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Special Economic Zones: A Synopsis

What Did Nations Do Before SEZ’s Existed?

The concept of Special Economic Zones stems from the orthodox strategy, termed as “Clustering of Industries”. Its initial implementation in Pakistan was through two modes:

  • Industrial Clusters
  • Industrial Estates

Industrial Clusters are an assemblage of interlinked businesses which produce and manufacture goods for a common industry. They are placed in one locality so as to promote the socio-economic development of the related community.

The Surgical Goods Cluster in Sialkot, Ceramic Industrial Cluster in Gujrat, and the Marble Cluster in Khyber Pakhtun Khwa are some of the existing Industrial Clusters in Pakistan.

Industrial Estates:

They comprise of a large number of factories constructed in close proximity to one another.

In order to remedy the industrial failure of the 1970’s, more than 100 industrial estates were established by the government. They differ from Special Economic Zones by occupying lesser area, as well as in the conservative policies legislated for their administration.

What are Special Economic Zones?

Special Economic Zones are specifically demarcated areas developed to augment the economic growth of a state through targeted industrialization. For this the government deals with two rudimentary concerns.

Geographical Concerns:

Since they aim towards aggrandizing the economy, the SEZ’s are usually located near rivers, ports, borders, or railways to create easy connectivity for international and domestic parties.

This is one of the primary reasons why Gwadar, being a port city, would serve as an ideal Special Economic Zone in Pakistan.

Infrastructural Concerns:

The constituents of SEZ’s also vary from the ones in affect State-wide. These include lenient monetary policies, unhindered power and water supply, paved roads and close proximity to local markets.

China- A Precedent For Prosperous Special Economic Zones:

While they are no longer an alien practice around the globe, China seems to have mastered the art of attracting foreign capital using SEZ’s. In 2010, it was estimated that SEZ’s accounted for 22% of China’s total GDP, 46% of FDI, and 60% of exports.1

By the end of 1970, it had 5 successful state-owned SEZ’s, which paved the way for 1750 new ones. The province of Hainan, which China declared as a Special Economic Zone is self-explanatory of its successful economic policy.

How Will Pakistan Benefit From Developing Special Economic Zones?

Currently Pakistan seeks to develop 9 economic zones in various parts of the country with the help and thorough guidance of the Chinese government under the umbrella of China Pakistan Economic Corridor. These include 2 in KPK, 2 in Sindh, 1 Baluchistan, 1 in Islamabad, 1 in Faisalabad, 1 in Gilgit Baltistan, and 1 in Azad Jamu and Kashmir.

Fiscal Benefits For Developers (Under Section 36 Of The Special Economic Zone Act 2012)

  • One time exemption from all custom-duties and taxes on plant and machinery imported into Pakistan except the items listed under Chapter 87 of the Pakistan Customs Tariff, for the setting up of an SEZ subject to verification by the BOI; and
  • Exemption from all taxes on income accruable in relation to the development and operation of the SEZ for a period of five years, starting from the date of signing of the development agreement

Auxiliary Benefits:

With the contingency that these projects are successfully developed and carefully executed, Pakistan will reap the following benefits:

  • Increased employment opportunities
  • Augmented regional connectivity
  • Industrial development
  • Elimination of rent seeking practices
  • Create research and development opportunities

How Will SEZ’s Attract Foreign Investment In Pakistan?

While dealing with foreign investment, Special Economic Zones are rather flexible. Lower taxes, land use arrangements, liberal, investor friendly policies, coupled with tolerant administrative framework and easy convertibility of local currency all translate in to low cost of production and higher profit margins.

The practical manifestation of this theory can be tested using china’s example. Direct foreign investment in china increased a colossal 171 times between the years 1980 to 1993.

Lessons For Pakistan: Made in China

In order to effectively regulate the foreign investment flux, china focused on

  • Tax incentives
  • Labour laws
  • Land use policies
  • Protection of private property
  • Manufacturing export-oriented products
  • Relying on foreign capital for construction

In light of China’s success rate, it is essential for Pakistan to follow suit.

Conclusion

As history narrates, Special Economic Zones have served to redeem crashing economies. With effective functioning, sincere leadership, efficacious land reforms, conducive institutional environment supplemented by Chinese aid and guidance, Pakistan too can restore its current economic position.

References:

  1. https://www.pide.org.pk/psde/pdf/AGM32/papers/Special-Economic-Zones-SEZs.pdf

Zeng. D. Z (2011), ‘How do Special Economic Zones and Industrial Clusters Drive China’s Rapid Development?’, World Bank, Policy Research Working Paper No. 5583.

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