Special Economic Zones: an Operational Review of Their Impacts
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Special Economic Zones An Operational Review of Their Impacts CIIP Competitive Industries and Innovation Program Financed by in partnership with Special Economic Zones An Operational Review of Their Impacts CIIP Competitive Industries and Innovation Program Financed by in partnership with ©2017 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); Inter- national Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. About the Competitive Industries and Innovation Program (CIIP) The CIIP partnership was created to enhance country growth and employ- ment prospects by supporting public policies and investments that promote competitiveness and innovation within and across industries. As the Trustee and Administrator for CIIP, the World Bank Group is responsible for program development, implementation, and monitoring and evaluation. For more information, visit www.theciip.org Cover picture: Port Klang and Special Economic Zone, Malaysia. Source: DigitalGlobe ii Contents Acknowlegements ix Abbreviations xi Executive Summary 1 Key Findings 5 Chapter 1. Introduction 9 Methodology and Data 9 Report’s Definition of Special Economic Zone 11 Structure of the Report 13 Chapter 2. Literature Review of Special Economic Zones, Rationale, and Impact 15 Agglomeration to Reduce Costs 15 Fiscal and Nonfiscal Investment Incentives 17 SEZs and Exports 19 SEZs and Firm Performance 20 SEZs and Labor Market Outcomes 21 SEZs and Spillovers 22 Conclusions 27 Chapter 3. Toward a Better Stocktaking of Existing Zones 29 Nightlights Data 29 SEZ Database 34 Institutional Framework 36 iii Corporate Tax Incentives 37 Other Fiscal Incentives 38 Zone Size 38 Zone Start Date 39 Chapter 4. Drivers of SEZ Performance 41 Conceptual Framework 41 Methodology and Dataset 46 Descriptive Analysis of SEZ Performance 56 Zone Performance, SEZ Characteristics, and Policies 59 Role of Spillovers 81 Conclusions 91 Chapter 5. Review of World Bank Portfolio 95 World Bank’s SEZ Portfolio 95 Structure of the Portfolio 97 Portfolio Performance 100 Summary of Lessons 111 Conclusions 115 Summary of Findings 115 Policy Recommendations 119 iv Appendix A. Variable Descriptions 121 Appendix B. SEZ Growth, 2007-12 125 Appendix C. SEZ Growth and Maturity, Size and Location, 2007- 2012 127 Appendix D. Zone Characteristics, Regulatory Variables, and SEZ Per- formance 129 Appendix E. Alternative Regression with Ease of Doing Business 131 Appendix F. Alternative Regressions with Logarithmic Transformations of the Explanatory Variables 133 Appendix G. SEZ Five-Year Growth Rate 135 Appendix H. Growth in Neighboring Regions 137 Appendix I. Effect on Neighboring Regions 141 Appendix J. Definition of Evaluation Concepts 143 Appendix K. Nightlights and Employment 145 References 147 v Boxes Box 2.1 Core-Periphery Model and Agglomeration Mechanism 16 Box 3.1 Caveats and Limitations When Using Nightlights Data 33 Box 5.1 Success Story: Korea’s Jeonju Regional Development Project (P004113) 103 Figures Figure 2.1 SEZ Performance and Surroundings Area Growth 23 Figure 3.1 Example of Nighlights Luminosity for the HOA LAC Zone, 2007 and 2012 30 Figure 3.2 Correlation of Nightlights with Number of Firms and SEZ Employment 34 Figure 4.1 Drivers of SEZ Performance, The Conceptual Framework 42 Table 4.1 Overview of SEZs per Country 54 Figure 4.2 SEZ Nighlights Performance, 2007-12 58 Figure 4.3 National Average of the Absolute and Relative Growth Per- formance, 2007-12 58 Figure 4.4 SEZ Growth 2007-12 and SEZ Maturity, Size, and Loca- tion 60 Figure 4.5 SEZ Growth 2007-12, Nature of Operator, and Sector Fo- cus 61 Figure 4.6 Fiscal Incentive Package and SEZ Performance 62 Figure 5.1 World Bank Special Economic Zone Projects by Region, 1970-2015 97 vi Tables Table 3.1 Overview of CIIP Database 35 Table 4.2 Characteristics of SEZs Included in the Dataset 55 Table 4.3 Zone-Related Variables, Dependent Variable: Absolute SEZ Performance, 2007-2012 64 Table 4.4 Regulatory Variables, Dependent Variable: Absolute Perfor- mance, 2007-2012 67 Table 4.5 Main Regresson Analysis, Dependent Variable: SEZ Perfor- mance, 2007-2012 70 Table 4.6 SEZ Growth in Early Years of Operation, Dependent Variable: SEZ Growth After 5 Years of Start of Operation 78 Table 4.7 Vietnam Case Study, Dependent Variable: SEZ Performance, 2007-2012 80 Table 4.8 Impact on Surrounding Areas, Dependent Variable: Change in Nighlights of SEZ Surrounding Areas, 2007-2012 86 Table 4.9 Impact on Surounding Areas, Dependent Variable: Change in Nighlights of Surrounding Area, 2007-2012 90 Table 5.1 Achievement of Project Development Objectives (PDOs) 101 Table 5.2 Relevance of Design 108 Table 5.3 Project Efficiency 109 Table 5.4 Were Projects Implemented Efficiently? 109 vii viii Acknowlegements he SEZ operational review was prepared by a World Bank team led Tby Michael Wong (Program Manager) and Johanne Buba (Senior Economist). The note was prepared under the overall guidance of Jose Ernesto Lopez Cordova (Practice Manager, GTCCS), and Klaus Tilmes and Cecile Fruman (Directors, Trade and Competitiveness). The research team was led by Andrés Rodriguez-Pose and Susanne Frick (both of the London School of Economics). The team comprised Elliot Rasmuson (Data Consultant, GTCCS), Egle Pugaciauskaite (Consultant), Keith Patrick Garett (Consultant, GGSCE), and Dileep Wagle and Abhishek Saurav (Consultants). The report benefited from inputs from Thomas Farole and Leonardo Iacovone (Peer Reviewers), Navin Girishankar (Lead Economist), Douglas Zheng (Senior Economist), Melanie Mbuyi (Operations Officer), Imtiaz Ahmad Sheikh (Program Assisitant), and Joshua Seth Wimpey (Private Sector Specialist, DECEA). Alicia Hetzner (Senior Editor) edited the report. ix x Abbreviations AGOA African Growth and Opportunity Act CIIP Competitive Industries and Innovative Program (World Bank) DMSPUS Air Force Defense Meteorological Satellite Program DN digital number DOD US Department of Defense DPO Development Policy Operation ECOSOC United Nations Economic and Social Council EPZ export processing zone ERR economic rate of return ES Enterprise Survey ETDZ economic and technological development zone EZ economic zone FDI foreign direct investment FIAS Facility for Investment Climate Advisory Services (WBG) FIL financial intermediary loan FIZ foreign investment zone FTZ free trade zone FZ free zone GDP gross domestic product GDPpc gross domestic product per capita GoK Government of Korea HTP high-tech park IC investment climate; industrial complex ICR Implementation Completion Report (WBG) IDA International Development Association (WBG) IDZ industrial development zone IEG Independent Evaluation Group (WBG) IFC International Finance Corporation (WBG) ILO International Labour Organization IMF International Monetary Fund IRR internal rate of return ISR Implementation Status and Results Report (WBG) ITi nformation technology ITES information-technology-enabled services xi IZ industrial zone km kilometer LAC Latin America and Caribbean LN natural log MAR Marshall-Arrow-Romer MSME micro, small and medium enterprise NCEI National Centers for Environmental Information (NOAA) NEG New Economic Geofigurey NLDI Night Light Development Index NOAAUS National Oceanic and Atmospheric Administration NTL night-time light OECD Organisation for Economic Co-operation and Development OED Operations Evaluation Department (WBG) OIZ organized industrial zone OLS Operational Linescan System OPCS Operations Policy and Country Services (WBG) OSS one-stop-shop p.a. per annum PAD Project Appraisal Document (WBG) PCR Project Completion Report (WBG) PDO Project Development Objectives (WBG) PoDE Mozambique Enterprise Development (project) PPAR Project Performance Assessment Report PPP public-private partnership; purchasing power parity PSC public service commission PSD private sector development SEZ special economic zone SME small and medium-sized enterprise SSA Sub-Saharan Africa STIP science and technology industrial park TFP total factor productivity UNCTAD United Nations Conference on Trade and Development VAT value-added tax WBG World Bank Group WGI World Governance Indicators WTO World Trade Organization ZF Zona Franca ZFIS Zona Franca Industriales o Servicios ZFPM