The Great Divide: Special Economic Zone - Economic Boon or Social Bane?

Saakshi Philip, Apr 2, 2024

In a world where economic growth is pursued fervently to boost signs of a country’s economic vitality and strength, special economic zones (SEZs) have emerged as tantalizing avenues for nations seeking rapid development. Since the establishment of the first SEZ in 1959, in Shannon, Ireland, these zones have epitomized a bilateral compromise between state intervention and market dynamics, facilitating economic globalization either as a supplementary or alternative mechanism to engage with the global market beyond conventional international economic laws. Despite their global prevalence, SEZs impact economies and structural transformation differently depending on various factors such as their location, governance structures, regulatory frameworks, and the specific industries they target. Successful SEZs arise from critical elements such as strategic location, alignment with broader development strategies, utilization of market insights, and the cultivation of a business environment maintained by robust legal frameworks and sustainability principles [1]. However, SEZs are a double-edged sword, bearing exacerbated consequences on social inequalities, labor exploitation, and environmental degradation, thus demanding a review and significant improvements to be made to current policies.


Inside the Structure of Special Economic Zones


The nomenclature itself outlines the deviance of these zones from the regular economic practices of their host countries: “special” refers to the distinct regulatory framework, “economic” serves as an umbrella term for the broad and diverse types of activities that can occur, and “zone” implies the demarcated space that SEZs occupy within a country’s territory [2]. The overarching goals of SEZs remain similar, as they serve as an experimental landscape for different policies, primarily focused on attracting foreign investment, to support more widespread and long-term economic reforms. However, based on geographical regions, SEZs vary in their characteristics and functions. While some focus on trade-related processes and light processing operations, others aim to accelerate industrialization and international trade, driven by the resources and infrastructure available to them. These types of SEZs include commercial free zones, free trade zones, free zones (FZs), export processing zones (EPZs), free enterprises (FEs) or single factory/single unit free zones, and freeports. Additionally, some classifications, like the term "freeport," can be used interchangeably with SEZs, based on their functionality, encompassing the vast territories, transport facilities, and economic activities within them. 


Global Successes of SEZs - Asia 


One notable case study exemplifying the significant impact of SEZs in Asia is that of Shenzhen, China. Established in 1980 as one of the first four coastal SEZs, Shenzhen has transformed from a small fishing village into a global economic powerhouse. Initially designed as an experimental zone to attract foreign investment and stimulate economic growth through Deng Xiaoping’s “Open Door” policy, Shenzhen quickly emerged as a leading center for manufacturing, technology, and innovation. [3] The success story of Shenzhen’s SEZ lies in its strategic location, favorable policies, and robust infrastructure. Shenzhen capitalized on its proximity to Hong Kong, benefitting from its neighboring city's expertise and resources and becoming a leading example for the proliferation of SEZs throughout Southeast Asia. 


Among the 5,000 plus SEZs that exist around the world, 75% are located in Asia. To consolidate its emergence as a powerful trading bloc, ASEAN member states have been actively promoting SEZs as vital instruments to attract foreign investment. These zones, encompassing industrial parks, special export processing zones, technology parks, and innovation areas, gained increased significance following the establishment of the ASEAN Economic Community (AEC) in 2015 [4]. 


Building on the momentum generated by the proliferation of SEZs throughout Asia, Thailand embarked on an ambitious endeavor in 2015 to develop ten SEZs strategically located across its borders with Myanmar, Malaysia, Laos, and Cambodia. This led to flourishing border trade valued at 1 trillion Thai Baht (equivalent to 32 billion US dollars) in exports in 2018. The government reported investments totaling $23 billion in its SEZs since the initiative's inception, with targeted sectors including agri-industry, manufacturing, and textiles, among others. Thailand offers enticing incentives for businesses setting up in SEZs, such as corporate income tax (CIT) exemptions and reductions [5]. This theme of offering tax exemptions and reductions can is one used by other countries in the region, as Malaysia’s investment corridors, including the East Coast Economic Region (ECER) and Iskandar Malaysia, have attracted significant investments, creating millions of jobs and offering competitive incentives such as income tax exemptions. In addition, Cambodia, with 31 SEZs, entices investors with CIT exemptions and import/export duty waivers, and even Myanmar, despite facing challenges, has made strides with the Thilawa SEZ, attracting international firms across various sectors. The government offers tax exemptions and relief measures to investors, signaling its commitment to facilitating foreign investment through SEZs [6]. 


Nations throughout the region are also pursuing avenues of collaboration, combining resources to boost collective growth. Singapore, though limited in space, collaborates with Malaysia and Indonesia to establish successful SEZs such as the Iskander SEZ and the Batam Export Processing Zone [7]. 


While China's success inspired the Indian SEZs to attract foreign investment and stimulate economic growth, the differences in governance, ownership structures, and socio-economic conditions between the two countries led to distinct outcomes. Unlike China's state-led approach to SEZ development, India's 2005 SEZ Act encouraged private investment and development, resulting in a more fragmented and slower-paced expansion of SEZs. This difference in approach affected the provision of infrastructure and amenities within the SEZ—Indian zones faced challenges in delivering basic services and urban integration, particularly in rural locations [8].


SEZs play a pivotal role in ASEAN’s economic landscape, serving as magnets for foreign investment and bolstering trade relations within the global network. Despite having their own regional and socio-political challenges, countries continue to prioritize the use of SEZs to fuel economic growth and integration within the region.


Global Successes of SEZs - Africa


Over the past five decades, the concept of SEZs has captured the attention of policymakers across Africa, with countries like Liberia, Mauritius, and Senegal pioneering SEZ programs in the early 1970s. However, it was not until the 1990s and 2000s that the majority of African nations began to operationalize their own SEZ initiatives [9]. By 2014, the Sub-Saharan African (SSA) region saw a proliferation of active SEZ programs, with 38 countries hosting at least one SEZ and a total of 237 SEZs established by law [10]. Here, we will consider three cases of SEZs throughout Africa, highlighting their methods of success in the face of widespread doubt with regard to their long-term viability. 


The interconnected nature of a country's comparative advantage and SEZ programs is exemplified by Morocco's strategic focus on targeted industrial sectors to attract investment and foster economic development. Historically dominated by low-tech exports, Morocco leveraged its comparative advantage in political stability and proximity to major markets like Europe, among others, to transition towards higher value-added industries. Through initiatives like the National Pact for Industrial Emergence and the Industrial Acceleration Plan, Morocco strategically aligned its SEZ development with key sectors such as automotive, aerospace, and electronics. This targeted approach, combined with investment facilitation measures and specialized zones, has enabled Morocco to attract significant foreign investment and transform its industrial landscape.


Ethiopia's success in SEZ development stems from its integrated approach to policy implementation and institutional coordination. By restructuring existing institutions and creating new ones like the Ethiopian Investment Board and Industrial Parks Development Corporation, Ethiopia established a framework for collaboration across government agencies. This collaborative effort, coupled with proactive investment promotion and targeted SEZ policies, has facilitated a surge in FDI inflows and attracted anchor investors like PVH. The institutional setup, overseen by the prime minister's office and involving senior officials from relevant ministries, ensures policy coherence and operational synergy, distinguishing Ethiopia's approach from less coordinated efforts in other African countries.


In South Africa, the Coega Industrial Development Zone (Coega IDZ) stands out for its success in generating linkages with local enterprises, particularly small and medium-sized businesses (SMMEs). Through initiatives like the SMME Development Programme and mentorship programs, Coega facilitated SMME participation in industrial activities and procurement contracts. These efforts led to substantial benefits for local businesses, including increased procurement rates and access to training and mentorship. By actively addressing the challenges faced by SMMEs, Coega demonstrates the potential of SEZs to foster inclusive economic growth and extend socio-economic benefits beyond the confines of the zone.


Despite notable achievements in attracting investment, fostering industrial growth, and promoting local economic development, the long-term viability of SEZs across Africa remains uncertain. It is imperative for policymakers to address persistent challenges such as regulatory uncertainty, policy instability, and the quality of investment to ensure that SEZ initiatives contribute effectively to sustainable economic development and inclusive growth in the region.


Social Ramifications of SEZs: Impact on Communities and Society


A meeting organized by the International Commission of Jurists, EarthRights International, and the Land Watch Thai highlighted the urgent need for action to address the adverse social and environmental consequences of Special Economic Zones (SEZs) in the Mekong region. Challenges identified include large-scale evictions, inadequate compensation for affected communities, environmental degradation, and labor rights abuses. Additionally, the lack of transparency, consultation, and accountability in decision-making processes concerning SEZs was highlighted. Participants emphasized the deficiencies in policies and legal frameworks governing SEZ development, calling for transparency, human rights protection, and environmental safeguards [11]. 


In addition to the challenges highlighted, the nature of SEZ projects often involves land acquisition and the resettlement of displaced people, rendering them highly susceptible to environmental and social risks. Proper identification and assessment of these risks during the feasibility study, along with the development of sound mitigation measures, are indispensable for the success of SEZ programs and projects. Failure to do so has led to a lack of results from projects in some African and South Asian countries. It is crucial to choose zone locations that involve as few displaced people and businesses as possible to minimize social risks. A thorough consultation with relevant stakeholders, especially local communities affected by the project, should be conducted, and displaced people should be properly compensated and resettled. Additionally, affected individuals who may lose their means of living should be trained, reskilled, and employed within the zone. Zones must adopt high standards for worker compensation and protection, including services and infrastructure to support underrepresented worker groups such as female workers. Moreover, to mitigate environmental risks associated with highly polluting sectors, zones should prioritize eco-friendly and sustainable practices, potentially adopting the international Environmental Impact Assessment (EIA) framework and setting up their performance indicators for monitoring and evaluation. Without such measures, zones may deviate from their intended purposes over time [12]. 




The debate surrounding Special Economic Zones (SEZs) continues to intensify, as countries grapple with SEZs' multifaceted effects on economies, societies, and global trade dynamics. While SEZs have demonstrated success in attracting investment, fostering industrial growth, and promoting local economic development, they also raise concerns about social inequalities, labor exploitation, and environmental degradation. The urgent need for action to address the adverse social and environmental consequences of SEZs, as highlighted by the International Commission of Jurists, EarthRights International, and Land Watch Thai, underscores the importance of transparency, human rights protection, and environmental safeguards in SEZ development. Moving forward, policymakers must navigate these complex dynamics by implementing robust legal frameworks, properly consulting affected communities, and prioritizing eco-friendly and sustainable practices. By taking this step, nations can ensure that SEZ initiatives contribute effectively to sustainable economic development and inclusive growth while minimizing social and environmental risks.


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[2] de Baissac, Claude. February 15, 2011. “(PDF) Brief History of SEZs and Overview of Policy Debates.” ResearchGate.

[3] Figiaconi, Fabio, and Claudia A. Lodetti. July 16, 2020. “South-East Asian Special Economic Zones Are Becoming Geopolitical.” ISPI.

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[5] Rastogi, Vasundhara. April 13, 2018. “Thailand's Special Economic Zones – Opportunities for Investment - ASEAN Business News.” ASEAN Briefing.

[6] “Special Economic Zones.” August 26, 2021. Open Development Myanmar.

[7] Latiff, Rozanna, Kanupriya Kapoor, and Clarence Fernandez. January 10th, 2024. “Malaysia, Singapore agree to jointly develop special economic zone.” Reuters.

[8] Goodburn, Charlotte, and Jan Knoerich. July 9, 2022. “Translating China’s Special Economic Zone ‘Model’ into Rural Southern India: Impacts on Urban Development.” Global China Pulse.

[9] Farole, Thomas, and Lotta Moberg. April 2017. “Special Economic Zones in Africa: Political Economy Challenges and Solutions.” In The Practice of Industrial Policy: Government-business Coordination in Africa and East Asia, edited by John Page and Finn Tarp, 234-254. N.p.: Oxford University Press.

[10] Rodríguez-Pose, Andrés, and Federico Bartalucci. April 7, 2022. “The challenge of developing special economic zones in Africa: Evidence and lessons learned.” LSE Research Online.

[11] “Mekong Region: Authorities must address the adverse impacts of economic activity in SEZs on the environment and human rights.” July 26, 2022. International Commission of Jurists.

[12] Zeng, Douglas Z. 2021. “World Bank Document.” World Bank Document.