Special Economic Zones in Asian Market Economies
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Special Economic Zones in Asian Market Economies

Connie Carter, Andrew Harding, Connie Carter, Andrew Harding

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Special Economic Zones in Asian Market Economies

Connie Carter, Andrew Harding, Connie Carter, Andrew Harding

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About This Book

Special Economic Zones (SEZs) have proliferated rapidly during the past decade and are set to multiply in the next – embracing not only Asia and Europe but also Africa and the Americas. This book is the first to examine the Asian experience of SEZs in China, India, Malaysia and the Philippines. SEZs are usually clearly defined geographic areas in which national, provincial or local governments use policy tools (such as tax holidays; improved infrastructure; less onerous or differentiated regulations and incentives other than those generally available in the rest of the country) to attract and promote private - usually foreign - investment from enterprises which commit to create employment and to export their products or services, and generating foreign currency for the host country. SEZs have been especially successful in bringing about economic development in Asia, especially in China.

This book examines the origins, nature and status of special economic zones in Asia, together with the current trends connected with them, and the challenges they currently face. Although the World Trade Organisation cast doubts in 1995 on the future of special economic zones as a viable policy tool in the development agenda, special economic zones continue to be used, and favoured, as a way of encouraging foreign investment and economic development, with for example India, trying to emulate China, reincorporating special economic zones into its development policy. This book provides regional case studies of SEZs in Asian market economies to analyse the extent to which these zones serve the changing needs of Asian development.

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Information

Publisher
Routledge
Year
2010
ISBN
9781136901706
Topic
Law
Edition
1

1
SEZs

Policy incubators or catalysts for development?
Connie Carter and Andrew Harding
To set the scene and provide a context upon which this volume can be viewed, we underline three important factors.
First, during the past three decades, foreign direct investment (FDI) rather than trade has become the most important vehicle for bringing goods and services to foreign markets and for integrating national production systems (Sauvant 2008: 3).
Second, special economic zones (SEZs) have been the most potent and most successful vehicle for transporting FDI into developing countries and emerging market economies (Graham 2004; Jones et al. 2003; Lall 2000a).
Third, global FDI inflows, which were only about US$50 billion during the early 1980s, reached US$2.09 trillion by the end of 2007 (UNCTAD 2009) but have slowed significantly during the 2008–9 recession (Kedic 2009: 1). However, during the same three decades SEZs have proliferated worldwide, whether as policy incubators or providers of the ideal environment for capitalism and FDI promotion, while only showing signs of becoming somewhat ‘less special’ during the recent recession.
China’s FDI inflow experience (Graham 2004; Ota 2003) and emerging markets such as the Philippines (UNCTAD 2003), Bangladesh and Mexico (Sadni-Jallab and Blanco de Armas 2002), serve as examples to validate the claim that SEZs greatly increase FDI inflows and may help alleviate poverty. However, although both SEZs and FDI inflows are evidenced in developed as well as developing countries, in the past three decades it is developed countries that have accounted for the lion’s share of FDI inflows (UNCTAD 2009), while the proliferation of SEZs has occurred predominantly in developing countries and emerging market economies. Nevertheless, developing countries, especially those in Asia, accounted for some 30 per cent of global FDI inflows in 2006 (ibid.) and, according to the pundits, the Asian SEZs have been the most successful and most prolific (Graham 2004; Ota 2003; World Bank 2008). It is also worth remembering that most of the FDI inflows are in the services sector while agriculture and industrial manufacturing still dominate the economies of most developing countries. In light of these trends, it should be both satisfying and challenging to observe the development of FDI and modern SEZs and their effect on economic development and poverty alleviation in the new century.
The main purpose of this volume is to deconstruct the nature of SEZs in Asia and examine the ‘specialness’ of their contribution to development in Asia. To this end, the task of this introductory chapter is to explore key definitions that form a backdrop to the contributions in this volume and flag the surprisingly multifaceted nature of the individual contributions.

Key definitions: foreign direct investment (FDI), development and SEZs

Three concepts require definition in the context of this book: FDI, development and SEZs. Of course, FDI is now an everyday term. And yet, given the fickleness of foreign money as displayed during the so-called Asian crisis of 1997–99, to set the scene, it is perhaps worthwhile to proffer a definition of FDI here. FDI is
an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).
(UNCTAD 2007: 245)
Critically, the operative words in this definition are somewhat fuzzy and imprecise: how long is a long-term relationship? And what is the meaning of a lasting interest and control? On the facts, all that can be said is that in 2006, some 80,000 parent companies controlled more than 800,000 foreign affiliates (Sauvant 2008: 4), many of which were acquired rather than founded and grown organically. However, not all controlling parent companies originate in developed countries. Increasingly, many multinational companies (MNCs) originate in emerging market economies and developing countries, and control assets outside of their home countries. They too make foreign acquisitions and become expansionist in response to the liberalization of FDI regulations around the world. They also increasingly make use of advanced information and communication technologies to forge global networks for production and distribution. And they focus on outward FDI – sometimes by establishing themselves in SEZs – in order to exploit ownership, location and internalization advantages proffered by host countries.
Development is another of those words that everyone seems to know and bandy about comfortably, until it is time to say what it means – especially in relation to developing countries and emerging market economies. It is often said that China used its SEZs to kick-start its economic development in 1980 and that SEZ status specifically increased the annual growth rate in cities and provinces that were awarded preferential treatment through the establishment of SEZs (Demurger et al. 2002; Jones et al. 2003; Wang and Hu 1999; Wang and Meng 2001). However, is development merely a matter of economic growth rates, of GDP and GNP? A proper discussion of this issue is beyond the scope of this volume, although it is considered briefly in Connie Carter’s Chapter 4 on China. However, for a full discussion, readers are encouraged to consult the excellent contributions in Trubek and Santos (2006); the book’s focus is the law and development paradigm; however, the crux is a deconstruction of the concept of development especially in order to realize the incorporation of its social aspects and its overarching objective, which Amartya Sen (1999) claims is ‘freedom’.
What then of SEZs; what are they? Conventionally, an SEZ is a clearly defined geographic area in which national, provincial or local governments use policy tools such as tax holidays, improved infrastructure, and less onerous or differentiated regulations and incentives other than those generally available in the rest of the country (the domestic tariff area) to attract and promote private, usually foreign, investment from enterprises which commit to create jobs and export their products or services in order to generate foreign currency for the host country.
Two decades ago, this might have been an excellent definition of the SEZ, particularly of the modern SEZ in China. But gone are the days when that definition will suffice universally. In the twenty-first century, SEZs have evolved into a different animal. For a start, nowadays, SEZs are not necessarily clearly defined geographic areas – in some countries (for instance in Togo, Senegal, Cameroon and Nigeria) single enterprises may obtain the privileges and benefits that once were bestowed only upon SEZs in their guise as geographically defined areas. In other countries, SEZs are configured specifically to meet the needs of clearly defined industries and even specially designated activities. Thus, one can find special zones designed only for high technology and science-based industries (Malaysia, Korea, India); for financial services (Singapore, Malaysia, Korea); petrochemicals (Singapore, Thailand); software and information communications technology (China, Vietnam, India, Dubai); zones to support aviation and airline-based activities (China, Malaysia); tourism zones (Baru Island in Colombia); mining and extraction-based enclaves (Philippines, Indonesia); logistics parks, cargo villages and distribution centres (Czech Republic); zones that provide supply chain management, call centres and other trade supporting services. This list is not exhaustive and is set to grow as countries invent new ways of circumventing strictures laid down by the World Trade Organization (WTO).1
Second, SEZs are no longer just government-initiated or government-operated affairs; many are established and managed under public-private partnerships or purely private partnerships as allowed, for example, under the Indian SEZ Act 2005 (see Harding, Chapter 9 in this volume).
Third, not all SEZs crave the coveted foreign currency; some provide competitive advantage havens for companies which seek to trade in a lucrative domestic market, by manufacturing the products or services inside that market at substantial cost savings in labour and transportation. In such cases even domestic companies may import duty-free components and assembly kits, manufacture the goods domestically and only pay designated import duties and taxes once the finished goods are sold into the domestic market. Often the payback sought includes skills and technology transfer – so-called spillover effects through backward linkages. And often, host countries are disappointed as no such spillover effects are discernable.
The scenarios above illustrate not only the diversity of SEZs but also go a long way to explaining why it is so difficult to give a universally accepted definition of the concept, or even to agree on how many SEZs exist worldwide and what the future holds for them. In this volume, the term is used generically to denote any area or zone in Asia which operates under a special legal or regulatory framework and offers incentives to enterprises to locate or which are located within the specific area.

‘Open SEZAME’

The working title of this book was SEZAME, an acronym for Special Economic Zones in Asian Market Economies. The catch phrase was ‘open SEZAME’, because we sought to open the doors to the mysteries of SEZs in Asia. The following section gives an overview of the next eight chapters, tying them together in light of the themes and issues raised.
Peter Muchlinski’s Chapter 2 explores the conceptual issues of SEZs and locates them within the evolving regime of international economic law. He considers the nature and origins of the SEZ idea and examines the possible future impact of its implementation on economic and social development in a host country. At the economic level, he acknowledges the general trend towards trade and investment liberalization, and the increased regulatory strain which the introduction in 1995 of the WTO prohibition of export trade subsidies has placed on the use of SEZs. In such an environment, he questions the further utility value of the SEZ concept to twenty-first century players. In addition, as regards social development, he asks two crucial questions: how far can the SEZ concept be used to lower social standards? Or can it become a vehicle for the protection or enhancement of such standards (for example, of labour conditions and environmental standards)?
Three chapters on China follow. As if to suggest answers to Muchlinski’s social development questions, Feng Xu’s Chapter 3 focuses on the governance of China’s labour market regime, arguing that SEZs as laboratories for experiments in capitalism became the first instances where laws, rather than the Chinese state, became the lead regulatory mechanism in labour allocation. She observes that nowadays the Chinese state as a whole not only exhibits an increasingly free market economy, but also uses law as the specific regulatory tool for governing the labour market. However, this optimistic stance is tempered by further observations of both new and old impediments. For instance, she argues that the newer forms of mediating agencies that have emerged, particularly temporary employment agencies, have had the effect of making regulation of the Chinese labour market less effective overall than it could be. She also asserts that the relatively limited independence of the Chinese judiciary and the historical legacy of close relations between business and local government, mean that implementation and adjudication of laws are generally less effective than the making of them in China.
Connie Carter’s Chapter 4, presenting a tale of two Chinese SEZs, examines, inter alia, the minimalist legal environment under which early SEZs functioned and, using China’s first Equity Joint Venture Law 1979 (EJV Law) as an example, she would dispute even the efficacy of China’s early lawmaking skills as postulated by Xu. The EJV Law itself comprised only fifteen articles and was three pages long. However, the thrust of Carter’s chapter is to compare the performance of two Chinese SEZs: one, Wenzhou in Zhejiang province, which according to some Beijing policy-makers and scholars, has succeeded mightily and outperformed the other, Suzhou in Jiangsu province, by employing a predominantly endogenous growth scenario with domestic private investment as opposed to Suzhou’s exogenous growth with reliance on FDI (Hu 2008). There are limits to the clarity of the comparison itself owing to the limitations and integrity of the data collected. In particular, there is some speculation that key official data may have been manipulated or ‘over-reported’.2 However, the gist of Carter’s findings suggests convergence of the development models, which leads her to conclude that, under the strain of reduced Western demand for China-made goods, China should encourage endogenous growth and allow its population to reap the benefits of its own labour. This includes paying attention not only to social welfare benefits, housing and education for the rural poor, the urban poor, the aged, unskilled migrant workers, ...

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