New ADB research shows design of Special Economic Zones determines success

SINGAPORE — Special economic zones (SEZs) can be a driving force for increased trade, investment, and economic reform in Asia at a time the region is experiencing a slowdown in trade, provided the right business environments and policies are put in place, says a new Asian Development Bank (ADB) report.

The Asian Economic Integration Report 2015, examines current trends in trade, finance, migration, remittances and other economic activities in the region, with a special chapter on the role of special economic zones. 

“The expansion in the number of SEZs from about 500 in 1995 to over 4,300 in 2015 shows the strong and rising interest to this form of policy experiment, though the success record is somewhat mixed,” said ADB Chief Economist Shang-Jin Wei. “If designed right, SEZs can become drivers for increased trade, foreign direct investment (FDI), and better economic policymaking and reforms. Moreover, as countries develop, areas with SEZs can be transformed from mere manufacturing sites to hubs for innovation and modern services.”

 The special chapter in the report notes that the number of SEZs in an economy is positively related to overall export performance in Asia. The report also finds that in developing Asia, countries with SEZs attract significantly more FDI, with the existence of SEZs corresponding to 82% greater FDI levels.

However there have also been failures, with a lack of strategic focus and regulatory and governance gaps undermining performance in some cases. SEZs that have done well have been able to diversify their production bases away from assembly of imported inputs, and increase sales of their own branded merchandise in domestic and global markets by building closer ties with the domestic economy. 

Putting in place fiscal incentives for initial investments and ensuring an adequate supply of labor, strategic locations, transport connectivity, and dependable judicial systems and institutions, such as independent governing authorities and enabling legal frameworks, are all key ingredients of successful zones. At the same time, the report notes, that for zones to become a major driver of development they must be made an integral part of a government’s national development strategy and industrial policy. It also requires the fostering of business enabling environments which encourage firms to move up the industrial value chain and to explore growing opportunities in logistics, information and communications technology, and other areas of high technology, knowledge and innovation. 

The report also provides analysis on Asia’s trade. The data in the report show that Asia’s income elasticity of trade declined from 2.69 before the global financial crisis to 1.30 afterwards and the value of Asia’s intermediate goods trade—almost 60% of total trade—contracted 2.6% in 2014. Structural factors behind these include a general trend of rebalancing away from export and investment toward consumption and services, the slowdown in the expansion of global and regional value chains after decades of rapid expansion, and the People’s Republic of China’s (PRC) growth moderation. Nevertheless, regional trade integration is moving steady and Asia in general trades more with regional partners than outside the region.  

The report also outlines how Asia has become an important source of outbound investment, with FDI outflows outstripping inflows, growing over 45% between 2010 and 2014. Increased investment was led by traditional investors including Japan, Hong Kong, China and Singapore and also emerging Asian investors such as the PRC, India, Malaysia, and Thailand. Asia remains the world’s largest source of international migrants, accounting for a third of the global total in 2013, and the region also accounted for nearly 50% of global remittances in 2014. 

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region. In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.