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D I R E C T I O N S I N D E V E LO P M E N T

Trade

Special Economic Zones Progress, Emerging Challenges, and Future Directions Thomas Farole, Gokhan Akinci Editors

Special Economic Zones

Special Economic Zones Progress, Emerging Challenges, and Future Directions Edited by Thomas Farole International Trade Department World Bank

Gokhan Akinci Investment Climate Department World Bank

© 2011 The International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-8763-4 eISBN: 978-0-8213-8764-1 DOI: 10.1596/978-0-8213-8763-4 Cover design: Naylor Design, Inc. Library of Congress Cataloging-in-Publication Data has been requested.

Contents

Acknowledgments Contributors Abbreviations Chapter 1

Introduction Thomas Farole and Gokhan Akinci Attracting Investment and Creating Jobs: Old Models and New Challenges Moving from Static to Dynamic Gains: Can SEZs Deliver Structural Change? Social and Environmental Sustainability: Emerging Issues For SEZs Conclusion Notes References

xv xvii xix 1

8 13 17 19 19 20

v

vi

Contents

PART I Chapter 2

Chapter 3

Chapter 4

Attracting Investment and Creating Jobs: Old Models and New Challenges The Thin End of the Wedge: Unlocking Comparative Advantage through EPZs in Bangladesh Mustafizul Hye Shakir and Thomas Farole

23

25

Introduction Historical Development of EPZs in Bangladesh Performance Key Success Factors Challenges for the Future Conclusion Notes References

25 27 29 33 38 43 44 45

Success and Stasis in Honduras’ Free Zones Michael Engman

47

Introduction Historical Development of Free Zones in Honduras Performance Key Success Factors Challenges for the Future Conclusion Notes References

47

China’s Investment in Special Economic Zones in Africa Deborah Brautigam and Tang Xiaoyang China’s Overseas Special Economic Zones: Aims and Objectives China’s Overseas Zones in Africa: Current Situation China’s Overseas Zones: Mechanisms Progress, Challenges, and Potential Appendix 4.A. China’s Official Overseas Economic and Trade Cooperation Zones

48 49 54 61 65 67 68

69

69 72 80 91 96

Contents

Notes References Interviews Chapter 5

Partnership Arrangements in the China-Singapore (Suzhou) Industrial Park: Lessons for Joint Economic Zone Development Min Zhao and Thomas Farole Background Introduction to Suzhou Industrial Park The Strategy of the Chinese and Singaporean Governments Partnership Structure The Knowledge-Sharing Process Challenges to the Partnership Overcoming Partnership Challenges and Implementing Innovations Conclusion Appendix 5.A. Selected Indicators: Developments at SIP, 1994–2008 Appendix 5.B. SIP Timeline and Major Milestones Notes References

Chapter 6

SEZs in the Context of Regional Integration: Creating Synergies for Trade and Investment Naoko Koyama Introduction Regional Trade Agreements Implication of RTAS for SEZs Harmonization of SEZs: Beyond Tariff Issues Conclusion Appendix 6.A Regulations and Handbooks of Regional Trade Agreements Appendix 6.B Summary of Tariff-Related Measures Taken by Regional Trade Agreements for Special Economic Zone–Processed Goods Notes References

vii

97 98 100

101

101 102 104 105 107 110 113 115 121 122 124 125

127

127 129 134 143 149 150

151 154 155

viii

Contents

PART II Chapter 7

Chapter 8

Moving from Static to Dynamic Gains: Can SEZs Deliver Structural Change? When Trade Preferences and Tax Breaks Are No Longer Enough: The Challenge of Adjustment in the Dominican Republic’s Free Zones Jean-Marie Burgaud and Thomas Farole

159

Introduction Free Zones in the Dominican Republic Performance and the Challenge of Adjustment The Policy Response Current Situation and Conclusions Notes References

159 162 166 172 175 180 181

Fostering Innovation in Developing Economies through SEZs Justine White

183

Introduction SEZs as an Instrument for Innovation The Need for Absorptive Capacity and Local Linkages A Staged Approach to Building an Innovative SEZ Conclusion Notes References Chapter 9

157

Early Reform Zones: Catalysts for Dynamic Market Economies in Africa Richard Auty Context The Confused Definitions and Aims of Special Economic Zones Examples of Successful SEZs The Potential Role of ERZs in Sub-Saharan Africa Conclusions: ERZs and Economic Reform in Sub-Saharan Africa

183 184 189 197 200 202 202

207

207 210 214 220 223

Contents

Chapter 10

PART III Chapter 11

Note References

224 224

Planned Obsolescence? Export Processing Zones and Structural Reform in Mauritius Claude Baissac

227

Introduction The Policy Environment Overview of MEPZ Performance Today’s Challenges The MEPZ and Economic Reform Conclusion Notes References

227 227 230 235 237 240 243 244

Social and Environmental Sustainability: Emerging Issues for SEZs

245

The Gender Dimension of Special Economic Zones Sheba Tejani Introduction Background on Trade and Gender The Economics of Female-Intensive Production in SEZs Evidence on Gender in SEZs Quality of Female Employment in SEZs Defeminization of Employment Conclusion and Policy Implications Notes References

Chapter 12

ix

247

247 248 253 255 262 266 269 272 274

Low-Carbon, Green Special Economic Zones Han-Koo Yeo and Gokhan Akinci

283

Introduction Low-Carbon, Green SEZs: Overview Low-Carbon (Green) SEZ Framework

283 284 287

x

Contents

Low-Carbon, Green SEZs around the World: Current Status and Future Trends References

304 306

Index

309

Boxes 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 4.1 4.2 5.1 7.1 7.2 7.3 7.4 8.1 8.2 8.3 8.4 8.5 10.1

Incentives Offered in Bangladesh EPZs The Labor Counselor Program The Korean EPZ: The First Private EPZ in Bangladesh The Economic Zones Act Incentives in the Honduras Free Zones San Pedro Sula: Key Agglomeration for the Export Sector The Critical Role of Domestic Investors in Attracting FDI Instituto Politécnico Centroamericano Timeline: Tianjin TEDA in Egypt Challenges in the Lekki Free Zone in Nigeria SIP Free Trade Zone Development The Apparel Sector in the Dominican Republic Gulf and Western Establishes the Dominican Republic’s First FZ in 1969 Profile of the Dominican Republic’s Free Zones in 2010 Grupo M Pioneered the Strategy of Production Sharing between FZs in the Dominican Republic and Haiti The First Modern SEZ, Shannon, Ireland The Development of Backward Linkages: A Successful and Less Successful Example SEZs and Labor Circulation: A “Domestic Diaspora”? A Tale of Two Countries: Investment Climate Reform SEZs in Cambodia Targeting Productivity Improvements in the EPZs

37 40 42 43 50 58 60 65 75 93 116 160 162 164 174 186 194 195 196 199 234

Figures 2.1 2.2

Exports (US$ millions) and Contribution to National Exports (percent) of EPZ Enterprises Employment Generation in EPZs (Year-Wise and Cumulative)

30 32

Contents

2.3 3.1 3.2 5.1 5.2 6.1 6.2 6.3 6.4 7.1 7.2 7.3 7.4 7.5

7.6 8.1 8.2 8.3 10.1 10.2 10.3 10.4 10.5 10.6 11.1 11.2

Comparison of Average Wages and Benefits of Unskilled Workers in SEZs Employment in Free Zones Gross Value of Production in Maquilas Governance Structure of SIP Current Ownership Structure of CSSD Total Notifications Received by Year, 1948–2009 Network of Plurilateral Groupings in Africa and Middle East Evolution of the Share of Intra-PTA Imports in Total Imports, 1970–2008 Classification of Various Tariff-Related Measures by RTA Index of Growth (1995 = 100) in the Free Zone Program Free Zone Value Added (US$m) and Contribution to GDP, 1995–2008 Free Zone Exports (US$ million) and Share of National Exports Index of Free Zone Exports: Textile versus Nontextile (1995 = 100) Comparative Growth in U.S. Imports of Knitwear by Key Countries, 2004–08, and U.S. Imports of Apparel and Textiles by Key Country, 2009 and 2010 Evolution of FZ Employment, 1969–2008 The Republic of Korea’s Gradual Buildup of R&D Capacity Island to Catalyst SEZs SEZs from Linkages and Technological Capabilities to Upgrading Employment Data Investment Data Exports Sectoral Share of Exports Exports per Employment Measures of Export Productivity Female Share of SEZ Employment and Nonagricultural Employment, 2005–06 Female Share of SEZ Employment and Nonagricultural Employment in African Countries, 2009

xi

34 53 63 106 108 131 132 135 140 165 167 168 169

170 171 192 200 201 230 231 232 233 233 234 258 259

xii

Contents

11.3 11.4 11.5

12.1 12.2 12.3 12.4 12.5 12.6 12.7

Female Share of Employment in SEZs by Sector, Select Countries, 2009 Female Share of Employers and Managers, Select Countries, 2009 Female Intensity of Manufacturing Employment and Manufacturing Value Added per Worker, Average Annual Growth, Southeast Asia and Latin America, 1985–2006 Spectrum of Environmentally Sustainable Zones Main Components of a Low-Carbon, Green SEZ Framework Trajectory of GHG Emission and Mitigation Target Example: Some SEZ GHG Emission Structures by Sector Example of Industrial Symbiosis Networking Map, Republic of Korea Global Greenhouse Gas Mitigation Marginal Cost Curve Beyond 2030 Business-as-Usual Low-Carbon, Green SEZ Policy Framework

260 261

268 285 287 289 290 293 295 298

Tables 1.1 2.1 2.2 3.1 3.2 3.3 4.1 5.1 5.2 8.1 8.2 8.3 8.4 9.1 9.2

Summary of Types of Zones Summary of EPZs, 2009 Operating Enterprises in the EPZs by Sector, 2009 FDI in Manufacturing Activities FDI in Manufacturing by Country of Origin Value-Added Contribution by Manufacturing in “Industry” and “Maquila Industry” Structure of Investment in China-Africa SEZs SIP Key Statistics FDI Utilized, US$ Billion Direct and Indirect Benefits of SEZs Training for Workers in SEZs Staged Approach to the Development of an SEZ: The Shenzhen Case Some Policies Aimed at Stimulating Innovation through SEZs Export Processing Zone Performance, Six Asian Economies Ratio of Firms, Workers and Profits to Urban Population Share, Chinese Regions, 1996

2 28 30 51 51 52 84 103 112 185 191 201 202 212 219

Contents

11.1 11.2 11.3 12.1 12.2

Female Wages as a Percentage of Male Wages in Manufacturing SEZ Exports as a Percentage of Total Exports Total Employment and Female Share of Employment in SEZs Some Examples of CDM Projects of IDA Countries Interlinkage between CDM and FDI

xiii

250 256 257 302 304

Acknowledgments

The editors extend their sincere gratitude to all the authors who took the time to contribute to this volume. In addition, they thank the peer reviewers whose comments and feedback provided invaluable guidance to the authors and editors: Magdi Amin, Kishore Rao, Marilou Uy, and Michael Wong. Thanks also are extended to others who provided comments on the book or individual chapters, including Sumit Manchanda, Martin Norman, Harun Onder, and José Guilherme Reis. Thanks also to Cynthia Abidin-Saurman, Igor Kecman, Charumathi Rao, Marinella Yadao, and Aimee Yuson for support on administrative and financial matters, and to Stephanie Chen and Stacey Chow for support on publishing and marketing matters. Finally, thanks to the Bank-Netherlands Partnership Program, which provided the generous financial support under which this project was conducted. The book was produced under the overall supervision of Mona Haddad (sector manager) and Bernard Hoekman (sector director) in the International Trade Department of the World Bank.

xv

Contributors

Editors Thomas Farole

Senior Economist, International Trade Department, World Bank, Washington, D.C.

Gokhan Akinci

Lead Investment Policy Officer, Investment Climate Department, International Finance Corporation and World Bank, Washington, D.C.

Other Contributing Authors Richard Auty

Senior Lecturer, Geography, University of Lancaster, UK

Claude Baissac

Secretary General, World Economic Processing Zones Association and Executive Director, Eunomix Consulting, Johannesburg, South Africa

Deborah Brautigam

Professor, International Development Program, School of International Service, American University, Washington, D.C. xvii

xviii

Contributors

Jean-Marie Burgaud

Independent Consultant, trade and economic development, Santo Domingo, Dominican Republic

Michael Engman

Economist, Finance and Private Sector Development, Africa Region, World Bank, Washington, D.C.

Naoko Koyama

Project Leader, Dalberg Global Development Advisors, Nairobi, Kenya

Mustafizul Hye Shakir

Consultant, Finance and Private Sector Development, South Asia Region, World Bank, Washington, D.C.

Sheba Tejani

PhD Candidate, Economics, New School for Social Research, New York, NY

Justine White

Operations Officer, World Bank Institute, Washington, D.C.

Tang Xiaoyang

Ph.D. Researcher, Philosophy Department, New School for Social Research, New York, NY

Han-Koo Yeo

Senior Investment Officer, Investment Climate Department, IFC and World Bank, Washington, D.C.

Min Zhao

Senior Economist, World Bank, Beijing, China

Abbreviations

ADOZONA AFTA ASEAN BAU BEPZA BICF BPO BSCIC CACM CADF CBD CBI CBTPA CCECC CCX CDM CEMAC CER CNMC

Dominican Association of Free Zones ASEAN Free Trade Area Association of Southeast Asian Nations business as usual Bangladesh Export Processing Zones Authority Bangladesh Investment Climate Fund business process outsourcing Bangladesh Small and Cottage Industries Corporation Central American Common Market China-Africa Development Fund Central Business District Caribbean Basin Initiative Caribbean Basin Trade Partnership Act China Civil Engineering Construction Corporation Chicago Climate Exchange Clean Development Mechanism Economic and Monetary Community of Central Africa Certified Emission Reduction China Nonferrous Mining Company

xix

xx

Abbreviations

CNZFE

COMESA CSSD DEDO DR-CAFTA EAC ECCI ECOWAS EDB EFTA EIA EPA EPZ EPZDA ERZ ESCO FDI FIDE FOCAC FTA FZ GAFI GATT GCC GDP GHG GVC ICT IFC IFEZ IFTZ ILO INFOTEP IPC IPR JICA

Consejo Nacional de Zonas Francas de Exportación (National Free Zones Council of the Dominican Republic) Common Market for Eastern and Southern Africa China-Singapore Suzhou Industrial Park Development Company, Ltd. Duty Exemptions and Drawback Office Dominican Republic–Central American Free Trade Agreement East African Community Egypt-Chinese Corporation for Investment Economic Community of West African States Singapore Economic Development Board European Free Trade Association environmental impact assessment Economic Partnership Agreement export processing zone Export Processing Zones Development Authority early reform zone energy service company foreign direct investment Foundation for Investment and Development of Exports Forum on China-Africa Cooperation free trade agreement free zone General Authority for Free Zones and Investment General Agreement on Tariffs and Trade Gulf Cooperation Council gross domestic product greenhouse gas global value chain information and communication technology International Finance Corporation Incheon Free Economic Zone Integrated Free Trade Zone International Labour Organization Instituto Nacional de Formación Técnici Profesional Instituto Politécnico Centroamericano intellectual property rights Japan International Cooperation Agency

Abbreviations

JSC JTC KCER LDC LED LFTZ M&E MDC MEDIA MEPZ Mercosur MFA MFEZs MFN MMM MNC MOFCOM NAFTA NIC NPCC PKCC PMSD PPP PTA R&D RMB RPS RTA SACU SADC SAFTA SCM SEZ SFADCo SIP SIPAC SME SOE

xxi

China-Singapore Joint Steering Council Jurong Town Corporation Korea Certified Emission Reduction least-developed country light-emitting diode Lekki Free Trade Zone monitoring and evaluation Main Development Company Mauritius Export Development and Investment Authority Mauritius Export Processing Zone Southern Cone Common Market (Mercado Commún del Sur) Multi-Fiber Arrangement Multi-Facility Economic Zones most-favored nation Mouvement Militant Mauricien multinational corporation Ministry of Commerce North American Free Trade Agreement newly industrializing country National Productivity and Competitiveness Council Pingxiang Coal Group Parti Mauricien Social Democrate public-private partnership preferential trade agreement research and development Renminbi renewable portfolio standards regional trade agreement South African Customs Union Southern African Development Community South Asian Free Trade Agreement (Agreement on) Subsidies and Countervailing Measures special economic zone Shannon Free Airport Development Company China-Singapore Suzhou Industrial Park Suzhou Industrial Park Administrative Committee small and medium enterprise state-owned enterprise

xxii

Abbreviations

SPF SPO t CO2e TEDA TFP TVE UNFCCC VAT WAEMU / UEMOA WTO ZIP ZOLI

SIP Provident Fund System Software Project Office tons of carbon dioxide emissions Tianjin Economic-Technological Development Area total factor productivity township and village enterprise United Nations Framework Convention for Climate Change value added tax West African Economic and Monetary Union (Union Économique et Monétaire Ouest-Africaine) World Trade Organization Zonas Industriales de Procesamiento Zona Libre

CHAPTER 1

Introduction Thomas Farole and Gokhan Akinci

Ask three people to describe a special economic zone (SEZ) and three very different images may emerge. The first person may describe a fenced-in industrial estate in a developing country, populated by footloose multinational corporations (MNCs) enjoying tax breaks, with laborers in garment factories working in substandard conditions. In contrast, the second person may recount the “miracle of Shenzhen,” a fishing village transformed into a cosmopolitan city of 14 million, with per capita gross domestic product (GDP) growing 100-fold, in the 30 years since it was designated as an SEZ. A third person may think about places like Dubai or Singapore, whose ports serve as the basis for wide range of trade- and logistics-oriented activities. In fact, all three of these are correct descriptions of this diverse instrument: Table 1.1 provides a brief summary of the different types of zones in existence. This table highlights the many ways in which the concept of “special” economic zones has been operationalized and underscores the challenge of attempting to say anything specific about such a heterogeneous policy tool. But despite the many variations in name and form, all SEZs can be broadly defined as—

1

2

Integrated development

Export manufacturing Export manufacturing Export manufacturing

Development objective Support trade

None

1,000 hectares3 None

countrywide

None

Typical location Port of entry

No minimum