Brief History of SEZs and Overview of Policy Debates
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Individual contributions have significantly increased over the past 20 years. Early work includes Wall (1976), Ping (1979), and Basile and Germidis (1984). Post-1990 work includes Rhee and Belot (1990), Alter (1991), Romer (1993a, 1993b), Kaplinsky (1993), Willmore’s (1995) response, Kaplinsky’s (1995) reply to Willmore, Johansson (1994), Johansson and Nilsson (1997), Kusago and Tzannatos (1998), Madani (1999), Radelet (1999), Tekere (2000), Cling and Letilly (2001), Schrank (2001), Aggarwal (2005, 2006, 2007, 2010), Milberg (2007), and Tyler and Negrete (2009). These works have spanned the theoretical divide, as will be seen below.
Overview of Key Perspectives Trade-based perspectives: Formal analysis. As noted above, the initial formal work was primarily rooted in international trade theory. Early findings, especially those of Hamada (1975), were pessimistic about EPZs on the basis of fundamental principles. They were seen as a distortive policy tool set to correct the effects of another distortive policy tool. Indeed, trade, fiscal and quasi-financial incentives under the form of duty drawbacks, tax incentives, and discounted utilities and infrastructure are provided to compensate for high tariffs, import restrictions and quotas, and an overvalued exchange rate. From this perspective, in a free (or freer) trade environment, SEZs would have no raison d’être, as there would be no need for this “countersubsidization” policy instrument. For this reason they are considered to be a second-best policy instrument to the optimal policy of trade liberalization. From a prescriptive standpoint, SEZs should only be deployed in highly distortive environments in which the distortions introduce a disincentive toward exports (anti-export bias). Otherwise, SEZs are welfare-negative. In neoclassical analysis, SEZs are a distortive response to a distortive problem, whether they are welfarepositive or not. The logical conclusion of the analysis is that in an international context of trade liberalization, the need for and relevance of SEZs should decrease as the domestic trade environment becomes neutral (there are no policy biases toward imports, domestic production, or exports) and the country fits its natural comparative advantage. Later work has produced varied findings. Hamilton and Svensson (1982) concluded that SEZs positively affect allocative efficiency. Miyagiwa (1986), for different reasons, also found SEZs to be welfarepositive, as did Miyagiwa and Young (1987) and Ge (1993). The more recent work has tended to be more optimistic regarding the welfare