SEZs: China speed

Touted to be the surefire pathway toward industrial development in Pakistan—having skipped much of the exercise first time around—the Special Economic Zones (SEZs) under CPEC sound exciting, if shrouded in mystery. There are nearly 5000 SEZs around the world, dotted in Asia, and amidst some failures, many have proved to be a catalyst for growth. In fact, a good share of China’s growth has been associated to the success of its SEZs and industrial clusters.

Countries have looked toward the Chinese model to replicate but many have realized that there are no cookie-cutter solutions. For Pakistani SEZs, without the right policy framework and preparation, the tax holidays and incentives on top of the crumbling economy would only burden it further.

Pakistan is not foreign to sectoral clusters (surgical, garments, ceramics and marble etc.), which form the backbone of the SME economy in the country, but these are largely unorganized, ungoverned, informal and starved of investment.

They also differ from SEZs. By way of a quick definition: SEZs are a way to open up an otherwise closed economy to encourage manufacturing, trade and FDI- in geographic pockets- through comprehensive liberal tax and tariff policies, fiscal incentives, uninterrupted access to utilities like electricity or gas, flexible land acquisition, subsidized inputs, and access to infrastructure and transport network.

Though the country signed the SEZ Act into law in 2012, it was amended in 2016. A working paper by the Center of Excellence CPEC, a social think tank run by the combined forces of PIDE and Ministry of Planning informs that: “BOI has approved additional incentives for priority SEZs under CPEC with the goal to substitute the Chinese imports, to reduce the import bill and to promote export.

Other goals are relocating industry that would depend least on imports, promote local employment, promoting environment friendly industries, employs modern technology and 100 percent foreign investment/joint venture”.

These goals seem noble but are they even achievable with the current state of affairs? For starters, a lot of work needs to be done on the doing business and investment climate front. With nine SEZs under feasibility and 34 more planned (China has only 6 to date, all on the coastal lines), what polices are in place to remove the bottlenecks already highlighted by the World Bank’s annual index. Many of these hurdles are related to red tape and bureaucracy—while the cost may be subsidized for land acquisition, registration, trading, and access to utilities, it is the time spent on doing business that makes investments attractive or unattractive.

Moreover, going by the objectives provided by the aforementioned working paper, the part about promoting local employment seems ambiguous.

So far, the argument is that there will be an influx of Chinese labour seen to run these SEZs—there is a precedent of this as many economic zones in other countries (for e.g. MENA region) have seen Chinese laborers pouring into the countries. As suggested in a PIDE paper, Pakistan needs a policy on that.

It can be postulated that even if Pakistani local labour is recruited, they will be confined to low-level jobs.

There is no road map for any technical training and skills development so labourers can grow out of minimum wage jobs. There is also no news on any labour reforms that the country might introduce, though this should be a great opportunity to get going.

The third issue is one of logistics and transportation. Though all the SEZs will have proper transportation network in place, private sector freight forwarders and logistic companies have complained that there is no clarity on what role they can play in the supply chain network, though they are very eager to be involved.

Fourthly, as highlighted by Hasan Khawar, a public policy expert in an op-ed: the incentives within the SEZs ought to be tied with the performance.

There can be performance targets on investment size, technology transfer, local employment generation, R&D and innovation etc. which can inform the incentives that are given to investors.

Since exporting and import substitution are the primary targets of these SEZs, there has to be a laser-focus on R&D and technological advancement.

The world is changing dramatically every day—perhaps Pakistan hasn’t felt it because it is used to exporting raw and intermediary products but value-addition and transition from low-tech to high-tech in exports will be imperative.

Pakistan also missed the train on becoming part of the global value chains, but this is probably the best chance to get on that ladder and climb it slowly.

Consequently, there should be a solid technology transfer and advancement policy for SEZs—after all, that is how China built its technological and industrial empire.

As argued by many analysts, China ensured American companies transferred technology as a condition of market entry, or only be able to enter via JVs.

The current literature on SEZs is uninspiring because it is not asking more pertinent questions highlighted here. While Chinese models have worked, they cannot be emulated.

We have to tailor our SEZs to suit our specific dynamics and the only thing we can replicate is China’s expediency, and speed.