Have 'Special Economic Zones' Entered the 21st Century Yet? A Tale of Two Cities

At the World Free Zone Convention in Izmir, Turkey, which I attended in December, an important question was asked:  Have "Special Economic Zones" entered the 21st Century?  Evidence shows that, in many ways, they have – but in many instances we are still seeing across the globe the same isolated economic enclaves with few linkages to the local market and little economy-wide impact.

More than ever, special economic zones (SEZs) are on the defensive, despite the fact that the more than 3,500 SEZs worldwide have provided employment for more than 60 million people.

I believe that two zones, in particular, can shed light on the factors of success and failure in SEZs today:  Shenzhen, China, which is almost universally considered to be a success story, and the Calabar Free Trade Zone in Nigeria, which has failed to live up to its original projections. 
 

The Success Story: Shenzhen Special Economic Zone, China

In 1980, the site where Shenzhen is currently located, immediately north of Hong Kong, was a small fishing village in Baoan County.  Now, 33 years and US$30 billion of foreign investments later, Shenzhen is a sprawling metropolis of more than 10 million inhabitants. It’s considered to be one of the fastest-growing cities in the world, and it has the highest per-capita income of any city in China. 

Why has it been so successful?  There are several factors:
 

• Shenzhen was treated as a pilot of reforms, rather than an end unto itself.  Shenzhen started as a pet project of Deng Xiaoping, as an experiment with market economics, but it was understood from the beginning that successful reforms were to be expanded beyond its walls. Today those reforms have been rolled out to the rest of the province and beyond, and the result has been the well-known success of China’s growth story.
   
• China had the luxury of long-term planning.  China drafted a decades-long plan for Shenzhen, knowing that the country’s stability would allow for such long planning periods. Shenzhen SEZ took 10 to 15 years to take off, but the staggering growth in the last decade justified the entire project.
   
• Shenzhen is taking advantage of cross-border opportunities.  Its proximity to Hong Kong in the Pearl River Delta region has been a key factor in its success, as it allows Shenzhen to take advantage of Hong Kong’s highly sophisticated financial, professional and other services.

The Failure: Calabar Free Trade Zone, Nigeria

Calabar Free Trade Zone (CFTZ) in Cross River State of Nigeria has fallen into many of the pitfalls common to unsuccessful free zones.



This first of Nigeria’s free zones under the Free Zone Act of 1992 was fully completed in 1999 and started operation after November 2001. The multimillion-dollar project, located on 220 hectares, has failed to attract significant investment and has provided jobs for only a little more than 1,000 people – far below its potential of 25,000 to 30,000 jobs. Why has the CFTZ like so many other zones failed to live up to its potential and expectations?
 

• The government of Nigeria failed to choose a site with a strong business case. The city of Calabar is located in coastal southeastern Nigeria near the Cameroonian border. However, it is not situated along any major shipping routes, nor is it connected to any major highways that traverse the country.

• Calabar Port and CFTZ were never merged.  The strongest attribute of the CFTZ site is its proximity to the Calabar Port. However, the government failed to take advantage of the natural synergies between the port and the free zone. The port is under the management of the Ministry of Transportation, while the zone is under the management of the Nigerian Export Processing Zones Authority (NEPZA). Neither of these two authorities has demonstrated real willingness to make this bold move, nor has anyone sufficiently high in the government ranks had a vision for taking on this difficult but crucial merger.

• The government developed and continues to operate the CFTZ.  Most successful SEZ regimes worldwide have transitioned over time to private-sector-developed and -operated SEZs. In case of the CFTZ, until May of 2009 the power supply was still erratic, with companies having to rely on diesel generators a great deal of the time. A private-sector developer would have been more business-minded in phasing the development of the zone, charging market rental rates and providing much better infrastructure and services to the companies located there, encouraging more to join.

Is There a Magic Bullet?

There is no magic bullet for getting SEZs right, but governments interested in pursuing zones would do a much better job in designing them if they took a step away from their SEZ development plans and asked a few hard questions before proceeding with their zone regimes:

• What is the current market failure in the investment climate that the economic zones will tackle?

• Are zones the appropriate economic tool to tackle those particular market failures?

• Is there a specific market opportunity that the zones will be responding to, and if so, is there private sector demand from specific companies for the services of a zone in that location?

• Which reforms and streamlined procedures will the country’s zones be piloting?

• What are the ultimate two or three goals of the zones?

There is Still Hope

With one foot in and one foot out of the 21 ^st Century, special economic zones will continue to both entice and confuse investors. In asking the questions outlined above, countries like Nigeria can revisit their initial zones strategy and, by realigning themselves with current trends, they may be able to turn their zones around. 

It remains to be seen which countries have the courage to do so.
 
 
For further information on Special Economic Zones, see:

Special Economic Zones:  Performance, Lessons Learned, and Implications for Zone Development ( https://www.wbginvestmentclimate.org/toolkits/investment-generation-toolkit/upload/SEZ-Report-April-2008.pdf )

Farole, Thomas.   Special Economic Zones in Africa:  Comparing Performance and Learning from Global Experience. (openknowledge.worldbank.org/bitstream/handle/10986/2268/ 600590PUB0ID181onomic09780821386385.pdf?sequence=1)