Fri | Aug 18, 2017

Ian Boyne | Another kind of zones

Published:Sunday | July 23, 2017 | 7:53 AMIan Boyne

There has been much focus on the Zones of Special Operations (ZOSO) Bill (now law) over the past few weeks, but there is another kind of zones which might make it unnecessary for us to declare any further ZOSO after Round One.

I refer to the special economic zones (SEZs) that have proven to be catalytic as a tool of economic growth and take-off in a number of developing countries. Jamaica has a Special Economic Zone Authority, chaired by Metry Seaga, which, if properly run, could make a meaningful contribution to our quest for economic growth. Regulations are soon to be implemented for the operation of our special economic zones, and it will be the quality of this legislation that will determine our ability to make SEZs work for us.

Special economic zones provide special incentives for companies operating in that space, and usually free those companies from certain bureaucratic requirements faced by companies operating in the domestic market. This mechanism facilitates rapid expansion of foreign investment, as investors seek hassle-free access. Companies usually have special import and export duty exemptions, streamlined customs and administrative procedures, and generous tax concessions.

Special economic zones provide no magic elixir. Many have failed because of corruption, abuse or inadequate regulations. Metry Seaga assures me that his team is going about this matter very carefully and that they have learned from the failures in other places. This mechanism can be so critical in generating high employment and foreign-exchange earnings that we had better go about it with the utmost diligence and thoroughness.

Do's and Don'ts

I would suggest to members of the Special Economic Zone Authority that they all get a copy of the recently released (2017) book, Beating the Odds: Jump-Starting Developing Countries, co-authored by Justin Yifu Lin, former senior vice-president and chief economist of the World Bank and now dean of the Institute of South-South Cooperation at Beijing University. The other author is Celestin Monga, vice-president and chief economist at the African Development Bank and visiting professor of economics at the University of Paris 1 Pantheon-Sorbonne and Beijing University. They give the dos and the don’ts. We don’t need to learn from experience when we can read.

Lin and Monga shown in this enlightening, 390-page book that developing countries can escape the constraints of poor infrastructure, low capital, poor education, resource scarcity and even a poor business climate by adopting certain strategies like promoting SEZs. They don’t theorise. They give concrete examples of poor countries that have achieved significant growth rates and boosted employment and export earnings despite their significant constraints and low factor endowments.

Take Ethiopia, historically one of the poorest  countries in the world.  In 2012, Ethiopia was ranked a disastrous 125th on the World Bank’s Doing Business Index - an index Jamaica looks to worshipfully. In 2013, it dropped further to 127th. Ethiopia had been enjoying handsome rates of economic growth, but it was not a location for massive foreign investments. Ethiopia then decided to create industrial parks as islands of excellence in an otherwise business-unfriendly atmosphere.

Ethiopia started with just two production lines, employing about 600 workers with an investment is just US$5 million. In a short while, investors from Korea, Taiwan, China, Turkey and Bangladesh had pumped significant investments into the country. Within two years, 4,000 jobs were created. Rwanda followed Ethiopia’s success with notable successes.

Strategy and development

Mauritius is one country that has famously used industrial parks as a main strategy of economic development, attracting significant foreign direct investments (FDIs). China provides the most spectacular example of a country that has used industrial parks and special economic zones to reach dizzying heights of economic growth, growing by nearly 10 per cent a year for more than 30 years straight. And lifting more than 700 million people out of poverty.

 Says Beating the Odds: “Most of the growth of China’s exports can be attributed to foreign-invested enterprises and per-capita income growth in those regions of China where foreign direct investment concentrated has been substantially higher than other regions.

“When market institutions were not fully in place in the 1980s and 1990s, China experimented with opening up to foreign investment in selected coastal cities and in special economic zones and industrial parks, with a focus on attracting export-oriented manufacturing FDI.” Exports grew phenomenally, making China the reputed “factory of the world”.

Say the highly respected economists in their book: “SEZs have become the most effective channel for attracting FDI and for building the kinds of clusters of industrial districts that allow large or small economies to take advantage of the new patterns of global trade. If fragmentation is indeed the new normal in global exchanges for the foreseeable future, then even countries with poor infrastructure, limited human capital or weak governance can find pragmatic solutions to position their economies as credible business environments for global supply chains. Successful SEZs are not only zones of excellence where problems can be addressed but also essential places where business linkages can be built between domestic firms (small and large) in various sectors and international firms.” This is crucial point.

Our special economic zones could provide a significant boon to our small business sector, long starved of resources and opportunities. From what I gather about our particular regime, it has been so designed to maximise the benefits to the domestic economic. Coupled with the important macroeconomic reforms that the previous and present administrations have engineered, the special economic zones can provide the job creation, investments and linkages needed to give wings to the Jamaican economy.

And,happily, it provides some  insulation from the neo-liberal watchdogs  who frown at special incentives. There has been a tremendous bias and prejudice against industrial policy and “packing winners”, when the overwhelming empirical evidence on economic growth historically has been precisely one of industrial policy, picking winners and state-guided development. Neo-liberalism is profoundly ahistorical and mythical. Study how Europe, America, Japan the Four Tigers have developed and you see industrial policy, targeting, and state-directed development. China and India have not used laissez-faire strategies to grow.

Targeting industries

Say the esteemed economists in Beating the Odds: “Successful countries patiently used industrial policies to facilitate their industrial upgrading and they targeted industries in dynamically growing countries with a similar endowment structure … . There is a long list. Britain targeted the Netherlands industries in the 16th and 17th centuries … . Germany, France and the United States targeted Britain’s industries in the late 19th century. During the Mejia Restoration, Japan targeted Prussia’s industries. From the 1960s to the 1980s, Korea, Taiwan-China, Hong Kong-China and Singapore targeted Japan’s industries. In the 1970s, Mauritius targeted Hong Kong-China textile and garment industries.

“In the 1980s, Ireland targeted information, electronic, chemical and pharmaceutical industries in the United Sates. In the 1990s, Costa Rica targeted the memory chip packaging and testing industry.” Beating the Odds points out that the European Commission, the world’s largest club of high-income countries, “has been pursuing an integrated industrial policy approach since its creation. In many official documents, it has set out key priorities for industrial policy and specific actions to scale up self-discovery by private firms.”

In the UK, government and private-sector firms have collaborated to foster technological upgrading in targeted industries. The Washington Consensus strategies forced down the throats of developing countries have ignored actual economic best practice in the developed and developing world.

Jamaica worries about its rankings in the Doing Business report. But some of the best-performing countries in the world rank poorly in Doing Business: Brazil ranks 123, China 91, Dominican Republic 112 (in 2012). Jamaica should take heart.

“Developing countries can reap substantial economic benefits from their status as latecomers … . Even in their generally poor business environment, they can lower the cost of doing business by building a series of strategically located clusters and industrial parks and attracting foreign investment which also brings the positive externalities of technology transfer, managerial best practices, new knowledge, and state-of-the-art learning and access to large global markets.” Such a two-pronged approach could facilitate the dynamic development of competitive private firms in well-selected regions and industries and provide employment for a labour force with low skills and rapidly increase fiscal revenues.”

Seems like precisely the kinds of strategies Jamaica needs now.

- Ian Boyne is a veteran journalist working with the Jamaica Information Service. Email feedback to columns@gleanerjm.com and ianboyne1@yahoo.com.