Special Economic Zones in South Asia Industrial Islands

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Table of Contents,1 Background 2,2 Overview of the Literature 3. 3 Institutional Characteristics of SEZs in South Asia 5. 3 1 Incentive Regime 6,3 2 Infrastructure Regime 8. 3 3 Regulatory Regime 10,4 Trade Performance of SEZs in South Asia 12. 5 Summary Observations 18,References 19,Annex 1 Characteristics of EPZs in Bangladesh 20. I EPZ Policy regimes 20,II The Legal Frame work 22.
III Administrative Set Up 23,IV The Approval Process 24. V Rules and Procedures 25,VI Incentive Packages 26. Annex 2 Characteristics of EPZs in India 31,I EPZ Policy regimes 31. II The Legal Framework 34,III Administrative set up 37. IV The Approval Process 39,V Rules and Procedures 45.
VI Incentive packages 49,Annex 3 Characteristics of EPZs in Sri Lanka 55. I Policy Regimes 55,II The Legal Framework 57,III Administrative Set Up 57. IV The Approval Process 59,V Rules and Procedures 60. VI Incentive packages 61,1 Background, Many developing countries operate spatially confined economic areas in the form. of export processing zones special industrial zones or free trade zones They experiment. in these areas with infrastructure regulatory and fiscal policies that are different from. those implemented on the mainland In particular special economic zones SEZs offer a. more investor friendly business environment and are seen as vehicles to attract foreign. investment create employment opportunities and introduce advanced technology. Major changes to the external environment of SEZs in low income countries have. taken place in recent years On the one hand fiercer competition for foreign direct. investment has emerged from East Asia On the other hand new export opportunities. through preferential programs like EBA and AGOA have opened up Rolfe et al 2004. Cling et al 2005 These countervailing forces have further accentuated the differences. between well performing SEZs and sluggish zones, The potential role of SEZs as means to attract foreign investment create.
employment opportunities and introduce more advanced technologies has been a. controversially discussed topic Individual country experiences with such spatially. confined economic areas have been mixed Yet despite the existence of a large. descriptive literature on SEZs e g Madani 1999 Watson 2001 surprisingly little is. known about the particular determinants e g institutional setup governance labor costs. infrastructure support regulatory environment fiscal incentives that have caused some. zones to flourish while others have languished, SEZs contribute to diversification through two pathways First by attracting. manufacturing activities to predominantly resource based developing countries SEZs. add to the diversity of economic activities just through their very existence And second. SEZs can stimulate the mainland economy through productive linkages The latter can be. vertical by increasing demand for intermediate goods that are produced on the mainland. or horizontal by demonstrating the feasibility of manufacturing non traditional products. In this context the central development questions concern i the institutional. factors that have been instrumental for determining the relative performance of SEZs and. ii the extent to which the two types of linkages exist and can best be harnessed for the. diversification of the mainland economy This study addresses the two questions by. assessing and comparing the experiences with special economic zones in Bangladesh. India and Sri Lanka These three South Asian countries were chosen as case studies. since they represent a similar socio economic and cultural environment have been. operating SEZs for several decades and make data on institutional characteristics and. economic performance available, The remainder of the analysis falls into four parts Section 2 briefly summarizes. the literature on SEZ development and diversification Section 3 then compares the. policies and characteristics of SEZs in the three South Asian countries with a focus on. factors that might explain differences in performance The subsequent section 4 looks in. more detail at trade patterns of SEZs in comparison with the mainland and across zones. and activities in order to investigate to what extent SEZs have been the engines of. economic growth and export diversification in different sectors Finally section 5. presents some summarizing remarks,2 Overview of the Literature. There is a sizeable empirical and theoretical literature on SEZ performance. Applied studies are most often based on case examples of individual countries the. findings of which are difficult to compare and generalize Most studies find that SEZs. have been successful in terms of the dynamics of economic activity and employment. Examples include Honduras El Salvador Mauritius China Indonesia Malaysia South. Korea and Sri Lanka Yet this overall optimistic impression might partly be due to. sample bias in the sense that non performing zones which stagnate and perish receive. little attention from researchers so that their fate remains untold Also it is not clear. whether the incentives granted to SEZ firms in apparently successful zones such as tax. breaks or subsidized infrastructure can always be justified on a cost benefit basis. Madani 1999 For example detailed analysis suggests that governmental infrastructure. investments in the export processing zones in the Philippines have not been justified by. the outcomes in terms of employment tax receipts and foreign exchange earnings. Jayanthakumaran 2003 Moreover there are often intangible factors that influence the. success or failure or SEZs In Trinidad and Tobago the fear of unsteady labor relations. has been seen as a reason for the relatively low attractiveness of the SEZ for investors. compared with other zones in the Caribbean Willmore 1996 In Africa many SEZs. have suffered from lack of socio political and economic management skills that have not. made it possible to appropriately address the multiple challenges of EPZ establishment. such as providing high quality infrastructure government services and human capital. Watson 2001, Concerning vertical linkages to the mainland theoretical analysis shows that. benefits from SEZ investments spread to the mainland through purchasing relations if. the SEZ technology is expressing constant returns to scale and the purchased goods are. not traded internationally Din 1994 Yabuuchi 2000 In this case the additional. demand from SEZ firms leads to a strengthening and expansion of the respective. intermediate goods producing industries on the mainland This structural shift entails. economic diversification if the industries in question are non traditional. With respect to horizontal linkages empirical research on the Dominican. Republic suggests possibilities for significant knowledge transfers from multinational to. domestic firms within an SEZ Rhee Katterbach and White 1990 In subsequent. analysis on Malaysia it was found that the spillovers were not confined to the SEZs but. that indirect benefits extended beyond the zone Johansson and Nilsson 1997. Successful SEZ enterprises were reported as demonstrating to mainland firms how to. produce market sell and distribute manufactured goods on the world market and thereby. acted as catalysts for the diversification and growth of mainland production and exports. These empirical findings on horizontal linkages between SEZs and the mainland. are consistent with economic conjectures that postulate an ideas gap Romer 1993 or a. lack of product discovery Hausmann and Rodrik 2003 as potential causes of the poorly. diversified economies of low income countries The absence of sufficient local product. and marketing know how prevents opportunities for productivity growth to be exploited. through the introduction and expansion of new activities One important channel for the. transmission of new ideas is foreign direct investment The foreign affiliates may for. instance provide an important example for potential indigenous exporters in terms of the. required managerial technical and marketing know how to supply the world market A. study of nontraditional manufacturing industries in eleven developing countries and the. circumstances behind their successful entry into the world market provides some support. for this hypothesis Rhee and Belot 1990 In almost every case a particular person firm. or public agency played a critical role in the initial export phase by combining local. endowments with managerial experience marketing knowledge and mastery of relevant. technology In industries where the country in question had little or no previous. experience this role was often played by an affiliate of a foreign multinational enterprise. In this context SEZs which attract inward FDI can act as catalysts for initiating the. process of economic advancement and productive diversification. 3 Institutional Characteristics of SEZs in South Asia. Export processing zones in South Asia have a long tradition The first such zones. were established in India in 1966 in Sri Lanka in 1979 and in Bangladesh in 1983 All. the three countries have subsequently added several other zones and total employment. has increased over time to more than 100 000 workers in each country Table 1 The. institutional and political environment for zone establishment and operation have. changed markedly since the beginnings in response to global economic trends general. economic policy changes and experiences in zonal management Descriptions of the. major phases in zonal development in the three countries are contained in the three. country annexes to this study,Table 1 Summary statistics on EPZs in South Asia.
latest available data referring to 2003 05,Total investment Value of exports. Number of zones million USD Total employment USD,Bangladesh 6 749 148 080 1 027 380 210. India 11 501 124 162 4 830 340 758,Sri Lanka 9 291 104 237 177 458 677. Source Country case studies, Many factors contribute to the institutional environment in which SEZ firms. operate These include economy wide characteristics such as macroeconomic stability. labor skills and wage levels as well as zone specific factors such as incentive regimes. infrastructure quality and zonal governance The combination of these factors has a. determining influence on production and investment decisions of firms with different. elements carrying differing weight for particular industries and investors. Trying to capture the various factors for comparison purposes is challenging as. they are often complex multidimensional and not easy to quantify In many cases soft. factors such as the dynamism of the zonal management or the expectations of investing. firms are more important determinants of success than hard facts Also the components. of the institutional environment have evolved over time so that ideally a full time series. would be required to be able to represent the changes and make it possible to take time. lags between the alteration of particular factors and the production or investment. response of SEZ firms into account Unfortunately the available information in. Bangladesh India and Sri Lanka does not make it possible to do justice to the full history. of SEZ development and a descriptive account of major trends has to suffice see the. country annexes With these caveats in mind the following comparative descriptions. aim to highlight common and differing elements in the institutional set up of SEZs in the. three South Asian countries along the three major dimensions of incentive infrastructure. and regulatory quality,3 1 INCENTIVE REGIME,General and sector specific incentives.
Bangladesh Since 1998 imports into EPZ do not pay any VAT import duties or. supplementary taxes which can range from 20 350 for some products No stamp duty. is levied on the transfer of land within an EPZ In 1998 additional incentives for. backward regions have been granted These include a subsidy of 50 on land and factory. rents and a 30 cash incentive for agro industries Similar incentives also exist outside. the EPZ however, India There are multi product zones service sector zones electronic hard and. software zones and biotechnology non conventional energy gems and jewelry zones. Free trade and warehousing zones also exist Until 2005 units were required to generate a. certain value added in their activity but this obligation has been changed and units now. have to create a cumulative positive foreign exchange within the first 5 years There is no. investment limit for firms in the SEZs while there are some sector specific thresholds for. investment as Export Oriented Units SEZ units are also exempt from a 12 percent. service tax customs and excise duties and VAT While central excise duties were only. reimbursed until 2006 companies are now exempt from them Some municipal bodies. have also granted exemption from electricity duty and stamp duty on property. transactions The SEZ Act also directs the states to exempt zones from all local taxes On. the other hand there exist zone specific subsidies in West Bengal and Vishakhapatnam. Sri Lanka Incentives include duty exemption from importation of equipment. construction material and production inputs In 1982 this scheme was extended to local. suppliers in order to encourage backward linkages Between the late 1990 and 2002 so. Special Economic Zones in South Asia Industrial Islands or Vehicles for Diversification Aradhna Aggarwal University of Delhi Mombert Hoppe World Bank

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