Strategising of Sezs: China Vis-À-Vis India

Strategising of SEZs: China vis-à-vis India Aradhna AGGARWAL 1. Introduction A growing number of countries are increasingly focusing upon special economic zones (SEZs) as engines of industrialization. According to ILO (2007), the number of SEZs increased from a mere 79 across 29 countries in 1975 to 3500 across 130 countries in 2006. Not only has the number of SEZs increased recently, but so have the varieties of SEZs. New varieties of zones have evolved and are subsumed within the category of SEZs. Several countries are upgrading their SEZs into mega-industrial clusters and commercial hubs with generous incentives to take advantage of their potential (Aggarwal, 2012). The usefulness of SEZs for the domestic economy however remains highly controversial. Evidence suggests that while SEZs may bring signifi cant benefi ts, they can also have negative welfare effects on the nation due to government revenue loss and distortions in the growth process. It has been argued that the zones have high maintenance costs; employ low-wage, unskilled female labor; offer an unstable employment base; generate little domestic added value; develop few labor or managerial skills; transfer little modern technology or know-how; have weak links to domestic manufacturers; and hence generate little net benefi ts. The net results can be signifi cantly negative with losses outweighing the positive effects. The SEZ literature is replete with studies on the factors crucial for the success of zones as engines of industrialization and growth (Madani, 1999; Kusago and Tzannatos, 1998; Aggarwal, 2012). A variety of micro, meso and macro climatic factors are believed to determine the success of SEZs. Some observers argue that the location matters while others consider that an export processing zone is more likely to succeed when monetary and fi scal policies are sound and stable, and private property and investment laws are clear. Still others underscore the need for liberalising the outside economy to ensure that the benefi ts of SEZs outweigh the costs. Little attention however has been paid to strategic approaches adopted by different countries in the conceptualisation, creation and promotion of SEZs; and their implications for the contribution of SEZs to the domestic economy. This study is an attempt to fi ll this gap. ‘Strategic approach’ is a broad framework that encompasses the vision, mission, objectives and strategies that are required to achieve the objectives. It is a perspective, a way of creating the roadmap to achieve the goals. More specifi cally, it is a plan to do things a certain way to achieve a desired outcome. Despite the central role it plays in the long-term success of a SEZ program, strategic approach is often ignored in the literature; too much focus remains on the policy related matters. A policy is a mere set of rules designed for the implementation of the strategy and hence is an element of the overall strategic approach. This paper analyses the SEZ programme of India and China with a particular focus on the strategic approaches adopted by these countries to exploit the SEZ-generated benefi ts, and examines their implications. Both these countries have a relatively long history of the programme. India established its fi rst Zone in 1965 while China in 1979. However they adopted different strategic approaches and traversed along divergent evolutionary trajectories to meet with varied success with their SEZ programme. It would be of interest to analyse the SEZ strategies and performance in these countries to better understand the links between SEZ perspective, strategy and performance. The rest of the chapter is organized into 4 Sections. Section 2 presents the theoretical ？？？？？ 13 discussion on the strategic approaches to the SEZ policy. Sections 3 and 4 analyse the SEZ strategies in China and India respectively and examine their impact on the contribution of SEZs to their economies. Finally, Section 5 concludes the analysis with policy implications. 2. Strategic approaches to SEZs: Theoretical discussion Traditionally, SEZs are defi ned as ‘economic enclaves’ within which manufacturing for export occurs under virtual free trade. According to the neo classical (orthodox) theory they are established to offer duty free access to raw materials for export production to offset the anti- export bias of import substituting regimes which are characterised by anti-export bias in terms of high tariff barriers and distorted exchange rate regime. In this framework, SEZs are the second best solution to overall economic reforms and lose their signifi cance as countries implement country-wide systemic trade and macroeconomic and exchange rate reforms. An extended version of the theory (World Bank, 1992) considers SEZs as a policy means of achieving greater economic openness and growth. This theory however has little relevance in the current context. Recent experience shows that the considerable increase in the number SEZs across the world has followed the adoption of trade and economic reforms in the rest of the economy rather than preceded them. In that sense, in most countries they are the outcome of a liberalized regime. The heterodox school emerged in the 1980s explains the rationale of SEZs in open export oriented regimes (Baissac, 2003). According to this school of thought, the development of SEZs is the outcome of a move for export-oriented industrialization in developing countries. It argues that the countries that have adopted the model of “export oriented industrialization” (EOI) rely heavily on exports and FDI for rapid industrialisation. In general, export markets are characterized by fi erce competition, thin profi t margins and high volatility putting pressure on companies in developing countries to enhance their effi ciency, reduce production costs, and become internationally competitive. Domestic companies fi nd it diffi cult to compete in these markets due to inadequate production technology, ineffi cient management, and a lack of market access and marketing know-how. This packaging is provided by FDI. But the numerous market and production failures that the developing countries face due to a chronic lack of capable institutional actors affect their investment climate adversely by increasing both, production and transaction costs. This has dampening effects on FDI. Addressing these failures on economy would require time and resources due to socio-economic and political realities embedded in these economies. In this scenario, the establishment of industrial enclaves (SEZs) is an alternative second best policy tool by which these countries seek to address the structural deficiencies over limited geographical area and expedite the process of trade-based industrialization. SEZs offer numerous benefi ts (Madani, 1999; Aggarwal, 2006, among several others) including, tax incentives, provision of standard factories/plots at low rents with extended lease period, provision of infrastructure and utilities, single window clearance, simplifi ed procedures and relaxed labour laws, which reduce cost of doing business in the host country and offer a more conducive business environment to attract foreign direct investment, which would not otherwise have been forthcoming. Foreign direct investment (FDI) is believed to have catalytic effect by bringing positive spillovers to domestic fi rms in the host country, initiating a shift in the orientation of the domestic private sector toward export activities. Clearly, there has been evolution in the theoretical literature on SEZs. While traditional (orthodox) theories focus on the tax incentives offered by SEZs in an import substituting regime, heterodox economists suggest that SEZs offer an increased ease of doing business to promote exports and investment in an export oriented regime. Further, while the traditional approach fi nds SEZs useful in generating foreign exchange and providing employment, the 14 アジア研究 Vol. 57, No. 4, October 2011 latter approach views them as an instrument for expanding and modernizing the host economy through additional foreign investment/capital formation, technology transfer and technology spill-overs. These differences notwithstanding both the schools essentially treat SEZs as the second best solution to promote trade, directly a la orthodox approach and indirectly a la heterodox approach. We argue that the trade based second best solution approach to SEZs is erroneous. It has affected the design and performance of SEZs in most countries rather adversely. Zones are evolving over time and their characteristics have also been changing (FIAS, 2007; Meng, 2005). There is a need, therefore, to move to new theoretical paradigms to capture their potential benefi ts and consider them as part of the overall industrial policy of promoting cluster- based industrialisation. This study thus proposes to embed the establishment of SEZ within the economics of agglomeration in general and industrial clustering in particular. Although SEZs are concentrations of fi rms, the agglomeration economies associated with them are assumed to be of minor importance. They are being promoted as a mere trade enclaves; the relevance of localization economies and their role in promoting the competitive advantages of SEZs has gone unnoticed. The concept of industrial clusters was introduced and popularized by Porter in his book “Competitive advantages of nations”.1) Porter defi nes clusters as geographic concentrations of similar/ related fi rms that together create competitive advantages for member fi rms and regional and national

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