Special economic zones have helped many Asian countries such as the Philippines move forward in terms of development, but these policies may also weigh down countries if designed the wrong way.
Asian Development Bank (ADB) in a report this week said special economic zones, which allow companies to dodge taxes, have led to increased trade, higher incomes, more remittances to Asian countries.
“If designed right, special economic zones can become drivers for increased trade, foreign direct investment (FDI), and better economic policymaking and reforms,” ADB economist Shang-Jin Wei said.
“Moreover, as countries develop, areas with SEZs can be transformed from mere manufacturing sites to hubs for innovation and modern services,” he added.
According to official data, the number of special economic zones in the Asia Pacific region rose from about 500 in 1995 to over 4,300 in 2015.
This shows the strong and rising interest in this form of policy experiment, though the success record is somewhat mixed, ADB said.
The Manila-based multilateral lender said the Philippines had been able to attract foreign direct investment in its zones, but still needs to enhance benefits of technological spillovers.
In 2011, economic zones in the Philippines accounted for 15 percent of FDI, 73 percent of exports and 2 percent of employment.
However, the primary effects in some economies remain “direct” effects, which means more can be gained.
In general, the success in Southeast Asia has been relatively limited from a lack of linkages to the wider economy.
“There is a risk that the footloose investment these economies attract might move to other economies which have natural advantage in these activities,” ADB said.
To maximize the benefits of special economic zones, ADB said policymakers should put in place fiscal incentives for initial investments and ensuring an adequate supply of labor, strategic locations, transport connectivity, and dependable judicial systems and institutions.
Likewise, 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,” Wei said.