The Development Tool


A special economic zone (SEZ) is an industrial area created and governed by a package of policies representing an agreement between government, developers, and foreign investors applied to a specific bounded area for the purpose of economic development and the growth of global capital (Farole, p.8).  In the 1970s, economic development came to be redefined in terms of the reduction or elimination of poverty, inequality, and unemployment within the context of a growing economy.  Today the discipline of economics defines development as a means to improve the quality of people’s lives, and that is believed to occur through industrialization.  “Development must therefore be conceived of as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty” (Todaro, p.16).  Data suggests that on average, growth is the greatest lifesaver to the poor (Easterly, p.14).   Interestingly, the methods used to achieve industrial growth have been proven to raise gross domestic product (GDP), but not necessarily human development.

FDI contributes to the growth of gross domestic product, but GDP growth does not represent development. Data published in the United Nations Human Development Report 2010 reveals a weak relationship between changes in economic growth and changes in development indicators such as health and education in developing nations.  This data implies that the resources used to attract FDI are spent on private rather than public issues, and preferential trade agreements (PTA) and tax incentives are really just functions of crony capitalism, a form of corruption.  This idea is supported by World Bank economist Thomas Farole (2011).  His analysis determines that PTAs and fiscal incentives are not at all correlated with SEZ outcomes. That means that human development indicators are not rising with GDP and the majority of SEZs have not successfully contributed to the development of host economies. Tools designed to raise GDP must also be grounded in a local economy to effect the general population.  “Spillover”, an unintended economic benefit, can only occur if zone enterprises have forward and backward linkages that create an interconnectivity to local markets.  (The historical implications of these theories are found in the Appendix on Economic Development Theory.)

The SEZ offers a unique quasi-controlled environment for experimentation.  The first generation of SEZs was constructed in underdeveloped countries offering foreign investors tax incentives and the protection a stable business enclave within unstable economies.  They also allowed protectionist states the opportunity to experiment with market liberalization.  Since the 1980s, China found great success with this model and India, along with other less developing countries (LDC), followed on its heels. In addition to rapid growth, LDCs were attracted to the promise of jobs, the creation of infrastructure and the supportive environment for enterprise that the SEZs would create (Farole, p.18).

This generation of SEZs, referred to as “reform zones” because they reshaped trade policy, demonstrated the strength of the model’s ability to attract FDI and grow GDP.  Some industry specific incubators were so effective that mid-sized enterprises were expeditiously converted into MNCs.  For this reason, few small and medium sized enterprises (SSE and MSE) are found in SEZs in LDCs.

Liberalized trade with less developed countries remains debated decades after the first free trade zones were created. While free trade can grow GDP, an emerging body of evidence refutes the theory of mutual benefit between states pointing to cases of resource exploitation. The title of last year’s publication by former World Bank chief, Joseph Stiglitz, and economists Amarta Sen and Jean-Paul Fitoussi suggests their position, Mis-measuring Our Lives: Why GDP Doesn’t Add Up. They recommend that income and consumption replace production as a growth indicator as they more accurately reflect actual living standards (Stiglitz, p.56), and enable better policy. Theodore Moran argues that outcomes of SEZs are largely contingent upon the policies of the host country with two important considerations, the type of FDI attracted and the form of governance (hands on or hands off) that will dictate the business environment. He concludes that FDI is largely beneficial to host countries, but warns that FDI creates an environment that is highly susceptible to corruption.  This means that policy—and enforcement of that policy—must be directly related to any argument about the efficacy of FDI on development (Moran, 2011).

Policies that have stimulated growth are generally considered to be successful and tend to be replicated. However, the repeated use of “best case” models lead to policy packages applied in a one-size-fits-all manner. These examples have invariably produced less successful results than their predecessors.  This point underscores the importance of contextualizing and customizing policies that address the needs of a specific region.  Unfortunately, the obvious nature of this point gets lost as developing nations race-to-the-bottom to gain a comparative advantage in the global market.

China and India have experienced economic growth and a rising middle class.  Each country found its industrial niche by exploiting its comparative advantage in labor and its then non-existent environmental laws.  It seemed as though the rising GDP was lifting all boats, justifying the proliferation of SEZs. But replicating the same rapid growth policy package has replicated unwelcome externalities, such as working environments with sweatshop characteristics (China Labor Watch, p.11) and toxic water from industrial and urban waste (UNEP, p.109).  These alarming situations call for corrective measures.

Trend reports by the United Nations Commission on Sustainable Development and World Bank publications identify areas where progress may be seen.  China has partnered with the EU to build a market for clean technology and India has developed Green SEZ guidelines.  A range of public policies has been implemented to affect infrastructure and production, as well as offering capacity building tools.  However, analysis is not yet possible as many data sets don’t yet exist.  Even the World Bank acknowledges that there is a lack of systemic analysis on the performance of SEZs around the globe (Farole, p.2). The lack of data and analysis has called the necessity of billions of dollars for financing large-scale infrastructure projects in to question, and continues to stall many progressive projects.


World leaders and organizations such as the Organization for Economic Cooperation and Development (OECD) have joined academics and a handful of economists to question the reliance of GDP as an indicator of prosperity (Gertner, NYT).  The use of gross national income (GNI), the Human Development Index (HDI) and countless new indices has entered our vocabulary but this process hasn’t yet produced the irrefutable data sets required for new funding schemes.  The subject of data also raises the issue of analytical methods.

Policymakers rely on good data to evaluate and implement good policy.  Bad data generates bad policy that is kindly referred to as “distorted.”  A new body of work is emerging to address distorted policy tools that were set to correct the effects of other distorted policy tools (Farole, p.47).  In the words of Groucho Marx, “Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.”  The inefficient bureaucracy of development policy has earned its place at the punchline suggesting that the root problems are not only historical, but also systemic.

Can a systemic problem with development policy reform?  I believe so, provided that researchers continue to question methods of data collection.  Theodore Moran has extensively researched the impact of FDI on host economies in the developing world.  He found that the first generation of research on the subject is flawed in its aggregate approach and believes that a new wave of research will have a profound effect on policymakers.  The implication is the system of global development may be on the verge of reform–from data, to policy and enforcement—and a new set of guiding principles is emerging to become a primary policy tool.