Spatial Economic Clusters and Special Economic Zones This section applies the Duranton-Venables framework to instruments that directly try to attract investment to and create jobs in specific places. The basic objective of these instruments is to develop spatially localized clusters of economic activity. Interventions include industrial districts, free trade zones, export processing zones (EPZs), or any special district with favorable fiscal or institutional treatment. Here, these interventions are grouped under the category of special economic zones (SEZs). SEZs often employ a range of “hardware” and “software” policies in a well-defined geographical area or areas. Hardware policies include (1) liberal treatment of imports and exemptions from customs duties, particularly (but not only) in the export processing zones and free trade zones that were precursors to current SEZs; (2) tax incentives, particularly holidays from corporate income taxes; (3) provision of infrastructure, including electric power, transport, water, and sanitation; (4) distinct regulatory regimes, often involving laxer labor regulations, restrictions on union activity, and different land tenure systems; and (5) provision of large parcels of land, often with industrial sheds built in advance of occupation. Software policies include (1) management of SEZs that seeks out and works closely and effectively with private sector investors; (2) effective implementation and management; and (3) labor training. The popularity of SEZs has increased dramatically over the past few decades. While there were 176 zones in 47 countries in 1986, the International Labor Office database registered 3,500 in 130 countries 20 years later (Boyenge 2007). In the mid-2000s, SEZs accounted for almost 20 percent of exports and employed more than 60 million people in developing countries, the Foreign Investment Advisory Service estimates (Frick, Rodríquez-Pose, and Wong 2019).
Applying the Assessment Principles to Special Economic Zones Direct Quantity Effects: Attracting Investment Many SEZs have been hobbled because key elements of the ecosystem are absent. First, SEZs need to be located in places consistent with their objectives and long-term economic viability. If they are export oriented (or import dependent), they need to have good access to port infrastructure. In countries where even well-located regions have difficulty attracting investment, SEZs in backward or remote regions are unlikely to succeed. Nigeria provides a case in point (World Bank 2017). A review of industrial clusters highlights that these interventions tend to counter rather than reinforce port access and agglomeration economies. Aside from zones in Lagos, as well as the special case of the Ogun Guangdong in Ogun state (one of eight free zones that China plans to form in partnership in Africa), other SEZs that are scattered throughout other Nigerian states are not operational because of lack of interest by investors. Because of the export- oriented nature of activities in the zones, the benefits from agglomeration economies
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Place, Productivity, and Prosperity