Pakistan has recently jumped on the Special Economic Zone (SEZ) bandwagon. Board of Investment Chairman Dr Miftah Ismail informed the Chinese side that Pakistan plans to establish a total of 46 SEZs during the last meeting of the Pak-China Joint Cooperation Committee (PCJCC) held in Beijing. Of the 46, the setting up of nine SEZs has been prioritized currently.
There are at least 4,300 SEZs in the world in over 130 countries, as per a policy research working paper by World Bank “Global Experiences with Special Economic Zones”. Some SEZ become phenomenal success stories such China’s Shenzhen. Dubbed “Miracle of Shenzhen,” it enjoyed a growth rate of 58 percent annually from 1980 to 1984.
However, the report also highlights the many white elephants dotted around the world that have done nothing to aid economic development and growth in their respective countries
Case in point is the recent Shanghai Free Trade Zone that was established in 2013 and focused on finance. When it opened, it was hyped as a laboratory for economic reform that would help push China into a new age of prosperity. However, amid the slow reforms and confusion over policies, it has been labeled a “dud” by CNN.
To prevent a repeat of the lack of success from our export processing zones, Pakistan needs to overcome political influence, inefficient bureaucracy, and coordination failures among different stakeholders, and lack of policy implementation.
An important factor to consider is SME development. SEZs tend to benefit FDI and larger domestic investors with incentives geared towards exporters. For Pakistan’s SME’s development effective links have to be created between local SMEs and globally competitive firms anchored in the zones. Strong value chain linkages with local industrial clusters, governed by an autonomous regulatory authority with a unique value proposition for investors are crucial for success
In a recent interview that BR research had with Stefan Dercon, Professor of Economic Policy at the Oxford University and the Director of the Centre for Study of African Economies at Oxford University, Dercon spoke about realigning Pakistan’s existing incentive structure for spurring exports and FDI. “You would want to structure incentives in such a way that they encourage sectors where the value addition ladder can be climbed more effectively. They should also aid sectors where there is a scope of productivity improvement,” he said.
For SEZs to be successful, they have to be closed linked to domestic enterprises and industrial clusters such as Sialkot’s surgical good industry and Faisalabad’s readymade garments manufacturing industry, through supply chains or value chains. The FDI that would potentially flow in needs to be directed carefully so that spillovers gradually increase competitiveness, and hence exports.
To prevent Pakistan’s SEZs from failing to deliver on the expectations, key challenges such as poor regulatory and institutional framework, lack of effective strategic planning, weak governance and implementation capacity, inadequate infrastructure, among others, need to be addressed.
