TRADE, INVESTMENT AND COMPETITIVENESS E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S The Dos and Don’ts of Special Economic Zones Douglas Zhihua Zeng © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, 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 judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Diego Catto / www.diegocatto.com >>> Contents Acknowledgments 4 I. Introduction 5 II. The Four Dos 9 III. The Four Don’ts 13 IV. References 16 >>> Acknowledgements This policy note was prepared by Douglas Zhihua Zeng, senior economist in the Markets, Competition, and Technology Unit of the Finance, Com- petitiveness and Innovation (FCI) Global Practice at the World Bank. The objective of this note is to provide quick guiding principles to countries and economies implementing SEZs domestically. It builds on the SEZ Guid- ance to TTLs tool and previous work done under that initiative. The author is grateful to Sherif Muhtaseb, Sumit Manchandan, Etienne Kechichian, Maria Miller, Sinem Demir, Noelia Carreras Schabauer, Georgiana Pop, and Gemma Vives, who have contributed to that initiative. Special thanks to Martha Martinez Licetti (practice manager in the Mar- kets, Competition and Technology Unit of the FCI at the World Bank) for her guidance and supervision, to Caroline Freund (former FCI Global Director) and Mona Haddad (FCI Global Director) for their management support, and to Vincent Palmade and Mariem Malouche for their peer reviews and inputs. This work has benefited from the financial support under the Umbrella Facility for Trade trust fund that is financed by the governments of the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom, as well as the Competitive Industries and Innovation Program trust fund. The author is grateful for their generous support. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 4 1. >>> Introduction Special economic zones (SEZs) have been used by many developing countries as a poli- cy tool to promote industrialization and economic transformation. The World Development Report 2020 also recognizes the possibility of using SEZs as a means of facilitating global value chain participation (World Bank 2019). According to the latest World Investment Report by the United Nations Conference on Trade and Development (2019), zones (including SEZs and other types of zones) are used by more than 140 economies around the world, almost three-quarters of developing economies and almost all transition economies. That number has grown rapidly in recent years, with at least 5,383 zones in 147 economies. Among those zones, most are multi- activity zones. Industry-specialized zones and zones focusing on innovation are concentrated in more advanced emerging markets. Zones in most developed countries are regular zones (without a special regulatory or incentive regime) and focus primarily on logistics. As a “high-risk, high-reward” instrument, the global results of SEZs in developing coun- tries are quite mixed. Results vary significantly with some regions or countries (especially those in East Asia) in general being more successful while others (especially those in Sub- Saharan Africa) struggle to make zones work (Zeng 2015; World Bank 2019). Even in the same country, it is quite normal to have both successful and failed zones. As an industrial policy tool, an SEZ is supposed to complement market forces by helping to overcome market failures. Market failures need to be properly identified ex ante and typical- ly include a malfunctioning land market (such as unavailability of land, issues with land owner- ship, and resettlement), deficient industrial infrastructures (such as power, water, gas, telecom- munications, and waste treatment) needed for industrial agglomeration, and a poor regulatory and business environment caused by coordination failures within governments or between a government and the private sector. For any zone initiatives, the following key checklist questions can be used to determine whether developing an SEZ is advisable: EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 5 1. What is the national or regional industrial and economic development strategy of the host country? Is industrial development the key pillar for economic development? (The sector focus has implications on the choice of instrument.) 2. What are the market and government failures the country or region is facing in implementing such a strategy? (A spatial ap- proach needs to be used to address the market and government failures, not for any other problems.) 3. Is an SEZ or industrial park one of the instruments that could help address such failures? Or, would a land market-wide ap- proach, a sector-wide approach, a value-chain approach, a cluster initiative, or other policy be sufficient? Is there enough demand for new industrial land from the private sector? (A pre-demand survey might be needed to have a good understanding of the market demand). Depending on the answers to those questions, it might be possible to adopt a zone-based approach. Figure 1 provides a visual illustration of the zone decision-making process and the possible approaches. > > > F I G U R E 1 - The Decision-Making Process of a Zone Initiative and Possible Approaches NO Is industrial sector No SEZ END No SEZ END the key pillar START for economic Yes Scenario 1: Industrial development for the What are the key land / industrial infra Are there alternative country or region? YES “market or gov ways (e.g., nation failures” in the or sector-wide industrial & economic Scenario 2: A approach) to address development? combination of these failures? industrial land, industrial infra, gov’t coordination failures No Option 1: Purely private END No SEZ Is there enough approach: the private sector demand for new No END owns/ develops/ operates the industrial land zone especially if the gov’t has from the private weak capacity How to implement sector? the SEZ or IP project? (There are different Option 2: High degree of PPP: options depending on Go for industrial gov’t and the private sector the specific situations, park END jointly owns the zone project, but but in general, should (for Scenario 1) let the private sector develops try to maximize the or SEZ Yes and operates the zone (e.g. BOT) finance/ participation (for Scenario 2) from the private Option 3: Low degree of PPP: sector) gov’t owns and develops the zone, but let the private sector operates the zone (or some END parts of the zone, e.g., the skills training center or environmental facilities). In this case, it’s important to separate the regulator from operator Source: World Bank Group (2021) and author’s research. Note: PPP = public-private partnership; SEZ = special economic zone EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 6 Once it is decided that a zone approach is both necessary park, which does not require a special legal and regulatory and feasible, the host government also needs to decide what regime. In such cases, an industrial park may be more appro- type of zone is the most suitable. There are typically two types priate because it involves less complex and risky processes. of zones despite the many names they are given: SEZs and And in many cases, an industrial park or just better land use industrial parks. SEZs often involve a “special” legal and policies, for example, are needed instead of SEZ regimes regulatory regime (including incentive regimes) and may be (See “CPSD Guidance Note on Zones” and “CPSD Guidance appropriate in case the main constraints are related to legal Note on Land”). Therefore, depending on the specific develop- and regulatory issues that affect the business environment ment objectives and constraints, an SEZ can be considered besides other constraints, such as land and infrastructures. together with other possible options (alternatives), as shown In other cases, a simple alternative to an SEZ is an industrial in table 1, though this note will mostly focus on SEZs. > > > T A B L E 1 - SEZs and Possible Alternatives OBJECTIVES POSSIBLE OPTIONS Locate hazardous industries Reform of zoning regulations and/or IPs/SEZs Promote agglomeration economies Proper zoning and/or IPs/SEZs Improve the business environment National reforms and/or SEZs to pilot/demonstrate Attract large transformative investors Smart incentives and/or good practice in IPs/SEZs Facilitate access to industrial land for SMEs Proper zoning and/or plug-and-play facilities in IPs/SEZs Help develop linkages between large/small firms Cluster reinforcement initiatives in or outside IPs/SEZs Improve worker conditions (including for female workers) Regulations and/or worker facilities in IPs/SEZs Reduce adverse impact on environment and address climate Improvement of environmental regulations and/or additional change challenges environmental facility (e.g., wastewater treatment plants) or renewable energy/energy efficiency investments in IPs/SEZs Source: World Bank Group (2021). Note: IPs = industrial parks; SEZs = special economic zones. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 7 For any zone projects, wherever feasible, it is always a is important, the implementation capacity matters even more good practice to ex ante identify private investment op- for the success of a zone program. portunities with strong development impact as well as the eco-industrial park (EIP) approach (UNIDO, World Bank Policy makers should actively revise and consider les- Group, and GIZ 2021; “CPSD Guidance Note on Zones”), to- sons learned from successful SEZ programs. Among gether with specific, practical, and feasible measures (policy those lessons learned, the key elements include having a and regulatory reforms and, when justified, public support) strategic location; integrating zone strategy with the overall necessary and sufficient to unleash these opportunities. development strategy; understanding the market demand and leveraging comparative advantages; and, most important, en- The mixed global results clearly show that SEZs are not suring that zones are “special” in terms of piloting reforms for a easy to get right, and even successful SEZs1 usually take business-friendly environment and are resilient to various ex- 5–10 years to bear results (World Bank Group 2021; AfDB ternal shocks, such as the COVID-19 pandemic. The lessons 2015). In low-income countries, the results could take longer. can be broadly classified into four dos and four don’ts (see Therefore, a prudent approach is vitally important. Even in the table 2), which will be discussed in more details in the next case where an SEZ approach is well justified, policy makers sections. The lessons can also be mostly applied to regular should approach SEZs with a clear objective, a long-term com- IPs (without a special regime). mitment, and a strong technical team. While sufficient funding > > > T A B L E 2 - The Four Dos and Four Don’ts of SEZs DOS DON’TS 1. Choose the right location 1. Lack of strategic planning and demand-driven approach 2. Foster a conducive business environment with a reform- 2. Fail to address the critical market and government fail- oriented mindset (use SEZs to pilot policy reforms) ures (such as infrastructure and government coordina- 3. Increase the market contestability through a rigorous tion) market demand assessment and private sector partici- 3. Poor policy and legal environment and weak implemen- pation tation capacity 4. Maximize the positive spillovers through an inclusive and 4. Inability to mitigate the environmental and social risks sustainable approach Source: Author’s research. Note: SEZs = special economic zones. 1 As with any other projects, the success of an SEZ project is also defined by its initial objectives. In general, SEZs are measured against the objectives set up in the fol- lowing areas: (a) direct economic or social benefits—depending on the initial objectives, these could include investment (especially foreign direct investment) attraction, exports, employment generation, industrial output, and foreign exchange earnings and (b) indirect economic or social benefits—these could include indirect employment generation, skills transfer, technology diffusion, and local firm productivity improvement. Given their nature, those benefits are much harder to measure than the more tangible ones. See World Bank (2021) for details. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 8 2. >>> The Four Dos There are four essential practices that need to be carefully followed when designing and devel- oping an SEZ program to increase the likelihood of success. 1. Choose the right location The location choice of an SEZ could be the “make-it-or-break-it” factor. International expe- rience shows that SEZs tend to flourish in core areas and around gateway infrastructure (sea- ports and airports) (World Bank 2019). Cities offer features that tend to be essential to the suc- cess of large-scale, labor-intensive SEZs, including access to deep and specialized labor pools, specialized suppliers and business services, and social infrastructure, as well as connectivity to domestic, regional, and global markets (World Bank 2019). However, many country govern- ments continue to try (and fail) to use zones as regional development tools. Some governments (for example, the Arab Republic of Egypt, Kazakhstan, and Nigeria) put social equality agenda above economic viability when deciding to locate at least one SEZ in each “lagging” or remote region, but few governments have done enough to address the infrastructure connectivity, labor skills, and supply access that the regions tend to lack. Connectivity among individuals, firms, countries, and regions is increasingly under- stood as a key factor in achieving competitiveness and sustainable, inclusive economic growth. Connectivity has both physical and policy dimensions. To be a catalyst for structural transformation, zones need the following: to have or to be linked to key elements of transporta- tion infrastructure (such as ports, railways, and highways) with good trade logistics and customs services; to be well matched to local resources that leverage the nation or city’s comparative advantages (such as agro-processing or electronics); to be part of the global value chain; and to be focused not only on exports, but also on the domestic market. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 9 2. Foster a conducive business others. After the initial successes, China gradually rolled out the zone program and relevant reforms throughout the nation environment with a (Zeng 2015). Mauritius leveraged the SEZ program to simplify reform-oriented mindset the investment process and to carry out reforms to promote an export-led growth and structural transformation. The export pro- cessing zone model, so successful in transforming Mauritius One of the key objectives of zone programs is to overcome from its reliance on sugar and vanilla plantations to becoming a the constraints (both soft and hard) for businesses to ef- major apparel exporter, eventually became obsolete. However, ficiently operate in an economy. Instead of focusing largely as its source of comparative advantage moved away from low on fiscal incentives, such as tax holidays and free land, zones wages, the government returned to the zone instrument to pro- should strive to provide an environment conducive to business mote emerging industries, such as information and communica- and to foster firm-level competitiveness, innovation, local eco- tions technology and financial services (World Bank 2019). nomic integration, and social and environmental sustainability (Farole and Akinci 2011). Such programs must provide good infrastructure, such as power, water, roads, and telecommuni- 3. Increase the market cations. Meanwhile, the SEZ policy framework should be part contestability through a of the broader national policy context, including investment, trade, and tax policies (Zeng 2010; UNCTAD 2019), and zones rigorous market demand can be used to “pilot” policy, legal, and regulatory reforms to assessment and private support economic development, as evidenced in many East sector participation Asian countries. What’s important is to make sure that benefits (e.g., the simplification of customs procedures) can then be made available economywide. Since a zone program or project is a very expensive un- dertaking, it requires very careful planning, design, and In almost all the successful zones in the world, such as management. Besides the development costs, which involve Shenzhen (China), Aqaba (Jordan), Panama Pacifico the basic infrastructures, land acquisition and development, and (Panama), Jurong (Singapore), and Jebel Ali (United Arab green facilities, the project also includes the cost of common Emirates), to name a few, basic infrastructure is of high services in the zone, as well as the public revenues foregone quality, and public services and aftercare are efficient and from the various incentives often associated with a zone pro- effective. One of the important value-added features of SEZs gram. Many low-income countries must rely on international do- is the one-stop-shop (OSS) service. Since a zone program nors or development agencies to launch such programs. How- involves many government stakeholders in charge of such ever, the results are not guaranteed. As mentioned, because factors as land, transportation, utilities, customs, taxation, fi- of the high-risk nature of such programs, many of them end up nance, immigration, and skills, an effective OSS could make being “white elephants.” That’s why the implementation capac- the public services, such as registration, licensing, permits, ity of the government or private sector is crucial for success. taxation, and customs clearance, much simpler and efficient. For OSS to work, it’s very important to establish a proper dia- Ensuring that the zone programs and projects are actually logue, coordination, and cooperation mechanism among the based on business demand is of paramount importance central, provincial, and local governments and across different in order to avoid creating the poorly performing white elephant government agencies. Those features—characteristic of mod- zones. The planning process should include a rigorous assess- el zones in China, Malaysia, the Republic of Korea, Singapore, ment of the demand situation (preferably done by the private and United Arab Emirates—make the zones very attractive to sector) that will not only analyze the global, regional, and do- investors. Wherever the capacity is permissible, such services mestic industrial and investment trends and the local compara- could also be extended to firms outside zones by leveraging tive advantages, but also a solid understanding of the demand the increasingly available digital technologies. for industrial infrastructure in the designated area by the busi- ness sector, which often involves an investor or pre-investor In terms of using SEZs as pilots for policy and legal reforms survey to potential investors (both international and domestic). to achieve structural transformation, China, Mauritius, the The demand assessment is typically part of a comprehensive Republic of Korea, and Vietnam are prime examples. China feasibility study of a specific site and serves as the basis for the started with four zones at the initial stage to experiment with master planning and economic and financial analyses of the market-oriented economic reforms, which involve laws, regula- proposed zone. All this information will be used to determine the tions, taxation, land, labor, finance, customs, immigration, and viability and market contestability of the zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 10 To ensure smooth and efficient operations of zones, pri- In addition, it is important to make zones greener and sus- vate sector participation is encouraged and should be pro- tainable to upscale their competitiveness stance in the vided for in the SEZ legislative framework or in the country’s global market. Increasingly rigorous environmental and so- broad land market legal framework, enabling the private sector cial standards of international investors mean that SEZs that to invest in different kinds of land, including industrial land. adopt the principles of eco-industrial development and that This will not only reduce the financial burden to the govern- align with or go beyond international good practice compliance ment, but also reduce the risks by bringing professional exper- requirements may have a competitive advantage over other tise into play, thus increasing the chance of success. locations competing for the same investors. In this regard, zones are encouraged to voluntarily adopt the EIP framework Private sector participation can take the form of either a to make themselves resource-efficient, climate friendly, and pure private sector approach or a public-private partner- overall greener. An EIP can broadly be defined as “a dedicated ship (PPP) approach, and can be arranged at the different area for industrial use at a suitable site that ensures sustain- stages of the zone project from planning and development ability through the integration of social, economic, and envi- to management and operation. The level of demand, local ronmental quality aspects into its siting, planning, manage- context, risk appetite of private developers, and government ment and operations” (UNIDO, World Bank Group, and GIZ strategy will determine the most suitable configuration of pri- 2017). It has increasingly been recognized as an effective tool vate sector participation, ranging from wholly private to a PPP for overcoming challenges related to inclusive and sustainable approach where experienced private sector partners can be industrial development within the scope of the Sustainable De- brought in to help with the planning, infrastructure develop- velopment Goals (Kechichian and Jeong 2016). However, it ment, and management of the SEZ. is also used to respond to global demands for a green supply chain and to reduce resource constraints through improved resource management and conservation while ensuring na- 4. Maximize the positive tional and international climate change commitments are met. While zones can be the pilots, such good practices should be spillovers through an inclusive promoted throughout the economy. and sustainable approach An international framework on EIP was launched in 2017 by a partnership among the United Nations Industrial Development Despite the past successes of some “enclave” model zones Organization, World Bank Group, and GIZ (the German Agen- (especially export-processing zones) during the 1980s and cy for International Cooperation) to help countries and zones 1990s, the success of modern zones is increasingly en- apply the EIP concept. The EIP Practitioner’s Handbook was twined with the local economy to achieve structural trans- published in September 2018 to provide a step-by-step guide formation of the host economies. Zones need to build on lo- on how to operationalize the framework. The framework cov- cal comparative advantages and try to have local suppliers as ers park management environmental, social, and economic part of their value chains through an inclusive approach. Proac- aspects (figure 2) to help practitioners go beyond regulatory tive identification of opportunities, matching efforts and training compliance. The World Bank Group is currently implement- programs between firms within and outside zones, would great- ing EIP pilots in Bangladesh, Ethiopia, Turkey, and Vietnam, ly enhance zones’ impact (UNCTAD 2019). In many countries, and has achieved some encouraging results. For example, in such as those in Sub-Saharan Africa, zones are often criticized Turkey, the results from the diagnostics of 18 zones (5 percent as being enclaves without much linkage to the local economy. of the total number of zones in the country) suggest poten- Evidence from East Asia shows that, in the long run, zones with tial annual cost savings of US$95.4 million, with an estimated strong linkages to the local economy tend to be the most suc- capital investment of US$350.3 million, giving a payback of cessful (Zeng 2015; World Bank 2019). To fully benefit from the 3.7 years, which would result in a potential overall annual zone programs, governments and zone management need to energy efficiency of 1.0 million megawatt hour, carbon reduc- consider the local comparative advantages as they target prior- tion of 357 kilotons of carbon dioxide equivalent, water sav- ity sectors. Governments and zone management should also ing of more than 11.7 million cubic meters, waste reduction help local firms link with zone investors through supply chains of around 71.291 tons, and chemical reduction of more than or subcontracting relationships (Farole and Akinci 2011; Zeng 14,550 tons—all by integrating EIP practices in energy pro- 2015). These backward and forward linkages hold the potential duction, material circularity, resource efficiency, and waste to maximize spillover effects on the economic benefits (such as and wastewater management. technology transfer, skills upgrading, and productivity gains of local firms) that accrue beyond the zone itself. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 11 > > > F I G U R E 2 - The EIP International Framework Process of Continuous Improvement: Going Beyond the EIP Performance Requirements Core EIP Categories and Topics Park management Environmental Social Economic EIP Performance Requirements performance performance performance performance • Park management • Environmental • Social management • Employment services management and and monitoring generation • Monitoring monitoring • Social infrastructure • Local business and • Planning and zoning • Energy management • Community outreach SME promotion • Water management and dialogue • Economic value • Waste and material creation use • Natural environment and climate resilience Compliance with local and national regulations and alignment with international standards Source: UNIDO, World Bank, and GIZ (2017). Note: EIP = eco-industrial park; SME = small and medium enterprise. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 12 3. >>> The Four Don’ts Besides the dos, there are some negative lessons in planning, developing, and operating SEZs that should be avoided by all means, which are summarized next as four don’ts. 1. Lack of strategic planning and demand-driven approach International experience shows that effective zone programs (such as those in China, Malaysia, Mauritius, and Republic of Korea) are an integral part of an overall national, regional, or municipal development strategy and build on strong demand from business sectors. For public zones, governments need to clearly define the role and objectives of the zone initiatives in their overall economic development agenda and to conduct thorough planning that involves all the major stakeholders in the process. Such a process will help to build a con- sensus within the government and throughout the country or region, thus gaining broad support. To anchor the zone programs on a solid market-based foundation, the private sector must be involved from early on to understand its specific needs and constraints and to test the zone ap- proach. If a zone initiative is justified, the preliminary locations, sectors, and potential investors need to be identified; some cost-benefits analysis needs to be conducted; and a well-thought-out implementation plan needs to be developed. However, in many cases, a strategic planning process is skipped or compromised. Many decisions are made through a purely top-down approach, without considering the real needs of the private sector. Some zones are politically motivated even without a proper feasibility study, and some are established mainly for equality purpose, not necessarily in line with a country’s or region’s economic development strategy. Given the nature of SEZs, they may not be a suitable development instrument in a peripheral and remote region. A supply driven SEZ designed with- out business demand is a recipe for failure. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 13 2. Fail to address the 3. Poor policy and legal critical market and environment and weak government failures implementation capacity From the economics point of view, an SEZ instrument is In an SEZ program, a predictable, transparent, and justified because of its possibility to complement market streamlined (not multiple or even self-contradicting) legal forces and to help deal with certain market and govern- and regulatory framework is essential to provide protec- ment failures. The empirical research by Aghion and others tion and certainty to the developers and investors and to (2015) show that industrial policies allocated to competitive ensure the clarity of roles and responsibilities of various sectors or that foster competition in a sector increase produc- parties involved. Such a framework also helps to ensure that tivity growth. The important market failures and government the zones attract the right investments and are implemented failures that SEZs are intended to address would include a with proper standards. It will also help avoid or minimize un- malfunctioning land market, deficient industrial infrastructure predictable risks, such as political setbacks or interference (such as power, water, gas, telecommunications, and waste and land speculation, among other factors. In addition, the treatment) needed for industrial agglomeration, and poor implementation capacity of government or private developers regulatory and business environment caused by coordination and operators are also among the key determinants of zone failures within governments or between the government and success. Governments and private sector players with strong private sector. Strictly speaking, an SEZ approach is needed expertise in planning, designing, and developing zones or in- only when all the “failures” exist at the same time, otherwise dustrial infrastructure programs tend to deliver better results. an industrial park might be sufficient in cases where the regu- Strong, long-term government commitment provides an ad- latory and business environment is not the main constraint to ditional guarantee for the success of zones by ensuring policy investment, but rather deficiencies related to available and re- continuity and adequate provision of various public goods and liable sustainable infrastructure and investor services. services. Meanwhile, close coordination between the central and local governments and clarity over their roles are very However, in many zones, even the basic infrastructures, important for the smooth implementation of the different pro- such as power and roads, are not properly provided. grams. In China, Malaysia, the Republic of Korea, Singapore, A World Bank study (Farole 2011) of six African zone programs and other countries or economies with successful SEZ or (Ghana, Kenya, Lesotho, Nigeria, Senegal, and Tanzania) business hub programs, relevant laws and regulations were shows that the downtime in zones (measured by hours) be- already in place or were put in place when the programs were cause of power shortages is still quite high in absolute terms launched. In the implementation processes, various levels in in most African zones despite some reduction compared with the governments gave strong and long-term support in a con- outside zones—on average, the reduction is about 54 per- certed effort (Jeong and Zeng 2016). cent in African zones versus 92 percent in non-African zones. Also, in many countries, the OSS does not live up to its name However, in many low-capacity countries, especially those because of poor intra- or intergovernmental coordination. In in Sub-Saharan Africa, the current legal, regulatory, and in- such cases, the SEZs are unable to serve their true purpose. stitutional framework for SEZs is either outdated or does not And in some countries, governments decide to implement exist, and in some cases, the zones have been launched or SEZs to address other policy issues, such as regional devel- built without a proper framework in place (Zeng 2012). This opment, notwithstanding the location of the zone and access tends to create a lot of confusion and to deter potential inves- to markets. tors. Many governments or private developers and operators have never designed or run a zone program before, and they adopt a “learning-by-doing” approach, which makes such high-risk programs quite vulnerable. In such cases, if zones are indeed necessary, it might be better off to enable the pri- vate sector–led industrial zones with better regulations and better public services. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 14 4. Inability to mitigate the environmental and social risks Because of the nature of SEZ projects, they often need tion. To satisfy the needs of underrepresented worker groups to involve land acquisition and resettlement of displaced (such as female workers), the zone should create an ecosys- people, which makes them highly susceptible to envi- tem to provide services and infrastructure, such as day care ronmental and social risks. Therefore, it is indispensable in centers and kindergartens. SEZ programs and projects to properly identify and assess such risks during the feasibility study and to develop sound In addition, some zones may host highly polluting sectors, mitigation measures. Failing to do so may make or break such such as textiles, leather, and petrochemicals, and may create projects, which has been the case in some African and South severe damages to the natural and living environment. Such Asian countries, for example. situations can cause huge setback or even social unrest. To avoid or minimize such risks, zones should be eco-friendly and The choice of zone location should try to involve as less dis- environmentally sustainable. An effective way to do so is to placed people and businesses as possible to minimize the adopt the international EIP framework mentioned earlier. social risks. Also, a thorough consultation process should be conducted with all the relevant stakeholders, especially the lo- To integrate and operationalize the EIP framework, zones cal communities that would be affected by the project. The dis- should set up their own EIP performance indicators based placed people should be properly compensated and resettled. on the guidance provided in the EIP Practitioner’s Handbook. As a good practice, the affected people who may lose their They also should develop a rigorous system to regularly moni- means of living due to the project should be trained or reskilled tor and evaluate their performances in zone management and and employed within the zone, as long as they are still at a in economic, social, and environmental aspects and should working age. This can be done jointly by the government and report to key stakeholders. The absence of such monitoring, the zone developer or operator. Zones should also adopt a evaluation, and reporting system may result in zones diverging high standard with regard to worker compensation and protec- from their initial purposes. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 15 4. >>> References AfDB (African Development Bank). 2015. “Special Economic Zones in Fragile Situations: A Useful Policy Tool?” Abidjan, Cote d’Ivoire. Aghion, Philippe, Jing Cai, Mathias Dewatripong, Luosha Du, Ann Harrison, and Patrick Legros. 2015. “Industrial Policy and Competition.” American Economic Journal: Macroeconomics 7 (4): 1–32. Farole, Thomas. 2011. Special Economic Zones in Africa: Comparing Performance and Learning from Global Experiences. Washington, DC: World Bank. Farole, Thomas, and Gokhan Akinci. 2011. Special Economic Zones: Progress, Emerging Challenges, and Future Directions. Washington, DC: World Bank. Jeong, Hyung-Gon, and Douglas Zhihua Zeng. 2016. “Promoting Dynamic & Innovative Growth in Asia: The Cases of Special Economic Zones and Business Hubs.” KIEP Research Paper Policy Analysis-16-01. Korea Institute for International Economic Policy, Sejong, Republic of Korea. Kechichian, Etienne, and Mi Hoon Jeong. 2016. “Mainstreaming Eco-Industrial Parks: Conclusions from the Eco-Industrial Park 2015 Event in Seoul.” World Bank, Washington, DC. UNCTAD (United Nations Conference on Trade and Development). 2019. World Investment Report 2020: Special Economic Zones. New York and Geneva: UNCTAD. UNIDO (United Nations Industrial Development Organization), World Bank Group, and GIZ (German Agency for International Development). 2017. An International Framework for Eco- Industrial Park. Washington, DC: World Bank. UNIDO (United Nations Industrial Development Organization), World Bank Group, and GIZ (German Agency for International Development). 2021. An International Framework for Eco- Industrial Park: Version 2.0. Washington, DC: World Bank. World Bank Group. 2021. SEZs: A Practitioner’s Guide. Washington, DC: World Bank Group. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE | THE DOS AND DON’TS OF SPECIAL ECONOMIC ZONES <<< 16 World Bank. 2019. World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank. World Bank. 2021. “CPSD Guidance Note on Land.” World Bank, Washington, DC. Zeng, Douglas Zhihua. 2010. Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters. Washington, DC: World Bank. Zeng, Douglas Zhihua. 2012. “SEZs in Africa: Putting the Cart in Front of Horse?” Let’s Talk Development (blog), April 9. https://blogs.worldbank.org/developmenttalk/sezs-in-africa-putting- the-cart-in-front-of-horse. Zeng, Douglas Zhihua. 2015. “Global Experiences of Special Economic Zones: Focus on China and Africa,” World Bank Policy Research Working Paper No. 7240, World Bank, Washington, DC. Zeng, Douglas Zhihua, and Nah-Yoon Shin. 2021. “CPSD Guidance Note on Zones.” World Bank, Washington, DC. 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