This paper is a first attempt to apply a robust political economy framework to explain when Special Economic Zones (SEZs) can contribute to economic development. A robust political economy is one that channels the actions of self-interested individuals with limited information to promote economic progress. In the right institutional context, SEZs tend to promote economic growth. In the wrong institutional context, they can cause resource misallocation and rent-seeking. Policy makers introducing SEZs must overcome the knowledge problem to avoid misdirected economic planning. Yet, the scheme can only fulfill its purpose if it also prevents destructive rent-seeking behavior, both from businesses and from government authorities. The political economy framework of SEZs can be applied to judge their potential efficacy, something that orthodox studies of country features such as natural resources, infrastructure, and zone location fail to do. The Indian and Chinese experiences with SEZs illustrate these points.A draft of the paper is here.
When setting up a SEZ many decisions have to be made. The SEZs should be self-sustained; one does not want to run out of electricity, like it happened in Nigeria. Location is also important as well as the main type of economic activity to be performed in the zone. The zone should be close to the port; but, at the same time, it should be close to areas that can provide skilled labor. So, many things have to be "right". How to do that?
Generally speaking, participation of the private sector should be maximised as a way to decentralise decision-making in the Hayek sense. The author argues:
If private investors do make bad investments, then they, not the country’s taxpayers, pay for the mistake. p. 10.The Indian experience has not been very positive precisely because the process has been managerially centralised:
As of 2005, most companies had to go through 15 authorities to enter an Indian zone. p. 19.On the other hand, the tax system must be absolutely certain.
The Chinese case has been a success, and that is largely due to the decentralised nature of the administration, which goes back in time. China rulers realised that a country that big could not be effectively managed from the center. Indeed, local governments have substantial influence in the decision making process.
Some literature on SEZs:
A critical assessment of the SEZ in Panama is here. Positive effects of the SEZs in China are reported here (see also here for a study on SEZs in China and India). Some describe the SEZs in China as the most important step towards liberalisation. But the implementation of the idea in Africa, by Chinese, has not been easy, and the Nigerian experience has not been positive.
The Russian experience was not positive at least until the end of the 1990s.