Economic Zones

The 7 Deadly Sins of Special Economic Zones

The 7 most common mistakes made by people who run special economic zones - and how to avoid them
April 18, 2019
April 29, 2019

First Deadly Sin: Complacency

Complacency when dealing with threats to the zone is the most common problem faced by zone managers. Stay alert to political threats. Opposition always will come, whether from fringe political groups, powerful lobbies, or foreign nations. Special Economic Zones (SEZs) are typically managed by well-meaning individuals who underestimate bad actors with malicious intent- whether competitive, ideological, or political in nature. They fail to do adequate research and often find themselves on the back foot when faced with determined opposition.

The Coega SEZ in South Africa was staffed by idealistic development activists. But the staff were completely unprepared for a wide coalition of groups protesting the zone, including trade unions, environmentalists, and fringe left wing political parties. In other words, they became complacent. Sensing blood in the water, other protest groups joined the fray, including teachers unions, far right activists, and anti-Chinese protestors, resulting in 15 years of lawsuits and delays. Don’t let this happen.

Always assume that your zone will face opposition. Never let yourself or your team become complacent.

Second Deadly Sin: Pride

Don’t just focus on glamorous industries. Too many zone projects waste resources on glitzy projects. They build large tech parks, expecting to attract the next Facebook or Google, without regard for local limitations. In reality, these zones end up lying empty and neglected for years, fading into obscurity and wasting money. Instead, focus on industries that can realistically become profitable. Avoid vanity projects. Textile mills, ports, and factories may not be pretty, but they have potential to create jobs and prosperity.

Consider a country like Uzbekistan. In 2013, the China Development Bank loaned $50 million to create a technology park SEZ there. The park’s purpose was to increase “innovative activity in Uzbekistan”, and featured a startup incubator. Its purpose was described as “support[ing] startup projects of young businessmen at all stages of development.” But the park lay empty for 5 years, until 2018 when it pivoted away from tech to the petrochemical industry. Since then, the park has seen steady growth.

Focus on realistic industries, not just glamorous ones.

Third Deadly Sin: Avarice

Thinking big is good, but don’t forget the importance of small steps. Zones often raise large amounts of funding and try to do everything too fast. They get greedy and make mistakes, resulting in empty ghost cities.

In 2005, King Abdullah bin Abdulaziz Al Saud announced a plan to create their own version of Dubai in Saudi Arabia. Called the “King Abdullah Economic City”, the project raised $100 billion in capital and was planned to cover a massive 173 km². It was supposed to be finished in 2010, but so far only 15% has been developed. Since 2010, the city has suffered from imbalances and capacity shortages. Ahmed Al Omran, writing for the Financial Times, described the city as “eerily quiet and empty”. Now the city’s population is a mere 7,000 residents - a far cry from the original planned population of 2 million.

Too much funding is as bad as too little. Raise the minimum amount of capital you need, but no more (this is a good principle of entrepreneurship in general).

Fourth Deadly Sin: Sloth

Too many cooks spoil the broth. Zones which are developed in a centralized, top down manner are vulnerable to Hayek’s knowledge problem, where the plans of officials don’t reflect the realities on the ground. Inflexible administrators and decision making processes result in slow growth and failure.

As of 2018, India had 1014 approved economic zones. Most of these zones are abandoned projects that serve the interests of a narrow elite. Meir Alkon, of Princeton University, studied the problem and concluded that the Indian zone projects were too top heavy. He argues that officials suffer from an “incumbency disadvantage,” where officials hold office for shorter durations, which discourages them from pursuing long-term development of their region. Nikita Kwatra, a Mumbai journalist describes the misalignment of incentives: “Site selection for SEZs has been guided by self-serving agendas rather than considerations of growth and development. Local politicians often influence bureaucrats at state-owned industrial  development corporations to secure land for personal gains. As such, sites for SEZs are selected based on real estate speculation rather than the economic potential of a region.”

Optimize your staffing and decision making processes and cut down on bureaucracy.

Fifth Deadly Sin: Superfluousness

Many zones are unnecessary. If there is no need to create the zone, then the zone shouldn’t be created. Too often government officials looking for flagship projects are eager to start zones even where they don’t make sense. The result is bloated, empty, and superfluous zones. In other cases, governments create too many zones. The zones are too close to each other and end up competing with each other instead of providing real value.

After experiencing widespread success with Special Economic Zones in the 1980s and 1990s, the Chinese government began creating hundreds of small SEZs across the country. While many of the zones did very well, many more lay empty. Instead of creating a small number of zones with deep reforms, they created many zones with shallow reforms. The result was a wave of empty business parks and “ghost cities” littered across the country.

Zones are not always the answer. If there is no need for a zone, don’t build one.

Sixth Deadly Sin: Malevolence

Some zones are simply malevolent. They aren’t created with the intention of helping the people, but instead exist for the purpose of enriching the political elite. These zones are hotbeds of organized crime and corruption. There have been many cases where zones have become burdens upon the people they were supposed to help.

The Golden Triangle Economic Zone in Northern Laos is a hotbed of organized crime. Wildlife smugglers use it as a haven to illegally export endangered species. Human trafficking, murder, sex tourism, and drug trafficking occur frequently. Sigal Mandelker, US Treasury undersecretary for terrorism and financial intelligence, described the activities in the zone: “The Zhao Wei crime network [which is active in the zone] engages in an array of horrendous illicit activities, including human trafficking and child prostitution, drug trafficking and wildlife traffick­ing. US officials are also monitoring the zone for money laundering.”

Corrupt zones have a large and disproportionate impact on the reputation of the industry as a whole. Do good, and stamp out corruption.

Seventh Deadly Sin: Ignorance

Too often zone projects lack adequate research and planning. Many organizations jump into this area and soon find themselves overwhelmed by predictable and avoidable problems. Big problems like corruption, political opposition, and overexpansion often pale in comparison to the many small problems. For example, some zones forget to establish a proper legal entity, and therefore have trouble attracting investment. They don’t account for delays, or target the right industries.

During the turbulent 1990s, the Russian government attempted to create numerous SEZs across the country. In the years following the collapse of the Soviet Union, Russia faced hyperinflation, soaring crime rates, and industrial collapse. The government hoped to emulate China’s success with SEZs to restructure the formerly communist economy. Numerous ill-fated SEZs were created around Russia without any real research and planning. This resulted in years of delays, corruption, and constant changes to the zone program. Plans changed as governments changed. Recently, the Russian government has abandoned the zone program altogether, and started slowly revoking zone status for many projects.

Ignorance is a sin.

The artwork for this article made by Job Menting - find him here on Artstation