6
Special Economic Zones
low labor costs, scale economies, and preferential access to major consumer markets like the Europe, Japan, and the United States, economic zones—with their access to duty-free inputs, quality, flexible infrastructure, and often generous fiscal incentives—proved to be a powerful instrument through which to capture increasingly mobile foreign investment. This era may well have come to an end, however, for several reasons. Although trade has recovered significantly from the depths of the 2008 and 2009 economic crisis, it is clear that the United States and European economies can no longer be the ony engines of global demand. Responding in part to the crisis as well as longer-term strategic trends, lead firms in global production networks are increasingly consolidating their supply chains, both in terms of suppliers and production locations. Much of this consolidation increasingly is being entrenched in “factory Asia.” Linked closely to the issues discussed thus far, the expiration of the Multi-Fiber Arrangement (MFA)2 at the end of 2004 has had a huge impact on the cost competitiveness of textile and apparel manufacturing in EPZs in Latin America, Africa, and Eastern Europe in relation to lowcost Asian producers. Thus, for countries that have not yet established economic zones programs, the traditional variety targeting multinational assembly activities within global production networks is far from the sure thing that it used to be. In the absence of massive labor cost advantages (e.g., Bangladesh and Vietnam) or scale (e.g., China), most countries will need to design more sophisticated strategies—beyond the basic EPZ—to attract MNCs. For countries that already have established EPZ programs, the challenge is perhaps more acute. It is about remaining competitive, which in the absence of aggressive, long-term dampening of real wages, means upgrading production capabilities and attracting investment in higher value-added activities. But, as we will see from the examples in Parts I and II of this book, this is precisely where the EPZ models have often let down countries by creating an incentive environment that restricted adjustment processes. Indeed, recent years have seen a shift away from the traditional EPZ model. In its place, zone development is moving toward the SEZ model, with emphasis on physical, strategic, and financial links between the zones and local economies, and a shift away from fiscal incentives to value added services and a greater focus on differentiation through the investment climate in the zone. Although many of these zones eschew the narrow focus of traditional EPZs in favor of multiuse developments encompassing industrial, commercial, residential, and even tourism activities, others are moving to highly specialized developments focused on specific high-end