Special Economic Zones (SEZ)

This post is based on an article titled ‘Special Economic Zones: Revisiting the Policy Debate’ which came in the ‘Economic and Political Weekly’ authored by Aradhna Aggarwal.

 

 

The discontents against the SEZs are

 

1) This will bring about a significant revenue loss to the government. This will result in a kind of ‘disguised industry’ just as ‘disguised unemployment’. There will not be adequate production quid pro quo of the investments undertaken.

 


 

2) This will not only ruin various societies of their livelihood, but will also contribute to escalating inequalities and poverty. Moreover, relief and rehabilitation is to be provided by the SEZ developer. How far this will be successful is questionable.

 

 

3) This not only affects the people living in the proximity but also the agricultural sector as a whole. Of late, there has not been much growth in agriculture. This, like the author posits, will have serious implication for food security.

 

4) This will exacerbate the income and wealth inequalities. Moreover, since the public does not have access to the proceeding of SEZ’s, it will be difficult to ensure if the remaining 65% area is being used for productive purposes. [For that matter ensuring the 35% will prove difficult]

 

The trend is already seen in the initial approvals. The share of the four most industrialised states (TN, Karnataka, Gujarat and
Maharashtra) in total approvals is 49.5 per cent. Andhra Pradesh, Kerala and Haryana account for another 31.1 per cent of total approvals. Thus seven states account for 80.6 per cent of approvals. Their share of in-principle approvals is 63.8 per cent. On the other hand, industrially backward states of
Bihar, north-east and J and K do not have a single approval.

 

Thus not only do these SEZ’s worsen the lives of significant number of people, but also contribute to widening regional disparities and that too all at a cost to the government and people.

[Since a reader had requested me to discuss about SEZ’s, I thought of writing this post; though it is late.]

26 thoughts on “Special Economic Zones (SEZ)”

  1. Although the initial social and economics cost is high, I think the SEZs are important especially for developing countries. We can probably finds SEZs in many developing countries like China and Malaysia. And thinks are turning good for them.

    The importance of the SEZs can be shown using the O-ring Theory of Development. It says that concentration of industries will bring in the required high skill labour force to the developing countries and lower the cost of production through spillover effects. The theory is pretty long to explain, you can look it up ! :)

  2. Econoverser,

    SEZ’s are good for those promoting them and those willing to work there.

    The government loses out on a large chunk of revenue which it could have mobilised by its taxation.

    A large section of people get displaced so that these SEZ’s can be set up. These displaced people are mostly rural agricultural labourers who have no knowledge of other vocations. The Government assures them that they are likely to be employed by such SEZs and also that there will be spillover effects.

    Anyways, insipe of many caveats, the SEZs are sprouting in India.

    And regarding the 0-ring theory of development, the external economies which could arise out of concentration are

    1)Knowledge spillovers
    2)Labour market pooling and
    3)Specialised suppliers

    The spillovers are analogous to saying that the development policies will ‘trickle down’ to the poor. SEZ cannot be justified on tha basis of this theory, as this theory has a ‘production or manufacturing’ perspective.

    It would bring the ‘skilled workers’ together. They need to be paid high wages. The cost of production might fall, but it is not necessary that these would be converted into a fall in prices.

    Chad Jones has written a paper which is similar to Kremer’s O-Ring Approach. It is titled ‘The Weakest Link Theory of Economic Development’.

  3. Hey interesting reading your post as always Alex…

    Regarding SEZs the economist in its issue dated 14th October 2006 makes a good point about scale of an SEZ as an important factor in the success of an SEZ. It points that the biggest difference between the SEZ’s in India and China is its size (China’s SEZs are Shenzhen, China’s biggest SEZ covers 126 sq miles while the minimum area required for a multi product SEZ in India is just 3.9 sq miles), so the benefits of economies in scale may not be so much for smaller indian SEZs. Infact it concludes by saying that smaller SEZs could end up doing more for the promters than for the region.

    Also the forecasted FDI inflows in fy 2005-06 is about $10 billion for India while that for china is about $80 + billion.I think one could find a correlation between the size of SEZ’s and the FDI investment attracted.

    Infrastructure being the major bottleneck, it is hoped SEZs will make a sizeable contribution to the estimated $320 billion worth of investment infrastructure needed over the next five years. But then such investment commitment seems only possible if the SEZs come up in a big way and not just as pockets spread everywhere just to avail tax benefits for its promoters.

  4. Thinley,

    You are right. The scale of operations do matter when we are talking about external economies.

    What is happening in India is legalised ‘tax evasion’ by huge firms, especially by foreign investors at the cost of Indian populace.

    Thank you for bringing this very important point into the discussion.

  5. Hi

    The arguements advanced are raising a bogey about land grabbing and tax evasion apart from talking about esoteric and abstract economic theories about which our job starved and stomach hungry population is not concerned. SEZ’s will be engines of growth and will jumpstart the next round of industrial revolution. Boss,we are talking about leapfrogging to the next level of growth and we have huge capital scarcity. We have to take some risks down the line and move forward. Academic discussions are all fine,but we have to bite the bullet.

  6. The difference between India’s and China SEZ is that in China the infrastructure is provided by the govt. and the govt invites the investors to open projects but in India the govt. is asking the investors to build the infrastructure and then attract the other investors to those SEZ. So i think it is justified if the investors in India are being given more tax rebate than their Chinese counterparts..moreover most of the land which is being acquired for these SEZ’s are from farmers who have very less land(1 acre to 5 acre)on which the agriculture is not sufficient to sustain them. Since independence india has put a lot of emphasis on agriculture and the result is that we are still a developing nation.Now it’s time to realize that if we want to be a developed nation we have to move froward and bring the industrial revolution.

  7. Param,

    A country is measured as rich or poor based on the GDP figure. Those countries who have a high GDP will fall in the rich county or developed country category and those with a low GDP in the low income category.

    GDP refers to the final value of all goods and services produced within a country in a given time period, usually one year.

  8. ohh, thanx.one more thing, why RBI OR THE HEAD BANK OF ANY COUNTRY KEEPS SEPARATE DEPARTMENT FOR HANDLING GOLD BUT NOT DIANONDS N OTHER PRECIOUS METALS? IS IT SOME HOW RELATED 2 ECONOMIC STABILITY?

  9. Param,

    It is according to the reserves of Gold and other foreign exchange, that the central bank issues currencies. This means that the money in circulation is proportionate to a certain amount of gold and foreign reserved held by the Central Bank. Yes, the money supply is an important tool for maintaining Economic stability.

  10. alex, can u tell me if amount of gold n forex is considered while issuing currency in a country,then is it possible for all countries of the world to grow at certain rates? bcoz gold n forex reserve cant grow in all countries….i mean if 1 gets richer, someone has to b poorer.is it so or there is something else to it?

  11. Param,

    Interesting question.

    Gold does grow in countries, but like you mentioned, not in all countries. Reserves come from exports and foreign currency secured by other means.

    I am not sure. I will try my best to answer it. [I wonder; if so then like you said a country getting richer means essentially another country has to become poor.]

  12. Param,

    I am extremely sorry in stating that “It is according to the reserves of Gold and other foreign exchange, that the central bank issues currencies.”

    “No, we are on paper currency standard and not gold standard. Until the early 1970s, the US was on gold standard and the rest of the world on dollar standard. This problem cropped up because when other countries started growing, gold flew out of the US and dollar could not remain on gold and there was instability all around. On 15th Aug1971 the dollar was freed from gold and then we had the pegged currency system. So all the countries have been growing now.” [Since 1956 we have been on paper currency.]

  13. sez has bothits ill effects as well as good effects,but for a developing economy like india sez means investment which is lacking in our country.sez also means incoming new technology.thus using both these valuable inputs efficiently increasing indias production potential,and using these indegeneosly for further progress by india will result in a prosperous india less dependent on foreign capital.in brief for now sez’s are necessary for india

  14. Sanchari,

    Indian Economy is characterised by income inequalities, regional inequalities etc. When SEZ’s take up land where agricultural production went on and where thousands of people lived, it is an infringement on the freedom of the concerned people.

    Moreover, granting access to a large number of SEZ’s is not very applicable because of the above mentioned factors.

    They are highly efficient and they have huge financial and other resources, so why are they exempted from paying taxes? What will happen to the people who are displaced? Licenses to set up SEZ’s should be undertaken with caution and not with haste as millions of people are affected.

    I am for setting up an OPTIMAL number of SEZ’s located at places which are not used for agriculture and if people do not get displaced.

  15. Hi
    After readings all the blogs i believe we should go one with developing up SEZ but those big enough so that these are an asset to our economy instead of liability. Moreover as far as displacement of people is concerned, i believe everything comes at a cost, even freedom. Moreover those displaced people can be made to work up in SEZ as well as policies can be made by govt. so as to help them get skilled by guiding them about the investment of money they get by selling their land to SEZs. Because i believe education is the only tool that can make ones life bettter.
    In this way we can even make the illeffects of SEZ as benifits for our country.Moreover as they will bring in infrastructure, which our country needs the most. So they are need of the hour.

  16. Himmanshu,

    Moreover those displaced people can be made to work up in SEZ

    This does not happen.

    Because i believe education is the only tool that can make ones life bettter.

    True.

    i believe everything comes at a cost

    In this case, the cost borne is high as people’s lives are exteremely valuble.

  17. I really dont understand how ppl are supporting sez in India espcially wen agricultural land is being used. I personally think dat India being the 2nd most populated country wil not be able to self sustain the basic need of food if we start giving away agri land for sez. Further if we are thinking that we can import our food products then I’m really sorry to say dat I dont see ourselves developing in any way. my question to all is that have ne1 come across a developed economy which import its food? i guess a better alternative is to give away barren land of mid regions of India for SEZ.

  18. Vinay,

    Using agricultural land for SEZ’s is definitely not a sensible move, but it happens because of the politics involved more than the economics behind it.

    And a lot of developed countries like the US imports food as well. Importing will become a problem when we run out of forex reserves.

  19. This is a mechanism of exploitation of profit-hungry big business houses to enhance their profit in the long-run avoiding the much unpopular so-called globalisation.

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