National and International Issues

Importance of Special Economic Zones for the Socioeconomic Development of Pakistan

From Khunjerab to Gwadar, the landscape of Pakistan is studded with symbols of abiding by the all weather strategic cooperative partnership between Pakistan and China. However, China-Pakistan Economic Corridor (CPEC), as a transformational project, has become the unequivocal symbol of this ironclad relationship and holds a pivotal position in the development agenda of Pakistan. CPEC is a project of strategic significance for both the countries. Under the first phase of CPEC, Pakistan upgraded the energy and road infrastructure, paving the way for the launch of the second phase, envisaging the development of industry, agriculture and human resource through the development of Special Economic Zones (SEZs) along the CPEC route.



Expectations are that this will bring prosperity to billions of people in the region, including China, South Asia, Central Asia and the Middle East. The focus has therefore rightly shifted and SEZs is now the new buzzword in Pakistan. Development of SEZs is being considered the engine that will galvanize and boost the socioeconomic development of Pakistan including sustainable development, poverty alleviation, agriculture, healthcare and knowledge. Nine SEZs are currently envisaged of which three will be constructed on priority, that are: Rashakai, Allama Iqbal Industrial City and Dhabeji.
The successful development of SEZs can unquestionably contribute to the creation of employment opportunities and skills upgradation, develop infrastructure, increase exports, encourage product diversification, establish links to global production networks, and moving up the value chain to high value-added industries. It can also help enhance the GDP and government revenue, lead to the development of technology, attract investment and Foreign Direct Investment (FDI) inflows.    
The additional benefits of a successful SEZ programme includes the development of allied industries through backward linkages, which are not generally covered under regional trade arrangements. If the Road and Transport Authority (RTA) and SEZ policies are synchronized, it can lead to cross-country linkages and the establishment of regional manufacturing and services networks that use SEZs as hubs. Positive social and environmental impact due to improved technology, education and awareness are also significant positive outcomes of well-planned and technologically advanced SEZs. Therefore, they are rightly considered as important components of the cross-country economic corridor development and trade agreements. They can also lead to the growth of the services sector along with manufacturing in developing countries, such as Pakistan, if they are supported by the right policy framework and effective regulatory regimes of the government.
A cursory look at the successful SEZs in the world, and particularly those in the region, reveal that the basic prerequisite that ensures the success of SEZs is the provision of special incentives by the government that often include relaxations with regard to land acquisition, labor and pricing policies that attract FDI. These SEZs also act as experimental laboratories for the application of new policies and approaches before they are applied at a national level. If implemented properly, SEZs can derive significant benefits due to clustering and can achieve economies of scale and business efficiency. In China, for example, SEZs have become a resounding success and have emerged as a major driver of growth and exports. Compared to other emerging markets in the Asia-Pacific, the contribution of the manufacturing sector to Pakistan’s GDP is low. As a result, Pakistan faces competition from other countries in Asia that have similar comparative advantages and have successfully developed their manufacturing sector. Much of the growth of manufacturing in countries such as China can be attributed to their SEZ policy, and Pakistan can learn from their experiences that can provide valuable inputs.
China adopted an incremental approach to SEZ development and began by creating four SEZs in Shenzhen, Zhuhai, Shantou and Xiamen. Since then, the contribution of SEZs to the overall economic growth of China has been substantial. SEZ development led to China’s growth in the manufacturing sector, enhanced exports, attracted FDI and created employment. They helped China move up the value chain from labor intensive to high-value manufacturing, which has enabled the economy to become a key player in global production networks. In contrast, Pakistan has not been able to attract investment in the manufacturing sector in its existing SEZs in the same massive way. It is, therefore, important for Pakistan to examine China’s SEZ policy.
China is now experimenting with different types of services offered by SEZs to diversify their services export basket. This will offer tremendous competition to Pakistan in its services exports. Most countries in the region are also actively engaging in trade agreements, leading to the free movement of goods, services and capital across the region and greater integration with global production networks. Pakistan needs to develop its manufacturing sector and diversify its services sector through SEZs.
Pakistan and Bangladesh are both labor abundant countries in South Asia and members of SAARC. Both countries compete to get investment in the textiles and apparel sector, but unlike Bangladesh, Pakistan has not been successful in developing SEZs for it. Since wage costs in China are now rising, companies are looking for alternative destinations for labor-intensive work. Pakistan could become an alternative manufacturing hub, and SEZs can be an important cluster development model to replicate China’s experience. The upcoming SEZs in Pakistan, like the recently inaugurated Rashakai SEZ, need to attract investment and relocation of industry in sectors like engineering, pharmaceutics, IT, manufacturing, food processing, energy, jewelry, leather, footwear, and textile apparel etc.

It has often been observed that that the performance of SEZs or success of the SEZ act/policy does not depend solely on the institutional framework and administrative bodies. It depends on a multitude of other factors including location, ease of doing business, good governance, a transparent policy regime and good infrastructure. Factors such as location; availability and price of land; connectivity; infrastructure within and outside the SEZs; autonomy of the SEZs; fiscal and other incentives; supporting regulations and type of governance affect the success or failure of an SEZ. Fiscal incentives can be in the form of tax or duty reduction/exemption, ease in profit repatriation and provision of subsidies, among others.
Cheap labor, a large market and an enabling business environment are more important in attracting FDI. Non-fiscal incentives offered to SEZs include, fast track single-window clearances, simplified export-import procedures and customs clearances, lower land rent, 100% foreign ownership and allowing sale to the domestic tariff area. 
If Pakistan wants to be part of the global production networks and value chain, the country has to understand the concept of economic corridors and cross-country partnerships. The success of economic corridors in Asia is based on the concept of how domestic trade and subsidy policy can be linked to SEZs and trade agreements. Pakistan is now actively promoting economic corridors, and the experiences of ASEAN countries, in promoting and developing regional and sub-regional corridors, will benefit Pakistan and help to take off and contribute to the long awaited socioeconomic development of the country.
In order to be successful in Pakistan, SEZs need to be supported with the right policies, including an effective design, ease of conducting business with an effective implementation and management of SEZs. To maximize the benefits, it is also important to ensure that there are sufficient linkages between the SEZs and the rest of the economy. It is also important to consider that too many small SEZs increase the investment requirement for providing external infrastructure to them. A better option is to take a cluster development approach where several single-sector SEZs could be promoted in a cluster. 
Not only do SEZs need good infrastructure inside but they also need good infrastructure outside the SEZs; access and good connectivity to ports (except IT/ITeS and some other services SEZs), logistical facilities and availability of skilled manpower. Since SEZ developers cannot invest in social infrastructure (because of lack of scale) or infrastructure outside SEZs, they need to develop them in strategic locations keeping these demand-side factors in mind. It is difficult to get a high-skilled workforce in backward areas, therefore, industries are not interested in being positioned in such areas.
For Pakistan, developing world-class infrastructure inside SEZs should be a priority. The government needs to take a proactive role in order to ensure that SEZs are developed to attract the best enterprises from China and foreign countries. Badly developed SEZs will only attract substandard enterprises. Improving the business environment is essential in order to maintain the attractiveness of SEZs. There is an urgent need to streamline the single-window systems, which would require broader consensus with the state governments and various line ministries.
Clear and uniform policies are essential for SEZs throughout the country. The challenges impeding the fast and effective development of SEZs in Pakistan will be easily managed if a central authority is coordinating the affairs of the SEZs. Presently, the barriers faced by SEZs include: institutional mechanism and its implications; challenges related to land acquisition; location; sharing of infrastructure and the business model; barriers related to fiscal incentives; challenges related to shifting of existing units from DTA to SEZ; challenges related to backward and forward linkages.
A major flaw in Pakistan’s approach to SEZ development is that it is not incremental. Instead of setting up one or two SEZs, monitoring their development and success and then replicating the success story on to others, approvals are given to a large number of SEZs simultaneously. Multiple zones in Pakistan make it difficult to monitor their performance and addressing concerns over the misuse of SEZ incentives as compared to other countries. 
Two key problems in monitoring and measuring the performance of SEZs are the lack of a standard format for data collection and lack of detailed data. Such data would help measure the performance of SEZs in terms of net exports, foreign investment received, technological spillovers, training offered, quality of employment (measured by employment of skilled and high-skilled persons), etc. Overall, the gaps in data collection, collation and presentation make it difficult to examine SEZs’ performance over time across different zones and SEZs.
Pakistan has a unique institutional and administrative framework for SEZs, where issues of proper coordination between the centre and provinces is a perpetual issue. Lack of coordination and ownership across different ministries of the central government and between the central and provincial governments also brings up issues such as land grabbing and revenue loss from SEZs.
There are inconsistencies between the SEZ Act and other regulations/policies of the central and state governments that reduce the ease of doing business for SEZ developers. Land acquisition has become a highly political issue. Globally, countries have been successful in developing SEZs in the backward areas (e.g., Shenzhen in China). However, these SEZs succeed if they are close to the sea and the government takes on the huge expense required to develop the outside zone infrastructure.
The success of an SEZ depends on its access to raw materials, labor, markets, connectivity to social infrastructure and amenities among others. SEZs are, therefore, less likely to succeed if they are viewed as instruments for the development of backward and remote areas. If SEZs are located in backward and remote areas, they may fail to attract skilled workforce and professionals. Remote locations also lack basic outside zone infrastructure such as quality roads and social infrastructure such as schools and hospitals.
Issues related to social infrastructure in SEZs, like waste management and water treatment plants, are also immense. The developer needs sector knowledge to create appropriate infrastructure and managerial expertise to provide a hassle-free business environment so that units can establish themselves in the SEZs. Success of an SEZ also depends on the intent of the developer, its business model, including plans for raising revenue and making the project viable, its ability to carry out a project with long-term gestation period, its management and marketing capabilities, among others.
A large multi-sector manufacturing SEZ requires more investment and a longer time frame to break even than IT/ITeS SEZs, therefore, they require incentives that are tailored to their needs. Policies are framed in a dynamic environment, and at times, policy changes are necessary. Cluster-based industrial development model has enabled several developing countries to diversify exports, move up the value chain into high-value manufacturing, facilitate production networks and attract foreign investment and technology.
A meaningful and robust strategy to launch a national and international media campaign with the theme ‘create in Pakistan’ is required to attract FDI and encourage the potential investors to set up industries in the SEZs. The objective of this campaign should be to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure. There is also a need for a holistic policy focusing on regulatory, administrative and fiscal reforms.
If we wish to be a part of the global production network and value chain, then we need to fully grasp the concept of economic corridors and cross-country partnerships. The success of economic corridors in Asia is based on the concept of how domestic trade and subsidy policy can be linked to SEZs and trade agreements. The good omen is that Pakistan is now actively promoting economic corridors, and the experiences of China and ASEAN countries in promoting and developing regional and sub-regional corridors will benefit Pakistan.
To summarize, in order to attract industrial units to relocate to Pakistan and investors – both local and foreign – come to our SEZs to make them a success story, a clear and unambiguous strategy based on the following parameters may be considered: (a) strengthening the regulatory and administrative mechanism; (b) addressing land-related issues; (c) providing meaningful incentives to SEZs; (d) promoting backward and forward linkages; and (e) proactive marketing for SEZs in Pakistan. This will enable the SEZs to grow faster and contribute to Pakistan’s economic growth and exports. In order to be successful in Pakistan, SEZs need to be supported with the right policies, including an effective design, ease of conducting business and effective implementation and management. To maximize benefits, it is also important to ensure that there are sufficient linkages between the SEZs and the rest of the economy.


The writer has served as an Ambassador to China, European Union, Belgium, Luxembourg and Ireland. She has also authored and edited several books including Magnificent Pakistan, Pakistan-China All Weather Friendship, and Lost Cities of Indus.
E-mail: [email protected]
 

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