Economic Zones

The 10 Commandments of Special Economic Zones

The 10 most important things to remember when building a Special Economic Zone
April 17, 2019
April 18, 2019

First Commandment: Think Big

Most SEZs are small and insignificant, comprising little more than business parks or factories with tax incentives. Even so, zones can be implemented on a more ambitious scale. Dubai, Shenzhen, and Hong Kong are all examples of zones at city scale. That’s why the first commandment of SEZs is to think big.

International observers had low expectations for Dubai. In 1970, Dubai was an insignificant fishing and trade outpost, located in a poor desert country without natural resources or oil reserves. But Maktoum bin Rashid Al Maktoum and his son, Mohammed bin Rashid Al Maktoum had big plans. They had an idea of what they wanted Dubai to become, and were aware of the scale of the problem. They would have to innovate and be flexible. The leaders of Dubai never stopped thinking big, and slowly built their city up to become one of the world’s foremost centers of commerce.

When planning your zone, take what you think is a realistic goal, and shoot radically higher. Then plan backwards, thinking about how you could get there. Extraordinary results can only come from thinking big.

Second Commandment: Baby Steps Win the Race

Thinking big must be combined with meticulous planning. Some of the most ambitious zone projects have raised large sums of money, but failed to properly plan the intervening steps. Every step should be carefully set out: planning, legislation, approval, construction, investment, operation. Each new addition to the zone needs to be thoughtfully considered and justified. Each addition must be self sustainable, and profitable on its own.

The Coega Special Economic Zone in South Africa is a role model of combining ambitious goals with an incremental approach to development. Coaga was the central project of President Mbeki, and had high expectations from the beginning. But the Coega Development Corporation split the project into several stages. Once the port of Ngqura was completed successfully, the zone started an industrial park, followed by agricultural facilities. By doing one thing at a time and never over-extending itself, Coega became the largest and most successful zone in Africa.

Think big, but proceed carefully and slowly.

Third Commandment: Avoid Bureaucracy  

Too many zones suffer from excessive bureaucracy. Keep the zone management company lean and agile. Ensure that key decision makers have a stake in the overall success of the zone. Localized rather than centralized decision making is key. Zones should keep an eye on the global economy and be nimble enough to deal with changing circumstances and technology.

Singapore is the world’s most successful city state. While not a Special Economic Zone, it has many traits that are very similar to SEZs. It is a small country, the size of a city, and  enjoys complete legal autonomy. Due to its efficient administration, it is by many metrics the most successful country in the world. Its GDP is higher than almost every other country, and it consistently scores as one of the least corrupt countries in the world. Refined leadership has made this possible: successful government officials are highly paid, and corruption is strictly punished. There is a constant focus on maintaining the rule of law, and government agencies are minimalistic. Success is rewarded, and failure is punished.

The more efficiently the zone is managed, the more it will prosper.

Fourth Commandment: Look Outward, Not Inward

Empirical studies have found that internal permeability and access to foreign markets are critical for the success of any zone. The more permeability there is between the zone and the country at large, the better.

The World Bank FIAS describes the success of the Shannon Free Zone in Ireland:

“Located at Shannon International Airport, the zone offered investors secure access to European markets, attractive tax benefits, and subsidized rent and facilities. Specialized training and manpower development facilities were integrated into zone design from inception. As a result, export manufacturing activities accelerated.”

Never allow political concerns to isolate the zone.

Fifth Commandment: Trust, but Verify

Rapidly growing industries attract bad actors. The dot com and cryptocurrency bubbles are good examples: while both sectors started out with real innovations, they quickly became swamped with scams and “get rich quick” schemes. The problem with such behaviour is that it can quickly destroy trust in the industry - for everyone. Zones are likewise experiencing rapid growth, so there is always the risk that a minority of bad actors could bring the industry into disrepute. It is therefore necessary for the zones to police themselves by adopting measures to identify, avoid, or remove these actors before they do harm.

Fort Galt is a blockchain-oriented business park in Chile. It was started at a time when the cryptocurrency space was flooded by deceitful and wasteful projects, including numerous blockchain zone projects. Most never materialized, and were bogged down by dishonesty and incompetence. Fort Galt never raised more funds than were necessary, and was extremely selective about who they did business with. As a result, it is the last blockchain-centric business park left, and is set to open in late 2019.

Trust, but verify. Take precautions to keep bad actors at bay and uphold your reputation.

Sixth Commandment: Stay Vigilant

Zones need to stay vigilant at all times. Geopolitical changes, technological advancements, or the state of the global economy can easily crush zones. Small problems such as political lobby groups, faulty infrastructure, or bureaucratic processes can rapidly accumulate and become big problems. Many zones have found themselves obsolete overnight as anchor tenants are swept away in the tides of international markets.

Adaptability is what allowed the Shenzhen Special Economic Zone in China to become what is often cited as the most successful SEZ in the world. It never failed to adapt to changing markets and international conditions, and always used up to date intelligence. When textile manufacturing became cheaper in other countries, Shenzhen adapted by becoming the world’s largest chip manufacturing hub. As chip manufacturing is becoming cheaper elsewhere, it is once again re-inventing itself as a center of technological development and chip design.

Zones must stay one step ahead of global trends, even if it’s not immediately relevant.

Seventh Commandment: Protect the Environment

Zones should foster a healthy, clean, and beautiful environment. Unfortunately, many zones in the past have caused serious environmental damage. This not only hurts credibility and reputation, but can cause destructive externalities that actually hit the bottom line.

The Rwandan government has instituted a mandatory community trash cleanup in their capital of Kigali since 2009. This cleanup effort was written into law in order to protect the environment from growing levels of pollution as the country began to industrialize. While the policy is not restricted to Kigali SEZ, it remains an example of an effective effort to preserve environmental integrity. Now Kigali is one of the cleanest cities in the world, and heavy fines are imposed on citizens that do not participate.

A zone should protect local ecology, and leave nature in a better state than before it was created.

Eighth Commandment: Do No Harm

Avoid strong-arm tactics like eminent domain. Many zones have used such tactics when moving residents from land they plan to administer. The industry must do its best to mitigate corruption and economic exploitation. An obvious rule of thumb (sadly unrealized in some cases), is that a zone mustn’t harm anyone it was meant to help.

Indian SEZs, while well-intentioned, abused eminent domain to force impoverished farmers to sell their land at unfavorable rates. This had made zone projects in general unpopular in India. Dr. Kiran S.P, writing for the International Journal of Social Science and Economic Research describes the situation in India:

“Land is one of the most important assets of farmers and sometimes the only asset that they have. They derive their livelihood, identity and their sense of security from land. [...] The Land acquisition Problem in India for SEZs is the most important natural resource, upon which all human activities are based since time immemorial. Land continues to have enormous economic, social and symbolic relevance.”

Primum non nocere: first, do no harm.

Ninth Commandment: Help the People Grow

More than avoiding harm, zones should seek to do good. Establishing free schools, hospitals, and other essential services improves quality of life for people and attracts investment and human capital. Many zones lose sight of their social mission, and get caught up in the minutia of running a business.

Nurkent, a Chinese zone town on the border between China and Kazakhstan, serves as a role model for investment in human wellbeing. The New York Times describes how it went about improving its amenities:

“A new town, called Nurkent, has been built from scratch — with apartment blocks, a school, kindergarten and shops to serve the railway workers, crane operators, customs officials and other staff needed to keep the dry port running. Free housing is provided.”

Remember who zones were made to serve. Investing in people is good for business and good for society.

Tenth Commandment: Expect Backlash

The single most common problem that brings down zone projects is backlash. Zones rarely make adequate plans for it, and suffer the consequences. Whether it comes from populist political groups, industry lobbies, or foreign geopolitical actors, opposition is inevitable. Don’t be complacent, but don’t panic: prepare.

The Honduras ZEDE project was supposed to be uncontroversial. American investors had negotiated a deal with Honduran officials to create Charter Cities. These massive new cities would have a completely independent legal system, and be funnels for investment and growth. Initially, the opposition to the zone was mostly grassroots activists and community organizers. But zone operators discounted this threat, and didn’t plan for growing discontent. Eventually, local lobbyist groups and foreign geopolitical actors began supporting the various opposition efforts, leading to mass protests, riots, and political backlash. Honduras ZEDEs stagnated for nearly a decade as a result. Today, the topic remains a dividing talking point between the government and the opposition.

No matter where they are, or what they’re intended for, zones should expect backlash. Prepare accordingly.

Artwork used in blog post: New Urbanism, by Matus Garaj