The special economic zone as a new model of economic development

October 25e, 2021, a ceremony was held to celebrate the opening of Duqm Hongtong Piping Factory, the first factory in the new Sino-Omani industrial city located 300 miles from the capital of Oman, Muscat. The factory is located in the Duqm Special Economic Zone (SEZAD), a once sparsely populated fishing village that has evolved into a booming coastal town since its designation as a Special Economic Zone (SEZ). SEZAD is one example of a growing number of SEZs that have spread across the world over the past 50 years.

According to UNCTAD, there are now more than 6,000 SEZs in the world located in nearly 150 countries. With only 79 SEZs in existence in 1975, their proliferation was rapid. Although SEZs have been well received and promoted in many emerging economies, ranging from India to Nigeria to Panama, the United Arab Emirates and Malaysia, no country has more adopted the model of development led by SEZs than China. So what are special economic zones, what explains their proliferation in recent decades, and where do they fit into the 21st world economic system of the century?

What are Special Economic Zones?

Called in some cases “free trade areas” (not to be confused with “free trade areas”), there is great diversity in the different types of SEZs, ranging from high technology, industrial zones to industrial zones. and ecological. industrial parks, export processing zones, free ports, bonded warehouses, etc. SEZs are defined by the World Bank as areas “in a country that [are] subject to economic regulations different from those of other regions of the same country. These areas are generally characterized by more liberal economic laws, providing benefits to investors physically located in the area, such as duty-free benefits, tax incentives, relaxed labor and land use restrictions and procedures. simplified. SEZs are generally established with the aim of attracting foreign direct investment (FDI), accelerating industrialization, promoting technological innovation, creating jobs, stimulating exports, experimenting with new regulations and policies and support broader economic liberalization strategies.

The proliferation of SEZs

Although the concept of free ports dates back to the Italian Renaissance, the advent of the modern SEZ dates back to 1959 with the establishment of an international business park in Shannon, Ireland. The free trade zone was built near Shannon Airport, which previously served as a transit hub and refueling station for transatlantic flights. Anticipating that aircraft technology would soon allow flights to bypass the area completely, the then manager of Shannon Airport hatched a plan to lift the economy out of its dependence on commercial flights. This plan involved the creation of the Shannon Free Zone (SFZ), which offered tax incentives and tariff reductions with the aim of attracting FDI. Today, SFZ is still home to some 170 companies and employs more than 8,000 people.

Following the pioneering model of the SFZ, other SEZs began to appear alongside airports, seaports and border territories throughout the 1960s. Export Oriented Industrialization (EOI) becoming increasingly Most popular as an economic growth strategy in East Asia in the 1980s and 1990s, the number of SEZs continued to grow, reaching around 3,000 by the turn of the 21st century. A key turning point in the history of SEZs relates to Deng Xiaoping’s open door policy, which led to the establishment of the first SEZs in China in 1979. The objective of the open door policy was to end to the isolation of China and foster economic growth to compete with Western industrialized democracies. Therefore, the CCP authorities have established four SEZs along the east coast of China in Shenzhen, Zhuhai, Shantou and Xiamen.

Since then, the SEZ experience in China has been a remarkable success. China’s explosive growth since the 1980s would not have been possible without these special economic zones which have accounted for up to 22% of GDP, 45% of total domestic FDI and 60% of exports. In 2021, China is estimated to be home to around 2,500 SEZs in total. The successful experiment in China has also sparked a new wave of SEZs across Asia in places such as the Philippines, Thailand, Indonesia, Laos, Cambodia, Vietnam, Malaysia and Myanmar. Outside of Asia, SEZs are also gaining ground in other parts of the world, notably in Africa, the MENA region and Latin America. In addition to hosting SEZs and serving as a model for the development of SEZs, China has also encouraged the establishment of SEZs abroad through China’s overseas economic and trade cooperation zones. These state-funded ventures between Chinese companies and local partners are at the heart of the global infrastructure development strategy known as the Belt and Road Initiative.

A new model of economic development

These enclaves of liberal economic activity represent a new model of economic development. What began as experimental marginal elements of the world economic system in the 20e century are now turning into central elements of the 21st century. Due to the SEZs, many formerly undeveloped areas have grown rapidly. However, the question remains as to why countries don’t just liberalize all of their economies? Why opt for small areas of capital development instead of embracing a more openly market-based system?

There are a few possible explanations for this. The first is ideological, because skepticism towards capitalism remains high. Policymakers may be reluctant to impose sweeping, sweeping market reforms that mimic Western models. In this way, SEZs allow for small-scale experimentation rather than disruptive systemic changes that could risk causing instability and unrest.

Second, large-scale liberalization is an expensive endeavor. Cultivating a thriving environment requires a healthy and educated population with access to well-developed infrastructure such as electricity, plumbing, roads and internet technology. Providing these goods to an entire population is simply not an option for many developing countries. SEZs offer a viable alternative that deploys scarce resources more selectively.

Third, emerging economies may feel that their domestic industries are not yet able to compete globally. In such cases, large-scale liberalization could ultimately do more harm than good, as producers would be put in direct competition with producers in advanced industrialized countries. The past experience of developing countries adopting structural adjustment reforms serves as a caveat. SEZs, on the other hand, allow companies to benefit from access to external investment, while remaining insulated from global competition.

To look forward

The Duqm Hongtong Pipe Factory in SEZAD embodies the growing trend of Special Economic Zones, which now exist in much of the developing world. SEZs may serve as a springboard for broader liberalization efforts. Alternatively, they can continue to represent a new model of economic development. As the leader of the SEZ-led development model and one of the world’s largest economies, China will continue to shape the evolution of the global economic system and, with it, the role that SEZs will play.