Political Economy of Special Economic Zones: China vs India

Towhid Iqram Mahmood

IMG-3084According to the World Bank in 2008, a modern day Special Economic Zone (SEZ) typically includes a “geographically limited area, usually physically secured (fenced-in); single management/administration; eligibility for benefits based upon physical location within the zone; separate customs area (duty-free benefits) and streamlined procedures”. For that, practices related to business and trade differ from rest of the country and therefore, all units therein get special privileges. SEZs can generate both static and dynamic benefits. Static benefits include employment creation, export growth and rise in government revenues; whereas dynamic benefits include economic diversification, innovation and transfer of technology through Foreign Direct Investment (FDI) and skills upgrading. However, good governance, proper political and investment conditions for business and timely order of work is quintessential for a successful SEZ. The successes of SEZs in China made other South Asian countries like India to succumb to the Chinese SEZ model. The notwithstanding principles of this model resulted in a poor performance of India’s SEZs though.

In 2016, Chinese SEZs have contributed 22% of China’s GDP, 45% of total national FDI and 60% of exports. These SEZs have also increased the income of participating farmers by 30% and accelerated industrialization, agricultural modernization and urbanization. Whereas for India, SEZs contributed only 3.72% of GDP and 20% of exports. The most astounding fact is that only 223 are operational out of 420 approved SEZs. Furthermore, only 40% of the total lands acquired for SEZs are in use. Most of these lands were deliberately taken out from agricultural production to apt with quicker economic growth.

Chinese experience with SEZs has indicated a number of factors that contribute to their success and effective operation. For example, SEZs need to be linked to economic opening and capitalize on innovation, political stability, promote industrial expansion, building brands, incubating local ideas by integrating learning, bringing together resources and expertise from government, industry and research institutions to move into more advanced value chains etc.

The ease of doing business index by the World Bank shows fundamental differences in incubating businesses between China and India. One can argue that India started economic reforms and initiated SEZs much later than China. Although that is a very small fraction of caveat that India faces if not minimal. A few of the major reasons for slow growth of Indian SEZs are lack of diversification of products, unstable fiscal incentives due to changing regimes and their belligerence towards policies from previous regime, poor infrastructure, political patronage and delay in environmental clearance and approval by state governments.

However, the low performance of Indian SEZs can be looked at from a political economy perspective.  With better than ever infrastructure and geographically ideal position, China offers something more than that India could offer to the international market. We know that China is a one-party political system whereas India is a multiparty democracy. From the viewpoint of an investor, Chinese market is way more lucrative than India in terms of political stability and investment environment. Of course, it is not always true that an authoritarian system can incubate better economic system (take Idi Amin’s Uganda for example). However, China’s performance has assured investors to rely on its economic system ever since it has opened its door to a market economy. Thus, political stability along with better business environment helped China to attract the flood of foreign investment unanimously. In case of India, SEZ rules have been amended at least seven times since its initiation in 2010. These changes are concomitant with the caveats of regime changes that, in turn, changes most of the policies and acts because of internal rivalries between political parties. On top of it, as mentioned, bureaucratic complexity has made it more difficult for investors to easily start a business in India. Unjust land acquisition without feasibility studies raises questions. Perhaps, some of these are answered when some lands acquired for SEZs are sold at a higher-than-market rate by political activists.

Drawing from the discussion, it can be stated that undoubtedly political stability and understanding between political parties to ensure economic success for a country is the primary incentive for an SEZ’s success. Learning from SEZs in India, a lineation of rivalry between political parties in a multiparty democratic system is a must if we want to parallelly increase economic stability with the help of SEZs. To bolster effective SEZs, well monitoring of the mechanisms with inclusive functioning cannot be negated.

Towhid Iqram Mahmood, Senior Research Associate, SANEM

E-mail: towhid.iqram@gmail.com

First published in the Thinking Aloud, 1 November 2018