Fri 30 Sep 2016
Filed under: Business / Trade,Naypyitaw,Opinion
Since the 1980s, special economic zones (SEZs) have been considered an important part of a developing country’s policy apparatus. They generate jobs, attract foreign investment and improve local businesses. SEZs gained greater prominence when China began using them as part of its modernisation agenda. Shenzhen – the poster child of SEZs – previously a small fishing village, is now a thriving metropolis of 14 million people. Furthermore, the ideas and policies incubated in Shenzhen set the foundations for one of the most spectacular growth and poverty eradication stories in recent times.
With the right policies, SEZs can bolster the economy, creating growth for SMEs and workers alike. In an effort to bring these benefits to Myanmar’s economy, previous governments launched three SEZ projects between 2008 and 2013: Thilawa, Dawei and Kyauk Phyu.
Unfortunately, efforts to replicate China’s success with SEZs have not gone as planned. Delays and disputes over compensation and inadequate consultation with local residents have led to disenchantment and opposition by locals and civil society groups leading some to call for their closure. Thilawa is the only SEZ to have made considerable progress: By May 2016 – eight months after its opening ceremony – 13 factories have begun commercial operations bringing in more than US$800 million investment and creating close to 2200 jobs apart from the thousands of construction-related jobs that the zone has created; 39 factories are currently under construction.
Discontent with Dawei and Kyauk Phyu is understandable. They are yet to deliver on their promises to foster growth and create jobs. But Myanmar’s experience with building SEZs is not so different from that of other countries. Land acquisition has been an issue in China too. Construction of many SEZs in India has stalled due to regulatory and land issues.
Thus, this is not to suggest that Myanmar should reject the idea of SEZs. Firstly, companies operating in a zone bring with them modern technologies, technical know-how and managerial expertise. Successful SEZs foster the transfer of these skills and knowledge to the rest of the economy.
These transfers can take many forms. For example, SEZs can create business opportunities for local firms through increased demand for inputs by investors within the zones. Linkages may also facilitate the dispersion of “ideas” from the zones to the rest of the economy, such as how to set up just-in-time inventory processes that are best practice in global supply chains. These links between SEZs and the broader economy can help local firms to upgrade the quality of their products and services to match international standards. For example, in Bangladesh, research by the World Bank has found that the productivity of domestic firms improved when they sourced from a supplier that also sold to foreign firms.
Moreover, local workers who receive training from international companies can transfer their valuable experience to non-zonal firms. In Shenzhen, some zonal workers capitalised on their experience acquired in the SEZ and formed new companies. In the Masan zone in South Korea, it is estimated that about half the workers who received specialised training eventually moved to domestic electronic companies.
Myanmar has taken steps to ensure that the SEZs benefit the broader economy. For example, article 75 of the SEZ Law requires 75 percent of the skilled workforce employed in zonal firms, after four years of commercial operations, to be local. The Thilawa SEZ has also created a vocational training centre to encourage skill-development among workers.
A big constraint on the Myanmar economy is low productivity, a consequence of decades of isolation and economic mismanagement. Competing with its ASEAN neighbours will require Myanmar to improve the skills of its workers and update the technologies of its companies. SEZs are one proven way to achieve this goal.
Secondly, SEZs provide an ideal environment for policy experimentation. Devoid of political wrangling and parliamentary gridlocks, these industrial “islands” allow a country to test policies that it otherwise cannot evaluate. China used SEZs as a means to gradually tread its way to a more market-oriented economy. Its SEZs had the legislative authority to develop municipal laws and regulations, including local tax rates and structures to govern and administer these zones. Myanmar can similarly evaluate policies in such zones before it launches them on a larger scale.
The benefits from SEZs do not come cheap. Forgone revenues from tax incentives, duty exemptions and infrastructure investment are a big burden on the exchequer. For example, according to India’s Comptroller auditor general, SEZs in India had given $16.6 billion in tax abatements between 2006 and 2013. That is only around $6 billion less than its food subsidy program launched in 2013 that feeds two-thirds of its 1.2 billion people.
It is still too early to assess the potential costs incurred by Myanmar’s zones as the first SEZ, which is Thilawa, has been operational for only a year. However, as experience from other countries has shown, with appropriately designed policies, the future benefits – noted above – can outweigh such large costs.
The dominant electoral victory of National League for Democracy gives it momentum to change the perception of SEZs. Its widespread popular support is an opportunity to strike a reconciliatory tone with estranged communities, frustrated corporates and irked environmentalists.
In its recent economic policy statement the NLD government fully backed the idea of SEZs, stating that they can create jobs and generate business for SMEs. This is the first step. Now it needs to make sure that each SEZ is well designed and competently managed, and the Myanmar public may finally believe that these zones can indeed be special.
Mohak Mangal is a project manager for the International Growth Centre, Matthieu Teachout is a PhD student at Columbia Univeristy and Amit Khandelwal is professor of finance and economics at Columbia Business School. All three worked on a research project on SEZs funded by the International Growth Centre.