Economic Zones

The Hidden Force that Prevents Successful SEZs from Increasing Worker Wages

How internal migration prevents SEZs from increasing local wages in the areas where they are located.
,  
March 18, 2022

For decades, Special Economic Zones (SEZs) have been praised for lifting people out of poverty by creating jobs in their local area. However, research suggests that internal migration from more impoverished regions within the country could prevent wages from rising.

The theoretical argument that SEZs increase wages in their local area goes like this: an SEZ is created which increases the demand for labor. As a result, the price of labor - wages - increases.

Empirical evidence suggests that, in reality, SEZs do not cause measurable increases in wages. In fact, some studies have found precisely the opposite.

A December 2005 study published by the Korea Labor Institute pointed out that wages do not seem higher within SEZs:

“As most of the industries situated in SEZs belong to modern sectors of the economy and depend on the international market, it would be reasonable to expect that wages are relatively high. However, in reality, the pay is usually as bad as or even worse than the wages in local enterprises: in the Philippines, the minimum wage in Manila in 1995 was set at 5.27 dollars per day, yet the minimum wage in the SEZs was only 4.9 dollars per day. An ICFTU/APRO study carried out at the beginning of 1995 confirms that approximately 30% workers in the EPZs in six Asian countries earn wages below the legal minimum wage. Meanwhile, the social security in SEZ firms is not guaranteed either. According to an ILO report many SEZ enterprises do not pay their contributions to the social security institutions.”

One possible explanation is that SEZs that succeed in increasing the demand for labor (creating jobs) then attract internal migrants from elsewhere in the country. The supply of labor increases correspondingly, making wage increases difficult to detect.

In fact, the more successful an SEZ is at creating jobs, the more it is likely to cause internal migration, and the less wages will increase.

Two economists - Scott R. Sanders from Brigham Young University and David L. Brown from Cornell University - did an extensive survey of SEZs in the Philippines to see if internal migration was preventing wages from increasing. They examined 10 years of panel data from 1995 to 2005 to determine whether SEZs were causing internal migration, specifically examining SEZs that were known to have created new jobs.

Sure enough, they found that wages did not rise in many SEZs that had created jobs. Instead, they found that the zones had caused population increases.

Sanders and Brown concluded:

“[SEZs] contribute to regional inequality, stimulating job and population growth in some areas and out-migration from others.”

They also pointed out that once internal migration begins, it can be hard to stop, further strengthening this effect:

“Once a new migration stream is created, it will persist over time. This is because social networks are created that break down barriers to migration, increase the flow of information about economic and social conditions in the destination and reduce the overall risk of migrating to new areas.”


There is also anecdotal evidence for this phenomenon in Shenzhen.

Shenzhen, China’s largest SEZ, was created by Deng Xiaoping in 1980. It is an undeniable success, having transformed a small fishing village into a booming megacity of 12.5 million residents.

A 2011 study by the Asia Monitor Resource Center took a different approach. Instead of looking at large volumes of data, they instead sought out individual migrants to see what their ground-level experience looked like.

At the time of their study, they estimated that there were roughly 10 million unregistered rural migrants in Shenzhen - roughly 75% of the city’s population. They found that unregistered rural migrants had significantly lower wages than registered urban residents:

“The cost of rural migrant labor is estimated to be only about 40-55 percent

of the cost of regular urban labor (excluding many hidden subsidies provided to

urban residents).”

The study also found that the unregistered migrants had less legal labor protections than registered urbanites.

More recent studies have found that this effect tends to diminish over time, as migration slows. A May 2019 study by the International Growth Center found that:

“For unskilled workers, wage rates tend to be lower in SEZs than outside in the initial stages of SEZ development, but tend to increase with time.”

Whether or not SEZs increase local wages is almost irrelevant to the debate as to whether or not SEZs are beneficial or not. Even if SEZs do not necessarily increase local wages, they might still play an important part in helping people improve their economic livelihoods. It might just mean that they uplift nations more than they uplift local communities.

Empirical studies can only go so far - in the process of collecting data, academics all too often discard real human stories as “anecdotal.” But all human lives are, fundamentally, anecdotes. Academics like the Asia Monitor Resource Center which focus on human-level research with individual migrants often do much better. Academics need to do a better job of speaking to individual migrants - chances are that many are still seeing improvements in their lives relative to their past situation. The lack of interviews with internal migrants to SEZs makes it difficult to determine whether they benefit from or are hurt by SEZs.

SEZs need to temper their claims, lest they risk being discredited. They can promise job creation; they can promise population growth; they can promise economic development. They should be wary of promising increased wages.

Do SEZs increase wages in the areas where they are located? Probably not. Are SEZs helping millions of people escape poverty? Yes.

Tags
Economic Zones

The Hidden Force that Prevents Successful SEZs from Increasing Worker Wages

How internal migration prevents SEZs from increasing local wages in the areas where they are located.
,  
March 18, 2022

For decades, Special Economic Zones (SEZs) have been praised for lifting people out of poverty by creating jobs in their local area. However, research suggests that internal migration from more impoverished regions within the country could prevent wages from rising.

The theoretical argument that SEZs increase wages in their local area goes like this: an SEZ is created which increases the demand for labor. As a result, the price of labor - wages - increases.

Empirical evidence suggests that, in reality, SEZs do not cause measurable increases in wages. In fact, some studies have found precisely the opposite.

A December 2005 study published by the Korea Labor Institute pointed out that wages do not seem higher within SEZs:

“As most of the industries situated in SEZs belong to modern sectors of the economy and depend on the international market, it would be reasonable to expect that wages are relatively high. However, in reality, the pay is usually as bad as or even worse than the wages in local enterprises: in the Philippines, the minimum wage in Manila in 1995 was set at 5.27 dollars per day, yet the minimum wage in the SEZs was only 4.9 dollars per day. An ICFTU/APRO study carried out at the beginning of 1995 confirms that approximately 30% workers in the EPZs in six Asian countries earn wages below the legal minimum wage. Meanwhile, the social security in SEZ firms is not guaranteed either. According to an ILO report many SEZ enterprises do not pay their contributions to the social security institutions.”

One possible explanation is that SEZs that succeed in increasing the demand for labor (creating jobs) then attract internal migrants from elsewhere in the country. The supply of labor increases correspondingly, making wage increases difficult to detect.

In fact, the more successful an SEZ is at creating jobs, the more it is likely to cause internal migration, and the less wages will increase.

Two economists - Scott R. Sanders from Brigham Young University and David L. Brown from Cornell University - did an extensive survey of SEZs in the Philippines to see if internal migration was preventing wages from increasing. They examined 10 years of panel data from 1995 to 2005 to determine whether SEZs were causing internal migration, specifically examining SEZs that were known to have created new jobs.

Sure enough, they found that wages did not rise in many SEZs that had created jobs. Instead, they found that the zones had caused population increases.

Sanders and Brown concluded:

“[SEZs] contribute to regional inequality, stimulating job and population growth in some areas and out-migration from others.”

They also pointed out that once internal migration begins, it can be hard to stop, further strengthening this effect:

“Once a new migration stream is created, it will persist over time. This is because social networks are created that break down barriers to migration, increase the flow of information about economic and social conditions in the destination and reduce the overall risk of migrating to new areas.”


There is also anecdotal evidence for this phenomenon in Shenzhen.

Shenzhen, China’s largest SEZ, was created by Deng Xiaoping in 1980. It is an undeniable success, having transformed a small fishing village into a booming megacity of 12.5 million residents.

A 2011 study by the Asia Monitor Resource Center took a different approach. Instead of looking at large volumes of data, they instead sought out individual migrants to see what their ground-level experience looked like.

At the time of their study, they estimated that there were roughly 10 million unregistered rural migrants in Shenzhen - roughly 75% of the city’s population. They found that unregistered rural migrants had significantly lower wages than registered urban residents:

“The cost of rural migrant labor is estimated to be only about 40-55 percent

of the cost of regular urban labor (excluding many hidden subsidies provided to

urban residents).”

The study also found that the unregistered migrants had less legal labor protections than registered urbanites.

More recent studies have found that this effect tends to diminish over time, as migration slows. A May 2019 study by the International Growth Center found that:

“For unskilled workers, wage rates tend to be lower in SEZs than outside in the initial stages of SEZ development, but tend to increase with time.”

Whether or not SEZs increase local wages is almost irrelevant to the debate as to whether or not SEZs are beneficial or not. Even if SEZs do not necessarily increase local wages, they might still play an important part in helping people improve their economic livelihoods. It might just mean that they uplift nations more than they uplift local communities.

Empirical studies can only go so far - in the process of collecting data, academics all too often discard real human stories as “anecdotal.” But all human lives are, fundamentally, anecdotes. Academics like the Asia Monitor Resource Center which focus on human-level research with individual migrants often do much better. Academics need to do a better job of speaking to individual migrants - chances are that many are still seeing improvements in their lives relative to their past situation. The lack of interviews with internal migrants to SEZs makes it difficult to determine whether they benefit from or are hurt by SEZs.

SEZs need to temper their claims, lest they risk being discredited. They can promise job creation; they can promise population growth; they can promise economic development. They should be wary of promising increased wages.

Do SEZs increase wages in the areas where they are located? Probably not. Are SEZs helping millions of people escape poverty? Yes.

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