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Special incentives not critical for SEZ - World Bank expert

Published:Wednesday | October 8, 2014 | 12:00 AM

Special Economic Zones (SEZs) are no longer centred solely on low-cost labour, according to trade expert Anabel Gonzalez, whose advice to Jamaica is to prepare itself for a new world in which infrastructure, connectivity and efficient regulations make the difference the between success and failure of trade zones.

Gonzalez, the senior director of the World Bank Group Global Practice on Trade and Competitiveness, indicated in a speech to a logistics confab in Kingston that excellent infrastructure was a greater calling card than special incentives.

She intimated that incentives may otherwise not be a practical tool for Jamaica, anyway, because of its tight fiscal space.

The trade expert did not make the trip to Kingston, instead the speech was delivered for her by another World Bank colleague, practice manager for Trade and Competitiveness, Marialisa Motta.

The Ministry of Industry, Investment and Commerce, which hosted the two-day confab on October 6 and 7, is planning about 16 special zones as part of its plan to position Jamaica as an international logistics hub.

The SEZs will replace the free zones, which operate under the 1976 Jamaica Export Free Zone Act, but will have to be disbanded next year in compliance with World Trade Organization rules.

The free zones currently benefit from duty-free importation of capital goods, consumer goods, office equipment, raw materials or articles for use in connection with the approved product; no import licensing requirements; profit repatriation; total relief from income tax in respect of profits or gains earned from approved activities; and exemption from the normal fees payable with respect to work permits.

Gonzalez said both regulation and infrastructure were critical or SEZ success, drawing on the example of the Pacifico Special Economic Area in Panama which has registered

120 companies employing more than 5,000 people.

Key attraction

"The design of the Pacifico zone established a dedicated autonomous oversight agency, insulated from political interference. This is considered to be a key attraction of the zone, just as important as its strategic location," she told the conference on the Growth Agenda and Special Economic Zones Policy Dialogue.

The trade expert also referenced the Jebel Ali Free Zone in Dubai which benefited from significant public infrastructure investment, and was enhanced by the legal and financial autonomy of the zone's operation.

"The zone is required to cooperate with a range of government administrations and ministries, such as a joint venture with Dubai Customs, another factor that has made the zone a success."

On a global basis, she adds that World Bank research has shown that infrastructure reliability has a strong association with the success of SEZ, while incentives have no measurable effect.

"Jamaica has drawn lessons from established practices in how to design so-called smart incentives, for example, offering a flat-rate corporate tax, as opposed to tax holidays," said Gonzalez.

"Jamaica's current SEZ Policy calls for these kinds of smart incentives, but it is important to keep in mind that other factors such as infrastructure quality may be a much stronger pull than tax breaks, especially in a context of tight fiscal conditions," she said.

However, in citing the example of the free zone in Dubai, Gonzalez also acknowledged that there was no definitive conclusion on whether incentives or infrastructure caused its success.

"The free zone offers a wide range of incentives, including a zero per cent corporate income tax and full profit repatriation. However, the reality is that Dubai is a low-tax and low-duty environment outside the free zone. So what caused the success of the zone itself?" she asked.

"While we cannot say definitively, the quality of the infrastructure and of the regulatory regime of the zone must have played a major part," she insisted to the conference.

Gonzalez said SEZs are a second-best solution, and that the "ideal approach" should be efficient regulations available to all businesses, access to quality infrastructure available to all firms, and a fiscal environment that is attractive to private investment throughout the entire economy, not just the zones."

avia.collinder@gleanerjm.com