicles of Globalization
International trade agreements have allowed SEZs to gain further momentum. The most important driver has been the General Agreement on
Tariffs and Trade (GATT) Multifibre Agreement (MFA) between 1974 and
1994, which imposed quotas on countries for the production of textiles
and garments. Quotas assigned to large established exporters were relatively small, but those assigned to countries with a new, small industry
were substantial. This prompted exporters to move around the world in
search of available quotas, which has worked as a catalyst for the establishment of SEZs in Asia and the creation of millions of jobs in countries
that had little or no export garment industry previously. It also led New
York City to lose much of its traditional garment industry, which shrunk
from 16,000 jobs to 9,000 between 1995 and 2009 (Bagli 2009).
Meanwhile in the 1970s, the oil crisis caused economic turmoil that ultimately led to the rejection of trade agreements such as the MFA. Voters and politicians moved toward the rejection of traditional Keynesian
economics and the adoption of a more liberal approach to the economy,
driven by the belief that free markets provided the answer to economic
difficulties. This led, amongst other things, to the revision of GATT from
1986 to 1993, and its ultimate replacement by the World Trade Organization (WTO) in 1995. This move lifted 45,000 existing trade tariffs, the MFA
among them, which was replaced by the WTO Agreement on Textiles and
Clothing (ATC) from 1995 to 2004. The ATC effectively phased out the
quota system that existed under the MFA (Roberts 2004).
Following the end to of the garment quota system imposed by the MFA,
some countries succeeded to capture significant market shares, such as
Bangladesh, Sri Lanka and Vietnam (McCallum 2011). China in particular has benefited by establishing 61 Export Production Zones (EPZs) in
2000 to act on this trend. As a result, China’s apparel exports have tripled
13
Number of zones
14
Employment (thousands)
Exports (US$ millions)
China
187
China
50,000
China
145,000
Vietnam
185
Indonesia
6,000
Malaysia
117,013
Hungary
160
Mexico
1,300
Hong Kong
101,500
Costa Rica
139
Vietnam
950
Iran
87,289
Mexico
109
Pakistan
888
Ireland
82,500
Czech Republic
92
UAE
552
Czech Republic
68,626
Philippines
83
Philippines
545
India
49,000
Dominican Republic
58
South africa
535
Algeria
39,423
Kenya
55
Thailand
452
Argentina
36,478
Egypt
53
Ukraine
387
Philippines
32,030
Poland
48
Malaysia
369
Korea
30,610
Nicaragua
34
Lithuania
369
Tunisia
20,544
Thailand
31
Honduras
354
Bangladesh
11,716
Jordan
27
Hong Kong
336
Lithuania
11,404
UAE
26
Tunisia
260
Mexico
10,678
Special Economic Zones Rankings indicate that China is the absolute champion in the application of Special Economic Zones (World Bank 2008).
between 2000 and 2006 from US$36.1 billion to US$95.4 billion. Other
countries, such as Costa Rica, the Dominican Republic and Mexico, have
been strongly affected by international competition and were forced to
diversify. Exports from Costa Rica for example shifted from apparel to
other manufactured products including electronics and pharmaceuticals
(ILO 2008). The process of diversification has given rise to a value chain
across countries that is reflected in varying minimum wage levels today,
with China’s at $250 per month, Indonesia at $135, Pakistan at $80 and
Bangladesh at $48 per month or $1.50 a day (Vidal 2012).
One international trade agreement that still drives the establishment of
SEZs today is the Least Developed Country (LDC) status, which is given
to countries which, according to the United Nations, exhibit the lowest
indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. This status comes with
certain benefits, like competitive imports of raw materials, grants and
duty-free exports to certain developed countries. Some countries, like
Mauritius, have lobbied hard to retain their LDC status in order to keep
foreign parties interested in investing in SEZs, and successfully so, as it got
China to set up the first SEZ outside its national borders in Mauritius in
2007 (Cowaloosur 2011).
International trade agreements and their subsequent obsolescence gave
further momentum to the spreading of SEZs worldwide. Whereas SEZs
operated in 25 countries in 1975, they operated in 130 countries in 2008
(ILO 2008). The explosive growth in numbers of SEZs as a result of the
liberation of the market earned SEZs the reputation ‘vehicles of globalization’ (McCallum 2011).
The Export Zone Exported
China’s move into Mauritius has served as a stepping stone for the next
stage in the evolution of the SEZ: the move into Africa. SEZs have been
present in Africa ever since 1948, when Liberia opened a free trade zone in
the port of Monrovia. In 1974, when Senegal adopted a free zone regime
for the manufacturing industry, the movement was really launched, and
in 2009, Africa was host to 101 different kinds of SEZs, with Kenya leading
with 33 SEZs (Bost 2011).
SEZs in Africa have historically been multi-activity oriented, driven by a
common and highly opportunistic ‘take all’ approach typical of poorer
countries. Sectoral specialisation around a few targeted activities is virtually nonexistent in Africa, making it impossible for SEZs to achieve economies of scale as a way of reducing costs. This lack of focus is also harmful
in terms of of complementarity, capitalisation and transmission of experience among firms. As a consequence firms tend to operate side-by-side
15
Country/ zone
Total invest-
Start of
Current status
Developers
ment
planning
Zambia, Chambishi
USD 410 million
2003
In operation/
under construction
China Non-ferCopper and
rous Metal Mining copper miningGroup
related industries
Zambia, Lusaka
Subzone
Not available Under construction
China Nonferrous
Metals Corporation
Garments, food
appliances,
tobacco, electronics
Nigeria, Lekki
USD 369 million
2003
Under construction
China Civil Engineering Construction, Jiangning
Development
Corporation,
Nanjing Beyond,
China Railway
Transport equipment, textile and
light industries,
home appliances,
tele- communications
Nigeria, Ogun
USD 500 million for the first
phase
Early 2004
Under construction
Guangdong
Xinguang, South
China Developing
Group
Construction
materials and
ceramics, ironware, furniture,
wood processing,
medicine, computers, lighting
Mauritius, Jin Fei USD 940 million
(originally Tianli)
2006-07
Under construction
Shanxi-Tianli
Group, Shanxi
Coking Coal
Group, Taiyuan
Iron and Steel
Company
Property development, services
(tourism, education, finance),
manufacturing
(textile and
apparel, machinery, high-tech
industries)
Ethiopia, Oriental (Eastern)
2006-07
Under construction
Yonggang (withdrew), Qiyuan
Group, Jianglian
International
Trade, Yangyang
Asset Management, Zhangjiagang Free Trade
Zone (not a shareholder)
Electric machinery, steel and
metallurgy, construction materials
16
USD 101 million
Overview of Chinese Special Economic Zones in Africa (Cowaloosur 2011)
Industry focus
without any form of interaction or collaboration in African SEZs (Bost
2011).
Activities inside African SEZs fall for the most part within low value-added
sectors with a high coefficient of unskilled labour. They differ little from
activities outside the zones, except for their orientation towards exports,
and there is no apparent strategy to boost the range of products toward
middle and high-end technologies. The benefits for local economies are
very limited. What is more, SEZs across Africa are fairly similar from one
country to the next, which reflects the influence of the international consulting firms that have drafted most of them (Bost 2011).
China’s move into Africa is about to change that, and six new Chinese SEZs
are currently in development. This move constitutes a significant departure from the common practice of SEZs being initiated by local governments. In this case, China, as the foreign investor, takes the initiative to
approach local governments for the establishment of SEZs. China takes
on the role that traditionally has been confined to local governments, as
it will deliver considerable infrastructural investments as well. China is
thereby the first to export the SEZ concept: the export zone exported.
China’s infrastructural investments include multibillion-dollar projects
such as hospitals, water pipelines, dams, railways, airports, hotels, soccer
stadiums and parliament buildings, but contrary to Western development
funds, African leaders find it hard to embezzle Chinese funds. Money is
usually held in escrow accounts in Beijing; then a list of infrastructure
projects is drawn up, Chinese companies are given contracts to build them
and funds are transferred to the company accounts. Africa gets roads and
ports but no cash (Economist 2011).
The reasons for China’s move into Africa are plenty. China seeks to benefit from fewer restrictions on its exports to Europe and North America
that comes with the LDC status of many African countries. The relative
uncultivated nature of the African market allows China to move low value
production out of China and into Africa, thereby allowing domestic production to move up the value chain, and releasing pressure in the domestic market in the process. Indeed, most Chinese private ventures that are
active in Africa today are said to be there to escape the ‘pressure cooker
of domestic competition and surplus production’ and to benefit from
‘large markets and relatively less intense market competition from local
firms’ (Cowaloosur 2011).
Already, roughly 800 Chinese state-owned or state-controlled corporations are operating in Africa, with China’s Export-Import Bank funding
more than 300 projects in at least 36 countries. Tens of thousands of small
private companies and entrepreneurs are also on the ground. The value of
17
18
Top: Jin Fei (oringinally Tianli) Special Economic Zone in Mauritius. The first zone financed by the Chinese outside
China, and a stepping stone for branching out into Africa. Bottom: future expansion plans for Jin Fei.
Chinese aid in Africa is now thought to have overtaken World Bank assistance (Behar 2008), although the true value of aid is kept a secret by China
as well as African countries. As a result of China’s involvement, Africa’s
goods exports to China already increased more than 60-fold between
1998 and 2010, compared to a fivefold and threefold increase to the US
and the EU, respectively (Ali and Jafrani 2012).
The main reason for China’s move into Africa though is considered to be
the aim to secure access to natural resources. In recent years, China has
become the world’s top consumer of timber, zinc (with 30% of global
demand), iron and steel (27%), lead (25%), aluminum (23%), copper (22%),
nickel, tin, coal, cotton, and rubber. If China’s per capita GDP (currently
about $6,500) will approach South Korean levels in the next 20 years,
Chinese consumption of aluminum and iron ore will increase fivefold; oil,
eightfold; and copper, ninefold (Behar, 2008). China’s development of six
new SEZs is seen as a way to secure access to these resources (AEO 2011).
Geopolitical Implications
China’s decision to move into Africa has been met mixed responses. Some
observers believe that China is Africa’s only hope for an economic jumpstart, and see it as positive that China combines African development with
its own growth and sustainability.
19
But there are also concerns. One is that China may smother Africa’s
emerging light-manufacturing sector with its demand for cheap, unskilled
labour, and by flooding the African market with cheap household goods
from China. Another concern is China’s more relaxed approach to issues
such as the environment, human rights, and good governance, which could
potentially undo years of foreign aid efforts by other countries. Moreover,
a more relaxed approach to international standards also creates unfair
competition. Transparency International’s Bribe Payers Index for example
says that Chinese companies are more prone to bribery, whereas British
companies are now being held to the recently adopted UK Bribery Act
(Behar 2008).
At worst, China’s move into Africa is viewed as a desperate and ruthless
‘scramble’ to secure energy supplies and natural resources, one that could
trigger a new wave of global conflict and massive environmental destruction (Behar 2008). China’s approach causes anxiety in Western countries in
particular because it differs from the approach taken by Organisation for
Economic Co-operation and Development (OECD) of which most them are
a member, an approach also referred to at the ‘Washington Consensus’.
The OECD approach aims to reach agreements and then call for other
nations to join them into granting it legitimacy. It is a classic top-down
20 Lekki Special Economic Zone, Nigeria, funded by China.
approach where the OECD, or agencies like the International Monetary
Fund (IMF) or the World Bank, demand that other countries join them,
and in cases where nations do not respond positively, they are penalised
through sanctions. In Africa, financial aid has often come under conditions
of austerity, market liberalization, structural adjustment and democratization. This approach is often criticised as one-sided and beneficial for the
Western partners only, and has caused resentment in African countries in
particular.
China on the other hand follows a principle of non-interference, and does
not impose conditions before granting aid. For the development of Chinese SEZs for example, it is China who approaches African countries with
a proposal (the World Bank reports that over two-thirds of African economies now have a financial agreement with the Chinese). There is greater
host-country customization and state ownership in this approach, a result
that the IMF aims to achieve as well, as it aspires to revitalize its 19 development programs. In that sense, China’s approach may be seen as somewhat humbler, as China poses as a partner rather than a provider of aid.
China’s approach does not necessarily compete with the ‘Washington
Consensus’ model though, as Chinese and Western aid flows tend to be
directed toward different sectors. Western aid to Africa is mainly directed
toward supporting public health programs, democratization efforts,
counterterrorism cooperation, the development of health infrastructure,
and improved regulatory institutions. The Chinese on the other hand
primarily focus on infrastructure projects. China assumes a dual position;
one of peripherality toward the OECD approach, and one of appropriation
towards African states (Cowaloosur 2011).
Of course, China’s approach has its own disadvantages. While African
countries form issue-based coalitions and successfully lobby to secure
preferences and domestic safeguard measures when dealing with the
OECD, the competition for Chinese investment make them individualistic
and drives them apart. This causes a ‘race to the bottom’, in which countries offer ever more attractive benefits to investing corporations at the
cost of the local common good (more on this in chapter ‘Trial and Error’)
(Cowaloosur 2011). Also, China’s fragmented approach and lack of transparency gives rise to a new paradigm of competition rather than consensus, which enforces the idea of a ‘scramble for resources’.
China’s ultimate goal, it has been argued, is to build skyscrapers in Tokyo,
run banks in London and make films in Hollywood. China is learning the
ropes in Africa, where the competition is weak. For the Chinese, Africa is
another stepping stone to a commercial presence around the globe (Economist 2011). In that context, the SEZ continues to be a strategic instrument for the Chinese.
21
22
Top: Thika Highway, Kenya, financed by China. Bottom: billboards announcing the development of Lekki Special
Economic Zone in Nigeria by China. Developments like these cause anxiety amoung Western countries.
Trial and Error
Throughout the years, SEZs have become increasingly complex. Traditionally, low labour cost has been the driver for investments in SEZs, and it still
is the most dominant factor. But as SEZs went from single factories with
a focus on generating foreign exchange with export, to comprehensive
zones seeking to attract direct foreign investment (FDI), other avenues
have been explored to get investors interested in zones. Some of these
avenues have proven to be more effective in attracting investors than others. This chapter will take a look at which factors attribute to the success
of SEZs.
Race to the Bottom
A potential selling point explored by many zones is a more relaxed
approach to workers rights. This approach that has triggered a ‘race to
the bottom’ with work conditions entering a downward spiral, with wages
below minimum standards, excessive compulsory overtime and a lax attitudes towards health and safety standards. Poor working conditions are
sustained by a lack of respect for the freedom of association and the right
to collective bargaining in many SEZs. Issues include legal restrictions on
unionization and union membership, the use of yellow (non-independent)
unions, blacklisting of union officials, interference in the affairs of workers’ organizations, refusal to negotiate, harassment, violence and reprisals, legal restrictions or prohibition on industrial action. In Bangladesh, ‘no
unions or strikes’ is officially publicized as an incentive by SEZs (ILO 2008).
Poor working standards have led to high turnovers of workers in SEZs,
with average careers of seldom longer than five years, exhausting the
local pool of human resources (Farole 2011, McCallum 2011, ILO 2003).
Poor working standards have caused political sentiment at NGOs and
trade unions to turn against SEZs in recent years. They are seen as often
going too far, making corporate accountability impossible and promoting
widespread labour abuse and discrimination. NGOs and unions note that
23
24 Onne Export Zone, Nigeria
SEZs have only rarely achieved their stated goals of social and economic
development, and in cases where they are heralded as successes, like in
China, they point to the deplorable state of labour relations and working
conditions inside the heavily-patrolled factories (McCallum 2011). Competition based on the suspension of workers rights is thus considered to
be an unsustainable business model. It has been argued that more integrated policy approaches for attracting export-oriented FDI, for example
by encouraging tripartite representation on SEZ committees (employers,
workers and public authorities), guaranteeing workers’ rights (including
freedom of association and collective bargaining), and upgrading skills and
working conditions have tended to attract higher quality FDI (ILO 2003,
ILO 2008, McCallum 2011).
Another avenue that has been explored is the offering of various tax
incentives, including inexpensive land, exempWhy are Incentives Ineffective?
tion from export taxes, import duties of raw
materials or intermediate goods, profits taxes,
• A tax exemption is of little benefit if
municipal taxes, property taxes, value added
the company is not making profits,
tax, domestic purchases and national foreign
which is usually the case in the initial
years of operation.
exchange controls, the free repatriation of
•
Firms that are profitable from the
profit for foreign companies and the provision
outset might not have needed
of streamlined administrative services to faciliincentives in the first place.
tate import and export such as rapid customs
• Tax holidays encourage income
clearance (ILO 2008, Zeng n.d.).
shifting from non-tax-exempt
enterprises to tax-exempt companies
Experience has shown however that the use
through transfer pricing of interof incentives packages is generally ineffective.
company transactions.
There is an increasing commonality of incentives • Tax holidays reduce the appeal of
debt financing of capital investment
among zones worldwide, imposing significant
by removing the benefits of interest
costs on government budgets. Incentives also
deductibility. This equity funding bias
do not really benefit companies in SEZs. A tax
is accentuated if dividends of taxexemption is of little benefit if a company is not
exempt firms are also exempt from
making profits, which is usually the case in the
personal income tax.
initial years of operation. Firms that are profit• Tax exemptions tend to benefit
able from the outset on the other hand might
investments with a short-term time
not have needed incentives in the first place.
horizon. Longer-term projects that
• generate profits beyond the tax
In addition, tax exemptions tend to benefit
holiday period do not benefit, unless
investments with a short-term time horizon,
firms are permitted to accrue and
while longer-term projects that generate profits
• defer asset depreciation deductions
beyond the tax holiday period do not benefit.
beyond the tax holiday period.
Tax exemptions also do not benefit investors
• Tax exemptions do not benefit
from many OECD countries that tax income on a
investors from many OECD countries
global basis, unless a ‘tax sparing’ agreement is
that tax income on a global basis,
in place (Farole 2011, World Bank 2008).
unless a “tax sparing” agreement is in
place.
When China gave companies outside the zones
(World Bank 2008)
25
Taizhou Medical HIDZ (10-25 sq km), biotechnology, pharmaceuticals, chemicals production and processing,
26 medical equipment and supplies. Housing Hamner Research Institute, Texas Medical Center, China Pharmaceutical University. In 2010, sales income reached 550 billion yuan. In 2020, this will scale up to 200 billion yuan.
the same incentives that applied to companies inside the zones in 1991,
thereby nullifying the comparative advantage of the SEZs, FDI poured
into the country at even greater levels. This has caused some analysts to
wonder whether SEZ development have paved the way, or actually slowed
down the liberalization process. It has been argued that what contributes
to greater economic growth is a greater scale of liberalization, rather than
increasing the number of SEZs (McCallum 2011, Leong n.d.). This suggests
that whilst the exceptional status of SEZs may be helpful in attracting
foreign companies initially, long term benefits can only be achieved when
this status is suspended once these companies have settled in. SEZs, in
that sense, can be seen as transitional instruments.
Infrastructure as Incentive
Another development in the race to attract foreign investment is the
offering of infrastructure, facilities and services to international standards, such as roads, water, uninterrupted electricity supply, gas, sewerage,
networked and air conditioned buildings, and direct connections to ports
and airports. Indeed, the provision of reliable infrastructure has proven to
be much more effective in the success of zones than offering tax incentives, which cannot make up for poor location, infrastructure and facilities.
In addition, a higher quality environment benefits not only investors, but
workers as well (World Bank 2008, Farole 2011).
27
The provision of world class infrastructure and facilities requires heavy
up-front investments, which has traditionally been provided by local or
national governments. As a consequence, some zones were overdeveloped, much ahead of investor demand. In the
Special Economic Zone
case of the first four comprehensive SEZs in
Facilities and Services
China for example, Zhuhai lagged behind Shenzhen because it overbuilt its infrastructure
• Childcare facilities
beyond sustainable demand as its over-sized
• Medical clinics
airport exhausted its initial capital and became
• Conference centers
a drag on its economy (Zeng n.d.). In another
• Product exhibition areas
example, the Zolic Free Zone in Guatemala con• Commercial centers
structed over 24,000 square meters of factory
• Training facilities
• Shelter plans
space in its first two years of operations, which
sat empty without adequate marketing support. • Repair and maintenance centers
• Common bonded warehouse facilities
A lack of adequate funding has also meant that
• Incubator facilities
many public zones are inadequately maintained
• On-site banking facilities
(World Bank 2008).
• On-site housing
• On-site customs clearance and trade
The need for publicly funded up-front investlogistics facilities
ments changed when the focus of zones shifted
• High-speed telecommunications and
from generating foreign exchange through
Internet services, networked buildings
export to attracting foreign investment directly.
(World Bank 2008)
28 Special Economic Zones in Mumbai, India.
With the direct involvement of private investors, governments were enabled to adopt innovative approaches toward the financing of infrastructure such as public-private partnerships (PPPs). In the early stage of Shenzhen for example, joint ventures and private developers from Hong Kong
helped with developing some basic infrastructure (Zeng n.d.). Although
nowadays many public agencies are still establishing zones, a growing
number of privately owned, developed, and operated zones worldwide
has been a trend over the last 20 years. Today, 62 percent of the 2,301
zones in developing and transition countries are private sector developed
and operated. This contrasts greatly with the 1980s, when less than 25
percent of zones worldwide were in private hands (World Bank 2008).
Because private zones are run on a cost-recovery basis, they are generally
more responsive to tenant needs, and therefore provide a wider range
of property management services and amenities. Many SEZs now include
a host of services, such as childcare facilities, medical clinics, conference
centers, product exhibition areas, commercial centers, training facilities,
shelter plans, repair and maintenance centers, common bonded warehouse facilities, incubator facilities, on-site banking facilities, on-site housing, on-site customs clearance and trade logistics facilities and high-speed
telecommunications and Internet services (World Bank 2008). In addition,
local governments have also started to provide various business services
to many SEZs, including accounting, legal, business planning, marketing,
import-export assistance, skills training, and management consulting.
In Suzhou Technology Park in China, the government offers information
services, laboratories, product testing centers, technology trading rooms,
seed money and the like for start-ups (Zeng n.d.).
Higher quality infrastructure, facilities and services are able to command
higher prices from tenants. In well-run private zones, as much as 50 percent of revenues can be derived from amenities in addition to traditional
rental and sales income of a relatively lower profitability. As a result, private zones generally have been more profitable and have had better social
and environmental track records than public zones throughout the world
(World Bank 2008).
Comprehensive Clusters
Another consequence of an increased involvement of private investors has
been a shift of activities within the zones. Many government-funded SEZs
have traditionally focused on attracting low-quality FDI and low-margin,
cost-sensitive industries, like apparel assembly, in the hope that human
capital could be improved once they have attracted sufficient productive
resources. These zones have found it difficult however to escape the lowvalue-added trap. Benefits for the local economy have proven to be higher
when activities focus on more high-tech sectors such as electronics, and
29
30
Xiangfan, home of Xiangfan EDTZ (5 sq km) for the automobile industry, annual production capacity of 100,000
vehicles.
zones accommodating these activities are increasingly developed through
private parties. This pattern is apparent in the Philippines for example,
as private developers move ‘up-market’ in terms of facilities and services
catering to electronics and ICT operations, leaving government zones
to accommodate apparel, handicrafts, and footwear assembly activities
(World Bank 2008).
The development of high tech clusters has allowed China to no longer
focus on low cost production only and move up the value chain. Whereas
the first Chinese SEZs mainly focused on light manufacturing (such as
textiles and electronics), later generations of SEZs also started to include
real estate, electronics, tourism, pharmaceuticals, technology, R&D, residential, leisure, airports and financing (ILO 2003). Other countries have
followed, and high tech SEZs have been established in Malaysia, Taiwan,
Singapore, and elsewhere. SEZs catering to the software and informatics
services industries have been developed in India, Jamaica, the Dominican
Republic, Mauritius, and elsewhere.
High tech clusters tend to be better in achieving economies of scale that
enable business value chains, production specialization, division of labour
and effective local government support. High degrees of networking and
interconnections, and the development of a skilled and specialized work
force that may shift between enterprises, encourages knowledge and
technology spillovers and stimulates productivity and innovation. These
dynamics enable high tech clusters to become centers of knowledge and
technology generation, adaptation, diffusion and innovation, which enables a self-sustaining dynamic. The use of cluster developments to promote economic development by both developed and developing countries
is an approach supported by the development community at large and
has also brought interaction with the local economy, further investments,
infrastructural development, sharing of technology and expansion of R&D
(Cowaloosur 2011, Zeng n.d.).
High tech zones also have a disadvantage however, as the percentages of
female workers tend to drop. In general, zones with light manufacturing
activities tend to employ a mostly female work force. Women make up the
majority of workers in the vast majority of zones, reaching up to 90 per
cent in some of them. Zones thus have created an important avenue for
young women to enter the formal economy at better wages than in agriculture and domestic service. When zones shift toward high tech activities,
these advantages are taken away (ILO 2003). This suggests that a mix of
zone activities of light manufacturing as well as high tech will provide the
best results for local economies.
Main growth opportunities are now said to be in services sectors, especially information and communication technology (ICT), business services,
31
32 Kunming Tourist Holiday Resort (THR) Special Economic Zone, China
and more knowledge- and research and development (R&D) intensive sectors. This requires fostering innovation, which emphasizes the the importance of skills development and training, as well as the need for zones to
avoid becoming enclaves (Farole 2011).
Genius Loci
The success of SEZs is increasingly measured not only by the income of
foreign exchange they generate, but also by the benefits they deliver
for the local economy, a connection that is also referred to as ‘backward
linkage’. Generally, benefits for the local economy and local entrepreneurs are limited because of the very nature of zones. SEZs are created
to attract foreign firms because domestic firms are not competitive internationally. Thus, domestic firms are behind in their capacity to provide
low-cost, high-quality inputs to production in SEZs. Also, incentives that
are available within the SEZs are not available to firms outside of the SEZs,
which puts domestic firms in a competitively disadvantageous position
from the start (Milberg and Amengual 2008).
Another aspect of unfair competition is the fact that the products from
SEZs have the potential to push local manufacturers out of the market.
In Africa for example, Chinese exports consist mostly of mass quantities of low quality and cheap textiles, footwear, electronics, machineries
and plastics. The fear is that once China will establish SEZs in Africa, this
dynamic will be enforced, as the possibility to ‘export’ products from
within the zones to outside the zones will be made much easier. Benefits
for the local labour market are also believed to be quite limited, as an
overlap of manufacturing activities will often cause a shift in labour forces
rather than create a new labour force (Cowaloosur 2011).
Local enterprises also tend to be ignored as potential suppliers for SEZ
based firms. Experience with the Chinese SEZ Jin Fei in Mauritius shows
that investors ignore local enterprises as they cooperate among themselves to produce parts of a product, import parts of products from China,
and will seek linkages with Chinese companies outside the zone. Chinese
investors have refused to even buy construction materials from local Mauritian suppliers, and chose to import raw materials from China instead. As
a result, a leading Mauritian producer of construction materials reported a
slump of 68% in its third-quarter profits in 2011 (Cowaloosur 2011).
Viewing SEZs as disconnected from their context and taking a ‘tabula
rasa’ or ‘blank sheet’ approach to their development without taking into
account their context should be exercised with caution. Most governmentdeveloped zones located in remote areas to act as growth poles have
failed to succeed. Apart from their isolated location, causes also include
heavy upfront capital expenditures and poor collaboration between pri-
33
Yangling, China’s only agricultural HIDZ (50-100 sq km), biotechnology and pharmaceutical industries on a site
34 were China’s first farmers settled 4,000 years ago. A connection with local cultural history has proven to be an
important factor in the success of SEZs.
vate and public parties. Most private EPZs and industrial zones in Vietnam
for example, sat vacant because local and national authorities could not
provide road and other infrastructure connections to the site (World Bank
2008).
A better approach is considered to be building upon and nurture existing
economic ecosystems. Local histories of production or business activities
in a particular sector have been proven to attribute to the success of SEZs.
Most SEZs in China are located in the coastal region or near major cities
that have a history or tradition of foreign trading or business and thus
a better linkage to the international market. And Wenzhou, in Zhejiang
province has a long history of shoemaking, dating back to 422 AD, and
has built up local production capacity over time. Inevitably, it is easier to
devise policies for a functioning cluster, and much harder to call a cluster
into existence from scratch (Zeng n.d.).
There are pitfalls to the contextual development of SEZs though. Many
of the Chinese clusters were developed on the model of one product per
village and one sector per town. This approach has been very useful in the
initial stages for fully mobilizing a village’s or town’s resources based on
their comparative advantages, but once they were successful, they found
themselves lacking further competitive strength because of small scale,
limited human and technology resources, and high-level fragmentation.
Towns were actually competing with other towns in the same province or
other provinces. How to integrate these similar sectors throughout a city,
a province, or a region into a larger value chain so that they can achieve
greater economies of scale and have a deeper capacity for innovation is
considered to be a real challenge (Zeng n.d.).
SEZs that have been developed as stand-alone entities whilst ignoring the
local context have led to social tensions in the past, led by farmers experiencing dispossession of their land as well as political parties exploiting the
plight of the farmers for their own political ends. In India, there have been
court cases challenging the setting up of SEZs, especially the legitimacy
of forceful land acquisition on grounds of ‘public purpose’, which was
considered to be insufficiently proven. Nationalistic sentiments have also
came into play, with people taking to the streets and politicians starting
to lament the neo-liberal land grab. Illustrative for the potentially explosive nature of these conflicts is the case of Nandigram, India, where a bid
for the establishment of a chemical hub sparked unrest that left 14 of the
villagers dead (Dohrmann 2008). A more considered approach toward the
local context could help mitigate such tensions.
Contrary to what their reputation as ‘vehicles of globalization’ suggests,
the success of SEZs is in large part dependent on the ‘genius loci’: the
unique local connections and cultural-historic context.
35
Special Economic Zones
in China by Type
Economic and Technological
Development Zones (ETDZ)
36
High-Tech Industrial Development Zones (HIDZs)
Economic Processing Zones
(EPZ)
Typology
As described in the chapter ‘A Critical History, a quick succession of
increasingly sophisticated SEZs were developed in China once the first
experiment with Comprehensive Special Economic Zones (CSEZs) proved
successful. SEZs now include enclave-type zones as well as single-industry
zones; single-commodity zones; and single-factory or single-company
zones (ILO 2003). This chapter will provide an overview of the different
typologies that have been developed and applied in China. Not only has
China developed the widest range of SEZs, it also continues to set the
tone in the evolution of the SEZ. Typologies pioneered by China are being
copied by countries around the world that hope to replicate China’s success in attracting investment, boosting employment, increasing exports
and generating foreign exchange.
Functional I
The definitions provided below are composited from different sources
(Zeng n.d., Linhe 2005, CADZ 2012).
Comprehensive Special Economic Zones (CSEZs) comprise entire cities
or provinces and are highly autonomous in policy making and the determination of incentives to attract foreign investment. The first SEZs in China
were CSEZs (Shenzhen, Zhuhai, Xiamen, Shantou), and specifically aimed
at experimenting with the free market economy (see previous chapter).
Economic and Technological Development Zones (ETDZs) differ from
CSEZs in their scale, as they are much smaller. Also known as national
industrial parks, ETDZs are multi enterprise zones that offer an investment climate and infrastructure at international standards. Contrary to
EPZs, which focus on manufacturing, ETDZs focus on attracting high tech
industries. Under pressure of local enterprises, preferential tax treatment
was abolished in 2007. By 2010 there were 69 ETDZs (Zeng n.d.).
37
Special Economic
Zones in China by Type
(continued)
Free Trade Zones (FTZ)
38
National Border and Economic
Cooperation Zones (BECZ)
All Special Economic Zones
High-Tech Industrial Development Zones (HIDZs) aim to develop high
tech industries and products and to expedite the commercialization
of research and development by using the technological capacity and
resources of research institutes, universities, and large and medium enterprises, contrary to ETDZs, which only aim to attract high tech industries.
As of 2009, there are 54 state initiated HIDZs in China, which hosted about
half the national high-tech firms and science and technology incubators.
They registered some 50,000 invention patents in total, more than 70 percent of which were registered by domestic firms.
National Agriculture High-Tech Industry Demonstration Zone (AHIDZ)
specifically focuses on the development of new agricultural methods and
technologies in the face of 21st century water scarcity. To date, the only
agricultural high-tech industry demonstration zone is in Yangling (94 sq
km), Shaanxi province, where 4,000 scientists are dedicated to agronomy,
foresting, water management and herding.
Free Trade Zones (FTZs) have three targeted functions: export processing, foreign trade, and logistics and bonded warehousing. FTZs are
enclosed areas with an exempt status and supervised by Customs. Companies in FTZs are eligible for tax refunds on exports, import duty exemption, and concessionary value - added tax. Currently, there are 15 FTZs in
13 coastal cities.
39
Export Processing Zones (EPZs) are similar to FTZs in that they are
enclosed areas supervised by Customs. Whereas FTZs focus on trading and
processing exports, EPZs focus on manufacturing products for export. As
is the case with other SEZs, they aim to offer an environment of international standards that is more practical and efficient and therefore more
attractive to foreign investors that the local context, and through which
they aim to act as catalysts and example for the local economy. So far, 61
EPZs have been set up in China.
National Border and Economic Cooperation Zones (BECZs) are similar
to FTZ, though they are not established in the vicinity of ports or airports,
but located in border towns. Like the FTZ, they aim to develop trade and
local economies (especially those inhabited by ethnic minorities) by allowing processing of products for re-export. 14 BECZs have been approved
since 1992.
National Tourist and Holiday Resorts (THRs) are set up to attract foreign
investment and accelerate the development of the tourist industry. To
date, there are 11 national holiday and tourist resorts realized.
Functional II
Examples of Specialized Zones (World Bank 2008):
Type of
Zone
40
Development
Objective
Size
Typical
Location
Activities
Markets
Example
Technology or Promote
< 50 hectares
Science Parks high tech and
science-based
industries
Adjacent to
universities,
institutes
High technology activities
Domestic and
export
Singapore
Science Park,
Singapore
Petrochemical Promote
Zones
energy industries
100–300 hectares
Petrochemical
hubs; efficient energy
sources
PetrochemiDomestic and
cals and other export
heavy industry
L aem Chabang Industrial Estate,
Thailand
Financial Services
Development
of off-shore
financial services
< 50 hectares
None
O ffshore
financial and
non-financial
services
Export
L abuan Offshore Financial Centre,
Malaysia
Software and
Internet
Development
of software
and IT services
< 20 hectares
Adjacent to
universities,
urban areas
Software
and other IT
services
Export
Dubai Internet City, UAE
Airport-based
A ir cargo
trade and
transshipment
< 20 hectares
Airports
Warehousing,
transshipment
Re-export and Kuala Lumpur
domestic
A irport Free
Zone, Malaysia
Tourism
Integrated
tourism
development
200–1,000
hectares
Tourism areas Resorts and
other tourism
Export and
domestic
Baru Island,
Colombia
A irports,
ports, transport hubs
Re-export
D1 Logistics
Park, Czech
Republic
Logistics
Support logis- < 50 hectares
parks or cargo tics
villages
Warehousing,
transshipment
Organizational
Markusen’s Typology of Industry Clusters (Zeng, n.d.):
Cluster type growth
Characteristics of
member firms
Intra-cluster interdependencies
Prospects for
employment
Marshallian
Small and medium-size
locally owned firms
Substantial inter-firm
trade and collaboration
Dependent on synergies
and economies provided
by cluster
Hub and spoke
One or several large firms
with numerous smaller
supplier and service firms
Cooperation between
large firms and smaller
suppliers on terms of the
large firms (hub firms)
Dependent on growth
prospects of large firms
Satellite platform
Medium-size and large
branch plants
Minimum inter-firm trade
and networking
Dependent on ability to
recruit and retain branch
plants
State anchored
Large public or nonprofit
entity related supplier
and service firms
Restricted to purchaseDependent on region’s
sale relationships
ability to expand political
between public entity and support for public facility
suppliers
Political
The differences between ETDZ/HTIDZ/EPZ/BZ (McCallum, 2011):
Category
ETDZ / HTIDZ
Rate of corporate income
tax
15%
EPZ
BZ
Preferential arrangements of FIE
2 years of exemption and
three years of reduction
by half (7.5%)
Preferential arrangements of enterprises
adopting advanced technology
Reductions up to 3 years
under certain conditions
Preferential arrangePreferential tax rate at
ments for export oriented 10% for the year in which
enterprises
export value exceeding
70%
Duties and importation
VAT for imported selfused production equipments and parts
Exemption granted for
enterprises within the
encourage category
Exemption
Duties and importation
VAT for imported office
appliance and management equipments
No exemption
Exemption
Duties and importation
VAT for imported materials
No exemption except
for bonded materials for
processing trade
Exemption
License for imported
materials, equipments
and office appliance
under processing trade
No exemption except
for encouraged projects
under processing trade
Exemption for all projects
under processing trade
Exemption for all projects
under processing trade
Domestic sale of products Taxed as finished product
comprising bonded raw
materials
Taxed as finished product
Taxed upon imported raw
materials
VAT refund for finished
products made from
domestics
Refund granted only if
finished products leave
territory of China
Refund granted after
domestics enter EPZ
Refund granted only if
finished products leave
territory of China
Bank guarantee bond
under processing trade
Required
Not required
Rate of VAT
17%; 13% for agriculture
Tax refund for re-investment
40% of paid income tax
for the re - investment;
totality of paid income tax
for re- investment in the
case of export oriented
enterprises and enterprises adopting advanced
technology
41
Zhongguancun, ‘Beijng’s Silicon Valley’, 8,000 hi-tech enterprises. 361,000 employees, 5,000 with a doctoral
42 degree, 25,000 with a master’s degree, 180,000 with a bachelor’s degree. Income of 201.4 billion yuan from technology, industry and commerce; total industrial output value 128.7 billion yuan (2001).
Conclusion
Special Economic Zones (SEZs) are areas with a special status that offer
special benefits and a world class environment to get foreign companies
to invest. There are currently 3,500 SEZs worldwide, operating in 130
countries, employing 66 million people, and adding over $500 billion of
trade related value. SEZs can involve investments up to $900 million, are
able to stimulate national economies, and lift millions of people out of
poverty.
China’s strategic use of Special Economic Zones
43
China has not been the first country to apply SEZs, but it certainly has
been most successful in using them, often for strategic purposes. Perhaps
China’s success with SEZs is owed to the fact that China has been historically familiar with the concept of an area with an exceptional status that
accommodates foreign trade partners. As early as 1557, Macau was rented
to Portugal by the Chinese empire as a trading port, and in 1842, the
French, British and American concessions were granted in Shanghai following the Opium War.
The SEZ really took off in China in 1980, when Deng Xiaoping decided to
start using SEZs to experiment with the free market economy, a move he
referred to as ‘crossing the river, feeling the stones one at a time’. To this
end, the cities of Shenzhen, Zhuhai, Xiamen and Shantou were given the
special status of Special Economic Zone. This status allowed Shenzhen to
grow from a village of 25,000 people to a city of 10 million in just thirty
years time, making it the largest, and most successful, SEZ in the world
today.
After the success of the first four SEZs, a quick succession of increasingly sophisticated SEZs followed. In twenty years time, almost 200 new
SEZs were created in China, although they would no longer encompass
entire cities. These new SEZs were mainly focused on accommodating
Top: Lhasa, Tibet; Bottom: Kashgar, Xinjang province, China. Lhasa and Kasgar are cities in poor regions with
44 Bhuddist and Muslim minorities, respectively, that have seen ethnic unrest in recent years. China will develop
Special Economic Zones in both cities in an attempt to address poverty in and curb ethnic unrest.
high tech industries, although also other activities were included. Through
the years, SEZs have been created for car, aircraft, space, financial and IT
industries, as well as for agriculture and tourism.
SEZs have been able to grow local economies significantly, and lift millions
out of poverty. These qualities have led China to apply SEZs in areas that
have been scenes of ethnic unrest. In 2001, Lhasa, in Tibet, got an SEZ, and
in 2010, the city of Kashgar, in Xinjiang province in the West of China, was
given the status of SEZ. Just one year before, Kashgar had been the scene
of unrest among the Ozgur ethnic minority population.
SEZs have also been used by China to foster the relationships with neighbouring countries. Special zones were created in border towns near Russia, Mongolia, Kazakhstan and Vietnam to stimulate trade. Special zones
have also been created to stimulate trade with Malaysia and Taiwan. The
Taiwan SEZs in particular has attributed to considerably better relations
between Taiwan and China since 2008.
SEZs have helped China to benefit from changing international trade
agreements as well. When the Multifibre Agreement, regulating garment
quotas, was terminated in 1995, China moved quickly to create 61 special
zones to capture most of the Asian garment industry, and has been very
successful in doing so. Today, China is looking to move into Africa, partly
so it can benefit from the Least Developed Country status of many African
countries, which will allow them to export goods duty-free to developed
countries.
Many argue however that the main reason for China to move into Africa is
access to natural resources. China has announced the development of six
new SEZs in Africa. China will take on the role that is traditionally confined
to local governments, as it will pay for the full package, including considerable infrastructural investments, in return for access. China is thereby
the first to export the SEZ itself: the export zone exported. This move
has caused anxiety with Western partners, who have traditionally taken
a more commanding approach toward African aid. The Chinese approach
could potentially transcend the development of the six SEZs and cause a
shift in geopolitical relations globally.
In the course of 30 years, China has developed the Special Economic Zone
into a strategic instrument that is applicable to a range of issues. SEZs
have allowed China to first sort things out domestically, and now to make
an appearance on the world stage. China’s ultimate goal, it has been said,
is to build skyscrapers in Tokyo, run banks in London and make films in
Hollywood. It is learning the ropes in Africa, where the competition is
weak. For China, Africa is yet another stepping stone to a commercial presence around the globe.
45
Beijing Tianzhu International Airport Free Trade Zone (2008) is the first airport-based comprehensive bonded
46 area in China, with overall planning area 5,944 sq km. It advertises a ‘four-dimensional advantage’, which includes
air, sea, road and railway connections.
Special Economic Zones: Vehicles of Localism
Traditionally, low labour cost has been the driver for foreign companies to
invest in SEZs, and it still is the most dominant factor. Fierce competition
among SEZs worldwide however have led zones to explore new ways of
attracting foreign investors. Some of these ways have proved to be more
successful than others.
A common point explored by zones is offering a more relaxed approach
to workers rights. This means offering wages below minimum standards,
excessive compulsory overtime and a relaxed approach towards health
and safety standards. It also means the prohibition of workers unions, with
some countries openly advertising the absence of unions of strikes. This
approach has triggered a ‘race to the bottom’, in which work conditions
have entered a downward spiral. This in turn has led to high turnovers of
SEZ workers, with average careers of seldom longer than five years, and
exhausting the local pool of human resources. It has also caused negative
sentiments taking hold against SEZs among local populations and NGOs.
Competition based on low working standards can therefore seen as an
unsustainable business model.
Tax breaks are generally seen as helpful for SEZs in persuading foreign
companies to invest, but they have proven to be of little effect on a worldwide scale. In addition, companies are seldom helped by tax incentives.
Tax exemptions are of no value for firms that do not make profits, which
is usually the case in the initial years of operation. The limited duration of
tax holidays means that these companies cannot benefit from tax breaks
once they start to make a profit. Firms that are profitable from the outset
on the other hand might not have needed incentives in the first place.
The offering of roads, water, uninterrupted electricity supply, gas, sewerage, networked and air conditioned buildings, and direct connections to
ports and airports have proven to be much more effective in the securing the success of zones. Many SEZs now also include child care facilities,
medical clinics, conference centers, product exhibition areas, commercial
centers, incubator facilities, training facilities and on-site housing, and
zones also offer financial services, on-site customs clearance, legal assistance and management consulting. The zones that are most successful are
usually run by private parties, which are run on a cost-recovery basis and
are therefore more responsive to tenants needs.
Comprehensive SEZs that offer a wide scope of facilities and services
have allowed countries to move up the value chain and include activities
related to electronics, tourism, pharmaceuticals, technology, R&D, residential, leisure, airports and finance. These cluster developments tend to
be better in achieving economies of scale, which enable business value
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48
chains, production specialization, knowledge spillovers and effective local
government support that all attribute to a self-sustaining dynamic. Cluster
developments like these have brought interaction with local economies,
further investments, infrastructural development, sharing of technology,
expansion of R&D, and further innovation.
The interaction of SEZs with the local context is another success factor, even though the contained nature of SEZs suggests otherwise. SEZs
are able to nurture and grow the linkage to the international market
that some cities with a history or tradition of foreign trading or business
already have. Many of the successful Chinese SEZs have built upon local
cottage industries that have a tradition of centuries. Zones located in
remote areas that are meant to act a growth poles on the other hand have
involved heavy upfront capital expenditures, and have failed to succeed
nevertheless.
The success of SEZs is traditionally seen as linked with the liberalization of
markets, which has earned them the reputation of ‘vehicles of globalization’. The truth however is that the success of SEZs is not so much dependent on global business models and clever investment strategies. Rather,
the success of SEZs is in large part dependent on local investments in
world quality infrastructure, facilities and services, and a sensitivity to the
‘genius loci’, the unique local connections and cultural-historic context of a
place. In spite of what their reputation of ‘vehicles of globalization’ suggest, SEZs should really be seen as ‘vehicles of localism’.
49
50
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Image Credits
All reasonable efforts so secure permissions for the visual material reporduced herein have been made by the author of this publication. The publisher and authors apologize to anyone who has not been reached.
Key: page numbers are indicated with ‘P’. The location of an image on a
page is indicated by the following key: t=top; m=middle, b=bottom.
Cover: Hamburger Hafen und Logistik AG (HHLA)
P. 4; t, b: Shanghai International Medical Zone (website)
P. 6; t, b: Shanghai zhanjiang High Tech Park (website)
P. 8; t, m, b: by Colloquial, based on graphics United States Government
Accountability Office (GAO) (see bibiliography)
P. 10; t:
Unknown; b: Sarmu
P. 12; t:
Unknown; b: Oliver9111
P. 18; t:
Unknown; b: Jin Fei (website)
P. 20; t:
China-Lekki Investment Ltd; b: Dar Al-Handasah
P. 22; t:
The Kenyan Daily Post; b: unknown
P. 24; t: Boskalis; b: unknown
P. 26; t, b: Taizhou Medical HIDZ (website)
P. 28; t:
DNA Graphic; b: Yash Developers
P. 30; t:
Xiang Fang ETDZ (website); b: unknown
P. 32; t, b: Kunming THR (website)
P. 34; t, b: Yangling HIDZ (website)
P. 36, 38: Colloquial; Google Maps
P. 42; t:
Zhongguancun HIDZ (website); b: unknown
P. 44; t:
World News; b: unknown
P. 46; t, b: Beijing Tianzhu International Airport FTZ (website)
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Special Economic Zones (SEZs) are areas with a special status that offer special benefits
and a world class environment to get foreign companies to invest. There are currently
3,500 SEZs worldwide, operating in 130 countries, employing 66 million people, and adding over $500 billion of trade related value. SEZs can involve investments up to $900 million, are able to stimulate national economies, and lift millions of people out of poverty.
However, knowledge on what makes a SEZ successful is limited. ‘The Anatomy of Special Economic Zones’ looks at what makes SEZs successful, and is a primer for anyone
involved in their development. For this publication, comprehensive research has been
done of relevant scientific literature, business reports and newspaper articles.
57
colloquial
Urban and Architectural
Research and Development
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