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Promoting SEZs: the location factor


4/18/2019
How large are the benefits of Special Economic Zones (SEZs) and what channels are needed to achieve these benefits? These are the two rudimentary questions underpinning the dogmatic promotion of SEZs worldwide.
 
The location of SEZs plays a descrying role in answering these questions. Prime Minister Imran Khan, as per media reports, prioritised four specialised areas under the China-Pakistan Economic Corridor (CPEC) a couple of months ago. He ordered the groundbreaking of at least three SEZs by June this year.
 
These key areas relate to industrial cooperation, socioeconomic development, agriculture and Gwadar. In this regard, the planning and development of following four SEZs is reportedly in the offing: Dhabeji in Sindh, M-3 Faisalabad in Punjab, Rashaki in Khyber-Pakhtunkhwa cobbled with another one in Islamabad.
Out of these, three SEZs are ready for groundbreaking by June this year except the one in Islamabad requiring more time owing to location selection and land acquisition issues. At this stage it is important to underline the locational factors that can increase Pakistan’s economic growth from SEZs both in the short and long run.
 
As per the relevant literature, the benefits of SEZs and the channels required to achieve them largely depend on the location on which SEZs are established.
 
For instance, in a 2009 paper, Jin Wang from the London School of Economics winnowed the above-mentioned questions. Based on the evidence from China, he noted that SEZs increase per capita foreign direct investment, does not crowd out domestic investment, and augment total factor productivity.
 
This suggests that rightly located SEZs not only increase capital but also result in technological advancement alongside yielding business-friendly policy implications.
 
The success of the Shenzhen SEZ in China, for example, mainly depended on various locational determinants, especially its geographical contiguity with Hong Kong, transforming it into a principal access point for foreign investment. Pakistan also needs economic gossamer of such access points.
 
The Chinese iconoclastic experience with Shenzhen and other SEZs suggests that location determines profit maximisation, industrial entrepreneurship, transportation costs for raw material and finished goods, burgeoning jobs creation and improvement in tax compliance.
 
In order to right-locate SEZs, it is important to first identify a conflagration of factors influencing the location of individual activities, division of a spatial market among producers, and the allocation of land for different production types.
 
Pakistan must carry out extensive research before finalising CPEC-related SEZs’ location while talking with their Chinese counterparts. These factors may lead to the identification of production areas and market areas. The two indelible areas should ideally have lowest transportation costs.
 
Therefore, the best location for any SEZ may be a venerating point where the costs for transporting output to the market are at minimum. The Shenzhen-Hong Kong geographical contiguity, therefore, successfully reaped the exorbitant benefits of lesser transportation cost transforming it into a success story.
 
The literature suggests three main determinants requiring specialised focus for propitiating SEZs-related locational challenges: profit-maximising behaviour, trade-off between different factors and spatial structure of demand and supply.
 
Some authors argue that profit maximisation needs to be the predominant purpose of establishing SEZs. However, multiple evidences from the world suggest that profit maximisation may not be the sole criterion for transforming SEZs into success stories.
 
It is because reasonable profits at safe locations are better than high profits at risky locations. That means, in addition to profit maximisation, personal and policy preferences are also important factors for determining SEZs’ locations. It is partly because new industrial entrepreneurships are usually less sensitive to profit maximisation dimensions of locational choices vis-à-vis personal choices.
 
It may also be observed that many businesses in their early stages are located at a place where the owner lived irrespective of higher profits at other locations. It is, therefore, crucial to underline that new SEZs have their peculiar hidden economic strengths.
 
It is important to have long-term and sustainable profits in changing socio-economic conditions as compared with optimum profits in an unsustainable business environment. Pakistan may also consider following this approach in finalising its SEZs’ locations.
 
In their 1987 research paper, John Blair and Robert Premus argue that trade-offs among various business variables are an important factor in determining profit-maximising industrial locations.
 
The same principle applies while establishing SEZs. Trade-offs among factors such as wages, energy and transportation costs need to be considered in finalising profit-maximising industrial locations and SEZs. Supposing, if the savings due to low wages are offset by higher transportation costs, the firm will choose to select the low wage site.
 
However, if the low wages are not sufficiently offset, the industrial unit may locate itself at a point of minimum transportation costs. Many developing countries experience additional variables towards energy, wages and transportation costs. Frequent power outage in Pakistan is one such factor that may offset the savings due to lower transportation and wage costs. The locational decisions need to be aware of these kind of trade-offs.
 
The spatial structure of demand and supply is another important factor in determining SEZs’ location.
 
The territorial structure of production and market, therefore, needs to be incorporated in the cities’ space management plans. It may be observed that economic landscape drastically varies in cities particularly with the increase or decrease of distance from the central business district. That means the land for industrial entrepreneurship such as SEZs could be much higher if it is located close to central business district.
 
The price or rent of the similar piece of land may drastically decrease in the suburban areas. Similarly, the residential areas also experience similar trends resulting in high-rise buildings in inner urban areas and low-rise industrial and residential development in the outer suburban areas.
 
The establishment of SEZs and their associated industrial and residential locations need to be fully aware of this kind of urban and industrial management. This suggests that right-locating SEZs will not only optimise CPEC-related economic benefits but also ensure long-term industrial entrepreneurship and sustainable economic growth in Pakistan.