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The Anatomy of Special Economic Zones

colloquialUrban and Architectural Research and Development

Maurits Ruis

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Author: Maurits Ruis Date: November 2012 Website: www.cllql.com Feedback: sez@cllql.com

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SynopsisSpecial Economic Zones (SEZs) are areas with a special status that offer special benefits and a world class environment to get foreign companies to invest. There are currently 3,500 SEZs worldwide, operating in 130 countries, employing 66 million people, and add-ing over $500 billion of trade related value. SEZs can involve investments up to $900 mil-lion, are able to stimulate national economies, and lift millions of people out of poverty.

However, knowledge on what makes a SEZ successful is limited. ‘The Anatomy of Spe-cial Economic Zones’ looks at what makes SEZs successful, and is a primer for anyone involved in their development. For this publication, comprehensive research has been done of relevant scientific literature, business reports and newspaper articles.

London, November 2012

About the AuthorMaurits Ruis MSc RIBA is an accomplished architect who has worked on building pro-jects and masterplans for multi-disciplinary, award-winning architectural practices in the United Kingdom and The Netherlands. His work across scales and sectors and his long-time interest in urban dynamics gave him insight into the requirements of cities on multi-ple levels. Maurits has an intimate knowledge of the European and Brazilian Markets and has a strong sustainability background.

CopyrightThe Anatomy of Special Economic Zones Maurits Ruis

Copyright © 2012 by Maurits Ruis

All rights reserved. This publication contains material protected under international copy-right laws and treaties. Any unauthorized reprint or use of this material is prohibited. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information stor-age and retrieval system without express written permission from the author / publisher.

DisclaimerAlthough the author / publisher have made every effort to ensure that the information in this publication was correct at press time, the author / publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.

colloquialUrban and Architectural Research and Development

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Contents

Introduction 5Definition 7

A Critical History 9Urban Laboratories 9Vehicles of Globalization 13The Export Zone Exported 15Geopolitical Implications 19

Trial and Error 23Race to the Bottom 23Infrastructure as Incentive 27Comprehensive Clusters 29Genius Loci 33

Typology 37Functional I 37Functional II 40Organizational 40Political 41

Conclusion 43China’s strategic use of Special Economic Zones 43Special Economic Zones: Vehicles of Localism 47

References 51Bibliography 51Image Credits 55

4 Shanghai International Medical Zone (12 sq km). In 2011 more than 100 medical device and biomedical enterpris-es had settled including Siemens, Draeger, Analogic, Covance, Shanghai Pharma Group and Simcere.

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Introduction

It is estimated that there are currently around 3,500 Special Economic Zones (SEZs), operating in around 130 countries and territories worldwide, employing around 66 million people, and adding over $500 billion of direct trade related value (McCallum 2011, ILO 2008). Although these zones have traditionally comprised single factories with an exempt legal status, they increasingly comprise complete masterplan developments with $100 million to $900 million of involved investments that are part of a national economic strategy. Since SEZS gained momentum in the 1980s, they have become an important factor for local economies and international trade.

SEZs allow multinational corporations to benefit from lower labour costs overseas and to remain cost-effective in a fiercely competitive interna-tional market. They also allow poor countries to industrialise and to take part in international trade, thereby lifting local workers out of poverty. An export-oriented growth strategy is often seen as the only remedy to lagging economic growth, a position that for decades has been promoted by the IMF, The World Bank, and powerful economists. For development countries, SEZs offer a direct link to foreign markets and global produc-tion networks, and they offer an immediate way to soak up surplus labour (McCallum 2011).

Not often do SEZs make the front pages, and when they do, it is often in a negative context. They are often associated with Asian sweatshops with excessive overtime, underpayment and poor working conditions (Greenhouse, 2000). This has led to high numbers of employee suicides in factories in Shenzhen, China, that produce electronic components for iPads, among other products (Duhigg and Barboza 2012). There are also the reports of fatal factory fires, such as when 300 workers were killed in a factory that was locked from the outside in Karachi, Pakistan (Ur-Rehman et al 2012).

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Zhangjiang Hi-Tech Park (25 sq km), ‘Shanghai’s Silicon Valley’, with 110 research and development institutions, 100,000 workers, 3,600 companies including GSK, Roche, Eli Lily, Pfizer, Novartis, GE, AstraZeneca, Hewlett-Packard, Lenovo, Intel, Infineon, IBM, Citibank, eBay, Infosys, SAP AG, Wison Group, DSM, Henkel, Solvay, Dow, Dupont, Asia-Pacific Software, Sony, Bearing Point, Kyocera, Cognizant, TCS China, Satyam, Applied Materials.

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The modern SEZ is a relatively young concept that is following a steep learning curve. Through the years, SEZs have developed into complex enti-ties that include industries and services, and that are able to stimulate the economies of entire regions. Getting involved in their development, as a politician, investor, project developer, planner or architect, can be a daunt-ing business. This publication will attempt to help all parties involved by looking at the factors that make SEZs successful and by identifying best practices. To achieve this, a comprehensive study has been undertaken of scientific papers, business reports and newspaper articles.

China in particular has been very successful in the development and appli-cation of SEZs. Therefore much of the attention in this guide will there-fore go to Chinese policies and practices. First we will have a look at the modern history of the SEZ, and then we will look at the process of trial and error that has added complexity to the SEZ concept throughout the years. Then an overview will be provided of SEZ typologies, followed by a conclusive chapter.

Definition

There are many types of SEZs nowadays, with diverging scopes and scales. The features that all SEZs share is that they are geographically delimited areas with an exempt legal status, that aim to attract foreign capital and generate jobs by offering special incentives to foreign companies. The zones are usually physically secured and have a single management or administration. A SEZ normally operates under more liberal economic laws than those typically prevailing in the host country (Zeng n.d.). In the case of China, the SEZs also function as experiments for piloting the implemen-tation of capitalist policies (Leong n.d.) and, as we shall see, they are also applied for strategic purposes. Generally, the SEZ is seen as purely a politi-cal concept whose true purpose is the ‘creation of space’ rather than any particular activity (Cowaloosur 2011). For the purpose of this document we will speak of SEZs as the generic term that covers all different types of zones.

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Semiconductor Manufacturing Trends, 1960-2005

1960s-1980s: Assembly AbroadCompanies move assembly, testing, and packaging offshore.A = Design B = Fabrication C = Assembly, Testing, Packaging

1980s-2000s: Factories AbroadCompanies began contracting with offshore fabrication plants to produce components from designs.

2000s-2005: Design AbroadSome design services are offshored, or a part of global teams operating in many countries. Complex production chains develop as designs are fabricated in different locations, and components are then sent to still other locations for assembly, testing, and packaging (GAO 2006). The history of semicondu-tor manufacturing clearly shows the tendency of host countries to move up the value chain through time.

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A Critical History

Special Economic Zones have existed in some way or another for hundreds of years, but the modern SEZ developed significantly in the period after the Second World War. In this period, the SEZ has been able to benefit from growing international specialization, the expansion of the manufac-turing activities of transnational corporations and an increasing orienta-tion towards export (ILO 2008). The first known instance of a modern SEZ was an industrial park set up in Puerto Rico in 1947 to attract investment from the USA (Dohrmann 2008).

An important catalyst in the development of the modern SEZ was the introduction of the standardized shipping container in 1956. The container caused loading cost of cargo to drop from $5.86 per US ton to just under 16 cents (Poston 2006), which made it possible for firms to benefit from lower labour cost overseas whilst remaining cost-effective. Illustrative for the dependency of SEZs on shipping containers is the fact that nowa-days there are very few landlocked countries that have adopted free zone regimes (Bost 2011).

The first SEZs appeared in Asia in the 1960s, which would become the nursery home for the modern SEZ in the years to follow. In these years, The US semiconductor industry began offshoring intensive manufactur-ing activities such as assembly to Malaysia, Hong Kong and Taiwan. This move allowed the semiconductor industry to remain cost-competitive as new foreign rivals emerged in countries such as Japan (GAO 2006). At that point, the only benefits for SEZ host countries were the creation of jobs and income of foreign exchange generated by the exportation of prod-ucts, but no further benefits to the local economy were provided (Cowa-loosur 2011).

Urban Laboratories

Although the first SEZ in Asia was established in Kandla, India in 1965,

10 Top: One of China’s first Special Economic Zones: the French Concession in Shanghai Bottom: One of China’s latest Special Economic Zones: Pudong Financial District, Shanghai

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the history of the modern SEZ has very much turned out to be a Chinese history. China has been instrumental in the development of the modern SEZ, and has also been most successful in reaping its benefits, growing its domestic economy significantly, and lifting millions out of poverty. When India introduced its national SEZ policy in 2005, it was modeled closely after the Chinese model (Leong n.d.).

Perhaps China’s success with SEZs is owed to the fact that China was not unfamiliar with the concept of designated areas with an exceptional sta-tus. As early as 1557, Macau was rented to Portugal by the Chinese empire as a trading port, and in 1842, the French, British and American conces-sions were granted in Shanghai following the 1839-42 Opium War. The introduction of the modern SEZ in communist China was due to the deci-sion of Deng Xiaoping in 1980 to start using SEZs to experiment with the free market economy, a move he referred to as ‘crossing the river, feel-ing the stones one at a time’. To that end, Shenzhen, Zhuhai, Xiamen and Shantou were given the status of Comprehensive Special Economic Zone (CSEZ) (Leong n.d.).

These newly designated SEZs were deliberately located far from the center of political power in Beijing to minimize both potential risks and political interference. The choice of Shenzhen was especially strategic because of its location across a narrow river from Hong Kong, the principal area from which China would be able to learn capitalist modes of eco-nomic growth and modern management techniques from 1997 onwards, when Hong Kong’s sovereignty would transfer from the United Kingdom to China (Zeng n.d.). Ultimately, the SEZ status allowed Shenzhen to grow from a fishing village with a population of 25,000 into a metropolis of 10 million, making it the largest, and most successful, SEZ in the world today (Zeng n.d.).

As the Chinese SEZ experiment proved successful, a quick succession of increasingly sophisticated SEZs followed; respectively 14 Economic and Technological Development Zones (ETDZs) in 1984, 56 High-Tech Indus-try Demonstration Zones (HIDZs) in 1988, 15 Free Trade Zones (FTZs) in 1990, 14 National Border and Economic Cooperation Zones (BECZs), 12 National Tourist and Holiday Resorts (THRs) and 35 new ETDZs in 1992, 1 Agricultural High-Tech Industry Demonstration Zone (AHIDZ) in 1997 and 61 Export Processing Zones (EPZs) in 2000 (CADZ 2012). More details on these different types are provided in the chapter Typology. Because of their ability to stimulate progress, SEZs in China are nowadays also used as a way to curb potential political unrest, such as in Lhasa, Tibet, which acquired an ETDZ in 2001, and in Kashgar, Xinjiang province, which acquired the status of CSEZ in 2010. Just one year before, Kashgar had been the scene of ethnic unrest under the Ozgur minority population.

12 Shenzhen, one of China’s first Special Economic Zones, in the 1970s (top), and today (bottom)

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The national and provincial SEZs in China have played an important role in the Chinese economy and are regarded as the engine of growth in the regions. Despite their limited areas, they have greatly contributed to FDI inflows and trade, especially the processing trade and high-tech exports, together with industrial output and GDP. They also account for the bulk of employment provided by China’s foreign funded enterprises. In 2007, 27 years after the introduction of the first SEZs, the total GDP of the major state-level SEZs in China accounted for roughly 21.8 percent of national GDP. It has been estimated that the total utilized FDI from the major national-level SEZs (excluding HIDZs) accounted for about 46 percent of the national total in 2007. Added together, the total employment of the seven SEZs , the ETDZs, and the HIDZs accounted for about 4 percent of total national employment, or 770 million jobs (Zeng n.d.).

Vehicles of Globalization

International trade agreements have allowed SEZs to gain further momen-tum. The most important driver has been the General Agreement on Tariffs and Trade (GATT) Multifibre Agreement (MFA) between 1974 and 1994, which imposed quotas on countries for the production of textiles and garments. Quotas assigned to large established exporters were rela-tively small, but those assigned to countries with a new, small industry were substantial. This prompted exporters to move around the world in search of available quotas, which has worked as a catalyst for the estab-lishment of SEZs in Asia and the creation of millions of jobs in countries that had little or no export garment industry previously. It also led New York City to lose much of its traditional garment industry, which shrunk from 16,000 jobs to 9,000 between 1995 and 2009 (Bagli 2009).

Meanwhile in the 1970s, the oil crisis caused economic turmoil that ulti-mately led to the rejection of trade agreements such as the MFA. Vot-ers and politicians moved toward the rejection of traditional Keynesian economics and the adoption of a more liberal approach to the economy, driven by the belief that free markets provided the answer to economic difficulties. This led, amongst other things, to the revision of GATT from 1986 to 1993, and its ultimate replacement by the World Trade Organiza-tion (WTO) in 1995. This move lifted 45,000 existing trade tariffs, the MFA among them, which was replaced by the WTO Agreement on Textiles and Clothing (ATC) from 1995 to 2004. The ATC effectively phased out the quota system that existed under the MFA (Roberts 2004).

Following the end to of the garment quota system imposed by the MFA, some countries succeeded to capture significant market shares, such as Bangladesh, Sri Lanka and Vietnam (McCallum 2011). China in particu-lar has benefited by establishing 61 Export Production Zones (EPZs) in 2000 to act on this trend. As a result, China’s apparel exports have tripled

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Number of zones Employment (thousands) Exports (US$ millions)

China 187 China 50,000 China 145,000

Vietnam 185 Indonesia 6,000 Malaysia 117,013

Hungary 160 Mexico 1,300 Hong Kong 101,500

Costa Rica 139 Vietnam 950 Iran 87,289

Mexico 109 Pakistan 888 Ireland 82,500

Czech Republic 92 UAE 552 Czech Republic 68,626

Philippines 83 Philippines 545 India 49,000

Dominican Republic 58 South africa 535 Algeria 39,423

Kenya 55 Thailand 452 Argentina 36,478

Egypt 53 Ukraine 387 Philippines 32,030

Poland 48 Malaysia 369 Korea 30,610

Nicaragua 34 Lithuania 369 Tunisia 20,544

Thailand 31 Honduras 354 Bangladesh 11,716

Jordan 27 Hong Kong 336 Lithuania 11,404

UAE 26 Tunisia 260 Mexico 10,678

Special Economic Zones Rankings indicate that China is the absolute champion in the application of Special Eco-nomic Zones (World Bank 2008).

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between 2000 and 2006 from US$36.1 billion to US$95.4 billion. Other countries, such as Costa Rica, the Dominican Republic and Mexico, have been strongly affected by international competition and were forced to diversify. Exports from Costa Rica for example shifted from apparel to other manufactured products including electronics and pharmaceuticals (ILO 2008). The process of diversification has given rise to a value chain across countries that is reflected in varying minimum wage levels today, with China’s at $250 per month, Indonesia at $135, Pakistan at $80 and Bangladesh at $48 per month or $1.50 a day (Vidal 2012).

One international trade agreement that still drives the establishment of SEZs today is the Least Developed Country (LDC) status, which is given to countries which, according to the United Nations, exhibit the lowest indicators of socioeconomic development, with the lowest Human Devel-opment Index ratings of all countries in the world. This status comes with certain benefits, like competitive imports of raw materials, grants and duty-free exports to certain developed countries. Some countries, like Mauritius, have lobbied hard to retain their LDC status in order to keep foreign parties interested in investing in SEZs, and successfully so, as it got China to set up the first SEZ outside its national borders in Mauritius in 2007 (Cowaloosur 2011).

International trade agreements and their subsequent obsolescence gave further momentum to the spreading of SEZs worldwide. Whereas SEZs operated in 25 countries in 1975, they operated in 130 countries in 2008 (ILO 2008). The explosive growth in numbers of SEZs as a result of the liberation of the market earned SEZs the reputation ‘vehicles of globaliza-tion’ (McCallum 2011).

The Export Zone Exported

China’s move into Mauritius has served as a stepping stone for the next stage in the evolution of the SEZ: the move into Africa. SEZs have been present in Africa ever since 1948, when Liberia opened a free trade zone in the port of Monrovia. In 1974, when Senegal adopted a free zone regime for the manufacturing industry, the movement was really launched, and in 2009, Africa was host to 101 different kinds of SEZs, with Kenya leading with 33 SEZs (Bost 2011).

SEZs in Africa have historically been multi-activity oriented, driven by a common and highly opportunistic ‘take all’ approach typical of poorer countries. Sectoral specialisation around a few targeted activities is virtu-ally nonexistent in Africa, making it impossible for SEZs to achieve econo-mies of scale as a way of reducing costs. This lack of focus is also harmful in terms of of complementarity, capitalisation and transmission of experi-ence among firms. As a consequence firms tend to operate side-by-side

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Country/ zone Total invest-

ment

Start of

planning

Current status Developers Industry focus

Zambia, Cham-bishi

USD 410 million 2003 In operation/ under construc-tion

China Non-fer-rous Metal Mining Group

Copper and copper mining-related industries

Zambia, Lusaka Subzone Not available Under construc-tion

China Nonferrous Metals Corpora-tion

Garments, food appliances, tobacco, electron-ics

Nigeria, Lekki USD 369 million 2003 Under construc-tion

China Civil Engi-neering Construc-tion, Jiangning Development Corporation, Nanjing Beyond, China Railway

Transport equip-ment, textile and light industries, home appliances, tele- communica-tions

Nigeria, Ogun USD 500 mil-lion for the first phase

Early 2004 Under construc-tion

Guangdong Xinguang, South China Developing Group

Construction materials and ceramics, iron-ware, furniture, wood processing, medicine, com-puters, lighting

Mauritius, Jin Fei (originally Tianli)

USD 940 million 2006-07 Under construc-tion

Shanxi-Tianli Group, Shanxi Coking Coal Group, Taiyuan Iron and Steel Company

Property develop-ment, services (tourism, educa-tion, finance), manufacturing (textile and apparel, machin-ery, high-tech industries)

Ethiopia, Orien-tal (Eastern)

USD 101 million 2006-07 Under construc-tion

Yonggang (with-drew), Qiyuan Group, Jianglian International Trade, Yangyang Asset Manage-ment, Zhangjia-gang Free Trade Zone (not a share-holder)

Electric machin-ery, steel and metallurgy, con-struction materi-als

Overview of Chinese Special Economic Zones in Africa (Cowaloosur 2011)

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without any form of interaction or collaboration in African SEZs (Bost 2011).

Activities inside African SEZs fall for the most part within low value-added sectors with a high coefficient of unskilled labour. They differ little from activities outside the zones, except for their orientation towards exports, and there is no apparent strategy to boost the range of products toward middle and high-end technologies. The benefits for local economies are very limited. What is more, SEZs across Africa are fairly similar from one country to the next, which reflects the influence of the international con-sulting firms that have drafted most of them (Bost 2011).

China’s move into Africa is about to change that, and six new Chinese SEZs are currently in development. This move constitutes a significant depar-ture from the common practice of SEZs being initiated by local govern-ments. In this case, China, as the foreign investor, takes the initiative to approach local governments for the establishment of SEZs. China takes on the role that traditionally has been confined to local governments, as it will deliver considerable infrastructural investments as well. China is thereby the first to export the SEZ concept: the export zone exported.

China’s infrastructural investments include multibillion-dollar projects such as hospitals, water pipelines, dams, railways, airports, hotels, soccer stadiums and parliament buildings, but contrary to Western development funds, African leaders find it hard to embezzle Chinese funds. Money is usually held in escrow accounts in Beijing; then a list of infrastructure projects is drawn up, Chinese companies are given contracts to build them and funds are transferred to the company accounts. Africa gets roads and ports but no cash (Economist 2011).

The reasons for China’s move into Africa are plenty. China seeks to ben-efit from fewer restrictions on its exports to Europe and North America that comes with the LDC status of many African countries. The relative uncultivated nature of the African market allows China to move low value production out of China and into Africa, thereby allowing domestic pro-duction to move up the value chain, and releasing pressure in the domes-tic market in the process. Indeed, most Chinese private ventures that are active in Africa today are said to be there to escape the ‘pressure cooker of domestic competition and surplus production’ and to benefit from ‘large markets and relatively less intense market competition from local firms’ (Cowaloosur 2011).

Already, roughly 800 Chinese state-owned or state-controlled corpora-tions are operating in Africa, with China’s Export-Import Bank funding more than 300 projects in at least 36 countries. Tens of thousands of small private companies and entrepreneurs are also on the ground. The value of

18 Top: Jin Fei (oringinally Tianli) Special Economic Zone in Mauritius. The first zone financed by the Chinese outside China, and a stepping stone for branching out into Africa. Bottom: future expansion plans for Jin Fei.

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Chinese aid in Africa is now thought to have overtaken World Bank assis-tance (Behar 2008), although the true value of aid is kept a secret by China as well as African countries. As a result of China’s involvement, Africa’s goods exports to China already increased more than 60-fold between 1998 and 2010, compared to a fivefold and threefold increase to the US and the EU, respectively (Ali and Jafrani 2012).

The main reason for China’s move into Africa though is considered to be the aim to secure access to natural resources. In recent years, China has become the world’s top consumer of timber, zinc (with 30% of global demand), iron and steel (27%), lead (25%), aluminum (23%), copper (22%), nickel, tin, coal, cotton, and rubber. If China’s per capita GDP (currently about $6,500) will approach South Korean levels in the next 20 years, Chinese consumption of aluminum and iron ore will increase fivefold; oil, eightfold; and copper, ninefold (Behar, 2008). China’s development of six new SEZs is seen as a way to secure access to these resources (AEO 2011).

Geopolitical Implications

China’s decision to move into Africa has been met mixed responses. Some observers believe that China is Africa’s only hope for an economic jump-start, and see it as positive that China combines African development with its own growth and sustainability.

But there are also concerns. One is that China may smother Africa’s emerging light-manufacturing sector with its demand for cheap, unskilled labour, and by flooding the African market with cheap household goods from China. Another concern is China’s more relaxed approach to issues such as the environment, human rights, and good governance, which could potentially undo years of foreign aid efforts by other countries. Moreover, a more relaxed approach to international standards also creates unfair competition. Transparency International’s Bribe Payers Index for example says that Chinese companies are more prone to bribery, whereas British companies are now being held to the recently adopted UK Bribery Act (Behar 2008).

At worst, China’s move into Africa is viewed as a desperate and ruthless ‘scramble’ to secure energy supplies and natural resources, one that could trigger a new wave of global conflict and massive environmental destruc-tion (Behar 2008). China’s approach causes anxiety in Western countries in particular because it differs from the approach taken by Organisation for Economic Co-operation and Development (OECD) of which most them are a member, an approach also referred to at the ‘Washington Consensus’.

The OECD approach aims to reach agreements and then call for other nations to join them into granting it legitimacy. It is a classic top-down

20 Lekki Special Economic Zone, Nigeria, funded by China.

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approach where the OECD, or agencies like the International Monetary Fund (IMF) or the World Bank, demand that other countries join them, and in cases where nations do not respond positively, they are penalised through sanctions. In Africa, financial aid has often come under conditions of austerity, market liberalization, structural adjustment and democratiza-tion. This approach is often criticised as one-sided and beneficial for the Western partners only, and has caused resentment in African countries in particular.

China on the other hand follows a principle of non-interference, and does not impose conditions before granting aid. For the development of Chi-nese SEZs for example, it is China who approaches African countries with a proposal (the World Bank reports that over two-thirds of African econo-mies now have a financial agreement with the Chinese). There is greater host-country customization and state ownership in this approach, a result that the IMF aims to achieve as well, as it aspires to revitalize its 19 devel-opment programs. In that sense, China’s approach may be seen as some-what humbler, as China poses as a partner rather than a provider of aid.

China’s approach does not necessarily compete with the ‘Washington Consensus’ model though, as Chinese and Western aid flows tend to be directed toward different sectors. Western aid to Africa is mainly directed toward supporting public health programs, democratization efforts, counterterrorism cooperation, the development of health infrastructure, and improved regulatory institutions. The Chinese on the other hand primarily focus on infrastructure projects. China assumes a dual position; one of peripherality toward the OECD approach, and one of appropriation towards African states (Cowaloosur 2011).

Of course, China’s approach has its own disadvantages. While African countries form issue-based coalitions and successfully lobby to secure preferences and domestic safeguard measures when dealing with the OECD, the competition for Chinese investment make them individualistic and drives them apart. This causes a ‘race to the bottom’, in which coun-tries offer ever more attractive benefits to investing corporations at the cost of the local common good (more on this in chapter ‘Trial and Error’) (Cowaloosur 2011). Also, China’s fragmented approach and lack of trans-parency gives rise to a new paradigm of competition rather than consen-sus, which enforces the idea of a ‘scramble for resources’.

China’s ultimate goal, it has been argued, is to build skyscrapers in Tokyo, run banks in London and make films in Hollywood. China is learning the ropes in Africa, where the competition is weak. For the Chinese, Africa is another stepping stone to a commercial presence around the globe (Econ-omist 2011). In that context, the SEZ continues to be a strategic instru-ment for the Chinese.

22 Top: Thika Highway, Kenya, financed by China. Bottom: billboards announcing the development of Lekki Special Economic Zone in Nigeria by China. Developments like these cause anxiety amoung Western countries.

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Trial and Error

Throughout the years, SEZs have become increasingly complex. Tradition-ally, low labour cost has been the driver for investments in SEZs, and it still is the most dominant factor. But as SEZs went from single factories with a focus on generating foreign exchange with export, to comprehensive zones seeking to attract direct foreign investment (FDI), other avenues have been explored to get investors interested in zones. Some of these avenues have proven to be more effective in attracting investors than oth-ers. This chapter will take a look at which factors attribute to the success of SEZs.

Race to the Bottom

A potential selling point explored by many zones is a more relaxed approach to workers rights. This approach that has triggered a ‘race to the bottom’ with work conditions entering a downward spiral, with wages below minimum standards, excessive compulsory overtime and a lax atti-tudes towards health and safety standards. Poor working conditions are sustained by a lack of respect for the freedom of association and the right to collective bargaining in many SEZs. Issues include legal restrictions on unionization and union membership, the use of yellow (non-independent) unions, blacklisting of union officials, interference in the affairs of work-ers’ organizations, refusal to negotiate, harassment, violence and repris-als, legal restrictions or prohibition on industrial action. In Bangladesh, ‘no unions or strikes’ is officially publicized as an incentive by SEZs (ILO 2008). Poor working standards have led to high turnovers of workers in SEZs, with average careers of seldom longer than five years, exhausting the local pool of human resources (Farole 2011, McCallum 2011, ILO 2003).

Poor working standards have caused political sentiment at NGOs and trade unions to turn against SEZs in recent years. They are seen as often going too far, making corporate accountability impossible and promoting widespread labour abuse and discrimination. NGOs and unions note that

24 Onne Export Zone, Nigeria

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SEZs have only rarely achieved their stated goals of social and economic development, and in cases where they are heralded as successes, like in China, they point to the deplorable state of labour relations and working conditions inside the heavily-patrolled factories (McCallum 2011). Com-petition based on the suspension of workers rights is thus considered to be an unsustainable business model. It has been argued that more inte-grated policy approaches for attracting export-oriented FDI, for example by encouraging tripartite representation on SEZ committees (employers, workers and public authorities), guaranteeing workers’ rights (including freedom of association and collective bargaining), and upgrading skills and working conditions have tended to attract higher quality FDI (ILO 2003, ILO 2008, McCallum 2011).

Another avenue that has been explored is the offering of various tax incentives, including inexpensive land, exemp-tion from export taxes, import duties of raw materials or intermediate goods, profits taxes, municipal taxes, property taxes, value added tax, domestic purchases and national foreign exchange controls, the free repatriation of profit for foreign companies and the provision of streamlined administrative services to facili-tate import and export such as rapid customs clearance (ILO 2008, Zeng n.d.).

Experience has shown however that the use of incentives packages is generally ineffective. There is an increasing commonality of incentives among zones worldwide, imposing significant costs on government budgets. Incentives also do not really benefit companies in SEZs. A tax exemption is of little benefit if a company is not making profits, which is usually the case in the initial years of operation. Firms that are profit-able from the outset on the other hand might not have needed incentives in the first place. In addition, tax exemptions tend to benefit investments with a short-term time horizon, while longer-term projects that generate profits beyond the tax holiday period do not benefit. Tax exemptions also do not benefit investors from many OECD countries that tax income on a global basis, unless a ‘tax sparing’ agreement is in place (Farole 2011, World Bank 2008).

When China gave companies outside the zones

Why are Incentives Ineffective?

• A tax exemption is of little benefit if the company is not making profits, which is usually the case in the initial years of operation.

• Firms that are profitable from the outset might not have needed incentives in the first place.

• Tax holidays encourage income shifting from non-tax-exempt enterprises to tax-exempt companies through transfer pricing of inter-company transactions.

• Tax holidays reduce the appeal of debt financing of capital investment by removing the benefits of interest deductibility. This equity funding bias is accentuated if dividends of tax-exempt firms are also exempt from personal income tax.

• Tax exemptions tend to benefit investments with a short-term time horizon. Longer-term projects that

• generate profits beyond the tax holiday period do not benefit, unless firms are permitted to accrue and

• defer asset depreciation deductions beyond the tax holiday period.

• Tax exemptions do not benefit investors from many OECD countries that tax income on a global basis, unless a “tax sparing” agreement is in place.

(World Bank 2008)

26Taizhou Medical HIDZ (10-25 sq km), biotechnology, pharmaceuticals, chemicals production and processing, medical equipment and supplies. Housing Hamner Research Institute, Texas Medical Center, China Pharmaceuti-cal University. In 2010, sales income reached 550 billion yuan. In 2020, this will scale up to 200 billion yuan.

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the same incentives that applied to companies inside the zones in 1991, thereby nullifying the comparative advantage of the SEZs, FDI poured into the country at even greater levels. This has caused some analysts to wonder whether SEZ development have paved the way, or actually slowed down the liberalization process. It has been argued that what contributes to greater economic growth is a greater scale of liberalization, rather than increasing the number of SEZs (McCallum 2011, Leong n.d.). This suggests that whilst the exceptional status of SEZs may be helpful in attracting foreign companies initially, long term benefits can only be achieved when this status is suspended once these companies have settled in. SEZs, in that sense, can be seen as transitional instruments.

Infrastructure as Incentive

Another development in the race to attract foreign investment is the offering of infrastructure, facilities and services to international stand-ards, such as roads, water, uninterrupted electricity supply, gas, sewerage, networked and air conditioned buildings, and direct connections to ports and airports. Indeed, the provision of reliable infrastructure has proven to be much more effective in the success of zones than offering tax incen-tives, which cannot make up for poor location, infrastructure and facilities. In addition, a higher quality environment benefits not only investors, but workers as well (World Bank 2008, Farole 2011).

The provision of world class infrastructure and facilities requires heavy up-front investments, which has traditionally been provided by local or national governments. As a consequence, some zones were overdevel-oped, much ahead of investor demand. In the case of the first four comprehensive SEZs in China for example, Zhuhai lagged behind Shen-zhen because it overbuilt its infrastructure beyond sustainable demand as its over-sized airport exhausted its initial capital and became a drag on its economy (Zeng n.d.). In another example, the Zolic Free Zone in Guatemala con-structed over 24,000 square meters of factory space in its first two years of operations, which sat empty without adequate marketing support. A lack of adequate funding has also meant that many public zones are inadequately maintained (World Bank 2008).

The need for publicly funded up-front invest-ments changed when the focus of zones shifted from generating foreign exchange through export to attracting foreign investment directly.

Special Economic Zone Facilities and Services

• Childcare facilities• Medical clinics• Conference centers• Product exhibition areas• Commercial centers• Training facilities• Shelter plans• Repair and maintenance centers• Common bonded warehouse facilities• Incubator facilities• On-site banking facilities• On-site housing• On-site customs clearance and trade

logistics facilities• High-speed telecommunications and

Internet services, networked buildings

(World Bank 2008)

28 Special Economic Zones in Mumbai, India.

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With the direct involvement of private investors, governments were ena-bled to adopt innovative approaches toward the financing of infrastruc-ture such as public-private partnerships (PPPs). In the early stage of Shen-zhen for example, joint ventures and private developers from Hong Kong helped with developing some basic infrastructure (Zeng n.d.). Although nowadays many public agencies are still establishing zones, a growing number of privately owned, developed, and operated zones worldwide has been a trend over the last 20 years. Today, 62 percent of the 2,301 zones in developing and transition countries are private sector developed and operated. This contrasts greatly with the 1980s, when less than 25 percent of zones worldwide were in private hands (World Bank 2008).

Because private zones are run on a cost-recovery basis, they are generally more responsive to tenant needs, and therefore provide a wider range of property management services and amenities. Many SEZs now include a host of services, such as childcare facilities, medical clinics, conference centers, product exhibition areas, commercial centers, training facilities, shelter plans, repair and maintenance centers, common bonded ware-house facilities, incubator facilities, on-site banking facilities, on-site hous-ing, on-site customs clearance and trade logistics facilities and high-speed telecommunications and Internet services (World Bank 2008). In addition, local governments have also started to provide various business services to many SEZs, including accounting, legal, business planning, marketing, import-export assistance, skills training, and management consulting. In Suzhou Technology Park in China, the government offers information services, laboratories, product testing centers, technology trading rooms, seed money and the like for start-ups (Zeng n.d.).

Higher quality infrastructure, facilities and services are able to command higher prices from tenants. In well-run private zones, as much as 50 per-cent of revenues can be derived from amenities in addition to traditional rental and sales income of a relatively lower profitability. As a result, pri-vate zones generally have been more profitable and have had better social and environmental track records than public zones throughout the world (World Bank 2008).

Comprehensive Clusters

Another consequence of an increased involvement of private investors has been a shift of activities within the zones. Many government-funded SEZs have traditionally focused on attracting low-quality FDI and low-margin, cost-sensitive industries, like apparel assembly, in the hope that human capital could be improved once they have attracted sufficient productive resources. These zones have found it difficult however to escape the low-value-added trap. Benefits for the local economy have proven to be higher when activities focus on more high-tech sectors such as electronics, and

30Xiangfan, home of Xiangfan EDTZ (5 sq km) for the automobile industry, annual production capacity of 100,000 vehicles.

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zones accommodating these activities are increasingly developed through private parties. This pattern is apparent in the Philippines for example, as private developers move ‘up-market’ in terms of facilities and services catering to electronics and ICT operations, leaving government zones to accommodate apparel, handicrafts, and footwear assembly activities (World Bank 2008).

The development of high tech clusters has allowed China to no longer focus on low cost production only and move up the value chain. Whereas the first Chinese SEZs mainly focused on light manufacturing (such as textiles and electronics), later generations of SEZs also started to include real estate, electronics, tourism, pharmaceuticals, technology, R&D, resi-dential, leisure, airports and financing (ILO 2003). Other countries have followed, and high tech SEZs have been established in Malaysia, Taiwan, Singapore, and elsewhere. SEZs catering to the software and informatics services industries have been developed in India, Jamaica, the Dominican Republic, Mauritius, and elsewhere.

High tech clusters tend to be better in achieving economies of scale that enable business value chains, production specialization, division of labour and effective local government support. High degrees of networking and interconnections, and the development of a skilled and specialized work force that may shift between enterprises, encourages knowledge and technology spillovers and stimulates productivity and innovation. These dynamics enable high tech clusters to become centers of knowledge and technology generation, adaptation, diffusion and innovation, which ena-bles a self-sustaining dynamic. The use of cluster developments to pro-mote economic development by both developed and developing countries is an approach supported by the development community at large and has also brought interaction with the local economy, further investments, infrastructural development, sharing of technology and expansion of R&D (Cowaloosur 2011, Zeng n.d.).

High tech zones also have a disadvantage however, as the percentages of female workers tend to drop. In general, zones with light manufacturing activities tend to employ a mostly female work force. Women make up the majority of workers in the vast majority of zones, reaching up to 90 per cent in some of them. Zones thus have created an important avenue for young women to enter the formal economy at better wages than in agri-culture and domestic service. When zones shift toward high tech activities, these advantages are taken away (ILO 2003). This suggests that a mix of zone activities of light manufacturing as well as high tech will provide the best results for local economies.

Main growth opportunities are now said to be in services sectors, espe-cially information and communication technology (ICT), business services,

32 Kunming Tourist Holiday Resort (THR) Special Economic Zone, China

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and more knowledge- and research and development (R&D) intensive sec-tors. This requires fostering innovation, which emphasizes the the impor-tance of skills development and training, as well as the need for zones to avoid becoming enclaves (Farole 2011).

Genius Loci

The success of SEZs is increasingly measured not only by the income of foreign exchange they generate, but also by the benefits they deliver for the local economy, a connection that is also referred to as ‘backward linkage’. Generally, benefits for the local economy and local entrepre-neurs are limited because of the very nature of zones. SEZs are created to attract foreign firms because domestic firms are not competitive inter-nationally. Thus, domestic firms are behind in their capacity to provide low-cost, high-quality inputs to production in SEZs. Also, incentives that are available within the SEZs are not available to firms outside of the SEZs, which puts domestic firms in a competitively disadvantageous position from the start (Milberg and Amengual 2008).

Another aspect of unfair competition is the fact that the products from SEZs have the potential to push local manufacturers out of the market. In Africa for example, Chinese exports consist mostly of mass quanti-ties of low quality and cheap textiles, footwear, electronics, machineries and plastics. The fear is that once China will establish SEZs in Africa, this dynamic will be enforced, as the possibility to ‘export’ products from within the zones to outside the zones will be made much easier. Benefits for the local labour market are also believed to be quite limited, as an overlap of manufacturing activities will often cause a shift in labour forces rather than create a new labour force (Cowaloosur 2011).

Local enterprises also tend to be ignored as potential suppliers for SEZ based firms. Experience with the Chinese SEZ Jin Fei in Mauritius shows that investors ignore local enterprises as they cooperate among them-selves to produce parts of a product, import parts of products from China, and will seek linkages with Chinese companies outside the zone. Chinese investors have refused to even buy construction materials from local Mau-ritian suppliers, and chose to import raw materials from China instead. As a result, a leading Mauritian producer of construction materials reported a slump of 68% in its third-quarter profits in 2011 (Cowaloosur 2011).

Viewing SEZs as disconnected from their context and taking a ‘tabula rasa’ or ‘blank sheet’ approach to their development without taking into account their context should be exercised with caution. Most government-developed zones located in remote areas to act as growth poles have failed to succeed. Apart from their isolated location, causes also include heavy upfront capital expenditures and poor collaboration between pri-

34Yangling, China’s only agricultural HIDZ (50-100 sq km), biotechnology and pharmaceutical industries on a site were China’s first farmers settled 4,000 years ago. A connection with local cultural history has proven to be an important factor in the success of SEZs.

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vate and public parties. Most private EPZs and industrial zones in Vietnam for example, sat vacant because local and national authorities could not provide road and other infrastructure connections to the site (World Bank 2008).

A better approach is considered to be building upon and nurture existing economic ecosystems. Local histories of production or business activities in a particular sector have been proven to attribute to the success of SEZs. Most SEZs in China are located in the coastal region or near major cities that have a history or tradition of foreign trading or business and thus a better linkage to the international market. And Wenzhou, in Zhejiang province has a long history of shoemaking, dating back to 422 AD, and has built up local production capacity over time. Inevitably, it is easier to devise policies for a functioning cluster, and much harder to call a cluster into existence from scratch (Zeng n.d.).

There are pitfalls to the contextual development of SEZs though. Many of the Chinese clusters were developed on the model of one product per village and one sector per town. This approach has been very useful in the initial stages for fully mobilizing a village’s or town’s resources based on their comparative advantages, but once they were successful, they found themselves lacking further competitive strength because of small scale, limited human and technology resources, and high-level fragmentation. Towns were actually competing with other towns in the same province or other provinces. How to integrate these similar sectors throughout a city, a province, or a region into a larger value chain so that they can achieve greater economies of scale and have a deeper capacity for innovation is considered to be a real challenge (Zeng n.d.).

SEZs that have been developed as stand-alone entities whilst ignoring the local context have led to social tensions in the past, led by farmers experi-encing dispossession of their land as well as political parties exploiting the plight of the farmers for their own political ends. In India, there have been court cases challenging the setting up of SEZs, especially the legitimacy of forceful land acquisition on grounds of ‘public purpose’, which was considered to be insufficiently proven. Nationalistic sentiments have also came into play, with people taking to the streets and politicians starting to lament the neo-liberal land grab. Illustrative for the potentially explo-sive nature of these conflicts is the case of Nandigram, India, where a bid for the establishment of a chemical hub sparked unrest that left 14 of the villagers dead (Dohrmann 2008). A more considered approach toward the local context could help mitigate such tensions.

Contrary to what their reputation as ‘vehicles of globalization’ suggests, the success of SEZs is in large part dependent on the ‘genius loci’: the unique local connections and cultural-historic context.

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Economic and Technological Development Zones (ETDZ)

Special Economic Zones in China by Type

High-Tech Industrial Develop-ment Zones (HIDZs)

Economic Processing Zones (EPZ)

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Typology

As described in the chapter ‘A Critical History, a quick succession of increasingly sophisticated SEZs were developed in China once the first experiment with Comprehensive Special Economic Zones (CSEZs) proved successful. SEZs now include enclave-type zones as well as single-industry zones; single-commodity zones; and single-factory or single-company zones (ILO 2003). This chapter will provide an overview of the different typologies that have been developed and applied in China. Not only has China developed the widest range of SEZs, it also continues to set the tone in the evolution of the SEZ. Typologies pioneered by China are being copied by countries around the world that hope to replicate China’s suc-cess in attracting investment, boosting employment, increasing exports and generating foreign exchange.

Functional I

The definitions provided below are composited from different sources (Zeng n.d., Linhe 2005, CADZ 2012).

Comprehensive Special Economic Zones (CSEZs) comprise entire cities or provinces and are highly autonomous in policy making and the determi-nation of incentives to attract foreign investment. The first SEZs in China were CSEZs (Shenzhen, Zhuhai, Xiamen, Shantou), and specifically aimed at experimenting with the free market economy (see previous chapter).

Economic and Technological Development Zones (ETDZs) differ from CSEZs in their scale, as they are much smaller. Also known as national industrial parks, ETDZs are multi enterprise zones that offer an invest-ment climate and infrastructure at international standards. Contrary to EPZs, which focus on manufacturing, ETDZs focus on attracting high tech industries. Under pressure of local enterprises, preferential tax treatment was abolished in 2007. By 2010 there were 69 ETDZs (Zeng n.d.).

38

Free Trade Zones (FTZ)

National Border and Economic Cooperation Zones (BECZ)

All Special Economic Zones

Special Economic Zones in China by Type (continued)

39

High-Tech Industrial Development Zones (HIDZs) aim to develop high tech industries and products and to expedite the commercialization of research and development by using the technological capacity and resources of research institutes, universities, and large and medium enter-prises, contrary to ETDZs, which only aim to attract high tech industries. As of 2009, there are 54 state initiated HIDZs in China, which hosted about half the national high-tech firms and science and technology incubators. They registered some 50,000 invention patents in total, more than 70 per-cent of which were registered by domestic firms.

National Agriculture High-Tech Industry Demonstration Zone (AHIDZ) specifically focuses on the development of new agricultural methods and technologies in the face of 21st century water scarcity. To date, the only agricultural high-tech industry demonstration zone is in Yangling (94 sq km), Shaanxi province, where 4,000 scientists are dedicated to agronomy, foresting, water management and herding.

Free Trade Zones (FTZs) have three targeted functions: export pro-cessing, foreign trade, and logistics and bonded warehousing. FTZs are enclosed areas with an exempt status and supervised by Customs. Com-panies in FTZs are eligible for tax refunds on exports, import duty exemp-tion, and concessionary value - added tax. Currently, there are 15 FTZs in 13 coastal cities.

Export Processing Zones (EPZs) are similar to FTZs in that they are enclosed areas supervised by Customs. Whereas FTZs focus on trading and processing exports, EPZs focus on manufacturing products for export. As is the case with other SEZs, they aim to offer an environment of interna-tional standards that is more practical and efficient and therefore more attractive to foreign investors that the local context, and through which they aim to act as catalysts and example for the local economy. So far, 61 EPZs have been set up in China.

National Border and Economic Cooperation Zones (BECZs) are similar to FTZ, though they are not established in the vicinity of ports or airports, but located in border towns. Like the FTZ, they aim to develop trade and local economies (especially those inhabited by ethnic minorities) by allow-ing processing of products for re-export. 14 BECZs have been approved since 1992.

National Tourist and Holiday Resorts (THRs) are set up to attract foreign investment and accelerate the development of the tourist industry. To date, there are 11 national holiday and tourist resorts realized.

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Organizational

Markusen’s Typology of Industry Clusters (Zeng, n.d.):

Cluster type growth Characteristics of member firms

Intra-cluster inter-dependencies

Prospects for employment

Marshallian Small and medium-size locally owned firms

Substantial inter-firm trade and collaboration

Dependent on synergies and economies provided by cluster

Hub and spoke One or several large firms with numerous smaller supplier and service firms

Cooperation between large firms and smaller suppliers on terms of the large firms (hub firms)

Dependent on growth prospects of large firms

Satellite platform Medium-size and large branch plants

Minimum inter-firm trade and networking

Dependent on ability to recruit and retain branch plants

State anchored Large public or nonprofit entity related supplier and service firms

Restricted to purchase-sale relationships between public entity and suppliers

Dependent on region’s ability to expand political support for public facility

Type of Zone

Devel-opment Objective

Size Typical Location

Activities Markets Example

Technology or Science Parks

Promote high tech and science-based industries

< 50 hectares Adjacent to universities, institutes

High technol-ogy activities

Domestic and export

Singapore Science Park, Singapore

Petrochemical Zones

Promote energy indus-tries

100–300 hec-tares

Petrochemical hubs; effi-cient energy sources

Petrochemi-cals and other heavy indus-try

Domestic and export

L aem Cha-bang Indus-trial Estate, Thailand

Financial Ser-vices

Development of off-shore financial ser-vices

< 50 hectares None O ffshore financial and non-financial services

Export L abuan Off-shore Finan-cial Centre, Malaysia

Software and Internet

Development of software and IT ser-vices

< 20 hectares Adjacent to universities, urban areas

Software and other IT services

Export Dubai Inter-net City, UAE

Airport-based A ir cargo trade and transship-ment

< 20 hectares Airports Warehousing, transship-ment

Re-export and domestic

Kuala Lumpur A irport Free Zone, Malay-sia

Tourism Integrated tourism development

200–1,000 hectares

Tourism areas Resorts and other tourism

Export and domestic

Baru Island, Colombia

Logistics parks or cargo villages

Support logis-tics

< 50 hectares A irports, ports, trans-port hubs

Warehousing, transship-ment

Re-export D1 Logistics Park, Czech Republic

Functional II

Examples of Specialized Zones (World Bank 2008):

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Political

The differences between ETDZ/HTIDZ/EPZ/BZ (McCallum, 2011):

Category ETDZ / HTIDZ EPZ BZRate of corporate income tax

15%

Preferential arrange-ments of FIE

2 years of exemption and three years of reduction by half (7.5%)

Preferential arrange-ments of enterprises adopting advanced tech-nology

Reductions up to 3 years under certain conditions

Preferential arrange-ments for export oriented enterprises

Preferential tax rate at 10% for the year in which export value exceeding 70%

Duties and importation VAT for imported self-used production equip-ments and parts

Exemption granted for enterprises within the encourage category

Exemption

Duties and importation VAT for imported office appliance and manage-ment equipments

No exemption Exemption

Duties and importation VAT for imported materi-als

No exemption except for bonded materials for processing trade

Exemption

License for imported materials, equipments and office appliance under processing trade

No exemption except for encouraged projects under processing trade

Exemption for all projects under processing trade

Exemption for all projects under processing trade

Domestic sale of products comprising bonded raw materials

Taxed as finished product Taxed as finished product Taxed upon imported raw materials

VAT refund for finished products made from domestics

Refund granted only if finished products leave territory of China

Refund granted after domestics enter EPZ

Refund granted only if finished products leave territory of China

Bank guarantee bond under processing trade

Required Not required

Rate of VAT 17%; 13% for agriculture

Tax refund for re-invest-ment

40% of paid income tax for the re - investment; totality of paid income tax for re- investment in the case of export oriented enterprises and enter-prises adopting advanced technology

42 Zhongguancun, ‘Beijng’s Silicon Valley’, 8,000 hi-tech enterprises. 361,000 employees, 5,000 with a doctoral degree, 25,000 with a master’s degree, 180,000 with a bachelor’s degree. Income of 201.4 billion yuan from tech-nology, industry and commerce; total industrial output value 128.7 billion yuan (2001).

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Conclusion

Special Economic Zones (SEZs) are areas with a special status that offer special benefits and a world class environment to get foreign companies to invest. There are currently 3,500 SEZs worldwide, operating in 130 countries, employing 66 million people, and adding over $500 billion of trade related value. SEZs can involve investments up to $900 million, are able to stimulate national economies, and lift millions of people out of poverty.

China’s strategic use of Special Economic Zones

China has not been the first country to apply SEZs, but it certainly has been most successful in using them, often for strategic purposes. Perhaps China’s success with SEZs is owed to the fact that China has been histori-cally familiar with the concept of an area with an exceptional status that accommodates foreign trade partners. As early as 1557, Macau was rented to Portugal by the Chinese empire as a trading port, and in 1842, the French, British and American concessions were granted in Shanghai fol-lowing the Opium War.

The SEZ really took off in China in 1980, when Deng Xiaoping decided to start using SEZs to experiment with the free market economy, a move he referred to as ‘crossing the river, feeling the stones one at a time’. To this end, the cities of Shenzhen, Zhuhai, Xiamen and Shantou were given the special status of Special Economic Zone. This status allowed Shenzhen to grow from a village of 25,000 people to a city of 10 million in just thirty years time, making it the largest, and most successful, SEZ in the world today.

After the success of the first four SEZs, a quick succession of increas-ingly sophisticated SEZs followed. In twenty years time, almost 200 new SEZs were created in China, although they would no longer encompass entire cities. These new SEZs were mainly focused on accommodating

44Top: Lhasa, Tibet; Bottom: Kashgar, Xinjang province, China. Lhasa and Kasgar are cities in poor regions with Bhuddist and Muslim minorities, respectively, that have seen ethnic unrest in recent years. China will develop Special Economic Zones in both cities in an attempt to address poverty in and curb ethnic unrest.

45

high tech industries, although also other activities were included. Through the years, SEZs have been created for car, aircraft, space, financial and IT industries, as well as for agriculture and tourism.

SEZs have been able to grow local economies significantly, and lift millions out of poverty. These qualities have led China to apply SEZs in areas that have been scenes of ethnic unrest. In 2001, Lhasa, in Tibet, got an SEZ, and in 2010, the city of Kashgar, in Xinjiang province in the West of China, was given the status of SEZ. Just one year before, Kashgar had been the scene of unrest among the Ozgur ethnic minority population.

SEZs have also been used by China to foster the relationships with neigh-bouring countries. Special zones were created in border towns near Rus-sia, Mongolia, Kazakhstan and Vietnam to stimulate trade. Special zones have also been created to stimulate trade with Malaysia and Taiwan. The Taiwan SEZs in particular has attributed to considerably better relations between Taiwan and China since 2008.

SEZs have helped China to benefit from changing international trade agreements as well. When the Multifibre Agreement, regulating garment quotas, was terminated in 1995, China moved quickly to create 61 special zones to capture most of the Asian garment industry, and has been very successful in doing so. Today, China is looking to move into Africa, partly so it can benefit from the Least Developed Country status of many African countries, which will allow them to export goods duty-free to developed countries.

Many argue however that the main reason for China to move into Africa is access to natural resources. China has announced the development of six new SEZs in Africa. China will take on the role that is traditionally confined to local governments, as it will pay for the full package, including consid-erable infrastructural investments, in return for access. China is thereby the first to export the SEZ itself: the export zone exported. This move has caused anxiety with Western partners, who have traditionally taken a more commanding approach toward African aid. The Chinese approach could potentially transcend the development of the six SEZs and cause a shift in geopolitical relations globally.

In the course of 30 years, China has developed the Special Economic Zone into a strategic instrument that is applicable to a range of issues. SEZs have allowed China to first sort things out domestically, and now to make an appearance on the world stage. China’s ultimate goal, it has been said, is to build skyscrapers in Tokyo, run banks in London and make films in Hollywood. It is learning the ropes in Africa, where the competition is weak. For China, Africa is yet another stepping stone to a commercial pres-ence around the globe.

46Beijing Tianzhu International Airport Free Trade Zone (2008) is the first airport-based comprehensive bonded area in China, with overall planning area 5,944 sq km. It advertises a ‘four-dimensional advantage’, which includes air, sea, road and railway connections.

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Special Economic Zones: Vehicles of Localism

Traditionally, low labour cost has been the driver for foreign companies to invest in SEZs, and it still is the most dominant factor. Fierce competition among SEZs worldwide however have led zones to explore new ways of attracting foreign investors. Some of these ways have proved to be more successful than others.

A common point explored by zones is offering a more relaxed approach to workers rights. This means offering wages below minimum standards, excessive compulsory overtime and a relaxed approach towards health and safety standards. It also means the prohibition of workers unions, with some countries openly advertising the absence of unions of strikes. This approach has triggered a ‘race to the bottom’, in which work conditions have entered a downward spiral. This in turn has led to high turnovers of SEZ workers, with average careers of seldom longer than five years, and exhausting the local pool of human resources. It has also caused negative sentiments taking hold against SEZs among local populations and NGOs. Competition based on low working standards can therefore seen as an unsustainable business model.

Tax breaks are generally seen as helpful for SEZs in persuading foreign companies to invest, but they have proven to be of little effect on a world-wide scale. In addition, companies are seldom helped by tax incentives. Tax exemptions are of no value for firms that do not make profits, which is usually the case in the initial years of operation. The limited duration of tax holidays means that these companies cannot benefit from tax breaks once they start to make a profit. Firms that are profitable from the outset on the other hand might not have needed incentives in the first place.

The offering of roads, water, uninterrupted electricity supply, gas, sewer-age, networked and air conditioned buildings, and direct connections to ports and airports have proven to be much more effective in the secur-ing the success of zones. Many SEZs now also include child care facilities, medical clinics, conference centers, product exhibition areas, commercial centers, incubator facilities, training facilities and on-site housing, and zones also offer financial services, on-site customs clearance, legal assis-tance and management consulting. The zones that are most successful are usually run by private parties, which are run on a cost-recovery basis and are therefore more responsive to tenants needs.

Comprehensive SEZs that offer a wide scope of facilities and services have allowed countries to move up the value chain and include activities related to electronics, tourism, pharmaceuticals, technology, R&D, resi-dential, leisure, airports and finance. These cluster developments tend to be better in achieving economies of scale, which enable business value

48

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chains, production specialization, knowledge spillovers and effective local government support that all attribute to a self-sustaining dynamic. Cluster developments like these have brought interaction with local economies, further investments, infrastructural development, sharing of technology, expansion of R&D, and further innovation.

The interaction of SEZs with the local context is another success fac-tor, even though the contained nature of SEZs suggests otherwise. SEZs are able to nurture and grow the linkage to the international market that some cities with a history or tradition of foreign trading or business already have. Many of the successful Chinese SEZs have built upon local cottage industries that have a tradition of centuries. Zones located in remote areas that are meant to act a growth poles on the other hand have involved heavy upfront capital expenditures, and have failed to succeed nevertheless.

The success of SEZs is traditionally seen as linked with the liberalization of markets, which has earned them the reputation of ‘vehicles of globaliza-tion’. The truth however is that the success of SEZs is not so much depend-ent on global business models and clever investment strategies. Rather, the success of SEZs is in large part dependent on local investments in world quality infrastructure, facilities and services, and a sensitivity to the ‘genius loci’, the unique local connections and cultural-historic context of a place. In spite of what their reputation of ‘vehicles of globalization’ sug-gest, SEZs should really be seen as ‘vehicles of localism’.

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51

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Image Credits

All reasonable efforts so secure permissions for the visual material repor-duced herein have been made by the author of this publication. The pub-lisher and authors apologize to anyone who has not been reached.

Key: page numbers are indicated with ‘P’. The location of an image on a page is indicated by the following key: t=top; m=middle, b=bottom.

Cover: Hamburger Hafen und Logistik AG (HHLA)P. 4; t, b: Shanghai International Medical Zone (website)P. 6; t, b: Shanghai zhanjiang High Tech Park (website)P. 8; t, m, b: by Colloquial, based on graphics United States Government

Accountability Office (GAO) (see bibiliography)P. 10; t: Unknown; b: SarmuP. 12; t: Unknown; b: Oliver9111P. 18; t: Unknown; b: Jin Fei (website)P. 20; t: China-Lekki Investment Ltd; b: Dar Al-HandasahP. 22; t: The Kenyan Daily Post; b: unknownP. 24; t: Boskalis; b: unknownP. 26; t, b: Taizhou Medical HIDZ (website)P. 28; t: DNA Graphic; b: Yash DevelopersP. 30; t: Xiang Fang ETDZ (website); b: unknownP. 32; t, b: Kunming THR (website)P. 34; t, b: Yangling HIDZ (website)P. 36, 38: Colloquial; Google MapsP. 42; t: Zhongguancun HIDZ (website); b: unknownP. 44; t: World News; b: unknownP. 46; t, b: Beijing Tianzhu International Airport FTZ (website)

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colloquialUrban and Architectural Research and Development

Special Economic Zones (SEZs) are areas with a special status that offer special benefits

and a world class environment to get foreign companies to invest. There are currently

3,500 SEZs worldwide, operating in 130 countries, employing 66 million people, and add-

ing over $500 billion of trade related value. SEZs can involve investments up to $900 mil-

lion, are able to stimulate national economies, and lift millions of people out of poverty.

However, knowledge on what makes a SEZ successful is limited. ‘The Anatomy of Spe-

cial Economic Zones’ looks at what makes SEZs successful, and is a primer for anyone

involved in their development. For this publication, comprehensive research has been

done of relevant scientific literature, business reports and newspaper articles.