Are Special Economic Zones a Panacea for Developing Countries? Lessons for Developing Countries

Abstract

A special economic zone (SEZ) is an area of a country regulated specifically to attract foreign investment and spur economic development. It is separate from the rest of the country in the sense that the business activities it hosts are free from requirements such as commodity taxes, foreign currency exchanges and customs limitations. In addition, SEZs offer business incentives such as rent discounts and preferential tax structures. Both developing and advanced countries have established and utilized such zones to attract outsourced activities in industries such as manufacturing, distribution, logistics and trade. Over three thousand special economic zones now exist worldwide, and more countries have begun implementing or shown interest in using SEZs for their industrial development. The results so far have been quite mixed; SEZs have succeeded in countries such as China, Singapore and South Korea, while others are still struggling. Many scholars maintain the view that SEZs are not a panacea, and must be implemented properly and carefully aligned with a country’s specific circumstances.