industrial policy, SEZ

"Special" Economic Zones

The Bill for Special Economic Zones is out and a hat tip goes to Ed Kerby for sharing some nice links on Twitter this week. One of the best is this Business Day opinion piece by Leon Louw of the Free Market Foundation. He smartly argues that:

  • There is nothing special about them: They are not off shore, nor are they tax havens, they have not been freed from forex or financial controls and all labour laws are also in place.
  • There are too many: “We will start with twice as many SEZs as China did with 30 times our population”, which means no focus or momentum.

I have also complained about the SEZs and the latest old ideas in industrial policy, but the sort version of it all is that the economics of it all does not hold up. The whole ideas supposes that there is some kind of market failure that prevent private firms from identifying profitable opportunities. However, if government designates an area as a SEZ and adds some of the tax payers’ money to it (mainly infrastructure and some incentives), firms will find those opportunities there. The economics is that:

  • If they really want to make it profitable, they will really have to make some big exceptions, like those mentioned above. But those are typically not very sustainable or equitable anyway.
  • If they are hoping for agglomeration benefits and learning by doing in SEZ, it will be much better to provide the infrastructure and incentives at current agglomerations instead of in the middle of nowhere. Firms need a think labour market, specialised suppliers of intermediate inputs, infrastructure and knowledge spillovers and those are available mainly in Gauteng, Cape Town, Durban and PE. No sense it trying to recreate all that elsewhere.

But then I suppose the government likes to be seen to be doing something and SEZs sound nice. The benefits will go to quite specific people and places and the cost will be nicely spread over all tax payers.

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