Daily Times

Special Economic Zones (SEZs) are an important aspect of the China Pakistan Economic Corridor (CPEC), besides the projects centred on infrastructure, energy, and the development of Gwadar port. SEZs, as a growth strategy, have static and dynamic implications for the host economy.

In the static sense, they help in promoting investment, employment, trade and economic growth. In the dynamic sense, they result in technological advancements, human resource development, urban development, institutional and economic reforms, as well as infrastructure development. However, their success clearly depends on the threshold conditions that need to be met to reap the potential benefits associated with successful SEZs, in which regard, the development and operation of their organizational structure is of primary importance. For instance, the structure that resolves problems based on knowledge and incentives is deemed to produce the desired benefits. Likewise, effective labour policy, combined with less dependence on subsidies, ensure higher employment and competitive industrial development, respectively. Moreover, secure environment is among the essentials that lead to success in this regard as well.

To ensure the efficiency and transparency of organizational structure, we must look at its ability to solve the problems of knowledge and incentives. The knowledge problem arises when the decision makers, with respect to SEZs, do not have enough knowledge of the market mechanisms. For instance, in centralised decision making, the policy officials cannot understand the fluctuations in the economies or in the operations of the market, as would be expected in private businesses.

To have greater market access and, accordingly, successful SEZs, we should ensure both external and internal security. In this regard, relationships with Iran, Afghanistan and India are of upmost importance.

The consequence would be badly designed and misplaced SEZs. In contrast, in private decision making, businesses are well-informed about the mechanisms of the market, which helps them make more informed decisions. Overall, the organisational structure in private decision making would be somewhat efficient, as compared to centralised decision making. Decentralised decision making also exists, which involves both the officials and private agents working in tandem to make resolutions with respect to SEZs.

Like the knowledge problem is the incentives problem, which arises when the incentives of the policy makers are not aligned to the incentives of successful SEZs. Just like other policy packages, SEZs create opportunities for corruption and rent-seeking and, accordingly, policymakers will use these opportunities for their self-interest. Again, the solution to this problem would be the private development of SEZs. In Private SEZs, the incentives of the private developers are aligned to the success of SEZs. Alternatively, with private development, when the policy makers would not provide infrastructure and other facilities to these SEZs, there would be fewer opportunities for corruption and rent-seeking on part of the policy makers. The success of SEZs would be related to the benefits of the private developers. Private agents would not develop the zones where the opportunities for profit-making are bleak.

As stated earlier, SEZs are aimed at providing employment and technical skills to the domestic labour force. So far, Pakistan has not adopted any policy about the protection of domestic labour in projects under CPEC. At present, the enforcement of labour laws is ineffective at both the federal and provincial levels. Inspections and regulation of labour market are almost absent due to the corrupt and biased lower-level labour courts.

We need transparent and effective labour policy for CPEC and SEZs due to two reasons. First, we need a framework for the employment of domestic labours within SEZs by foreign investors, and second, policy guidelines should also be established to protect the rights of these workers. The Industrial Relation Act (IRA) of 2011 specifies the rights of workers, with respect to working conditions, memberships in union, safety measures and various other rights. The rules in IRA should be enforced in their true spirit.

Similarly, we would be successful in SEZs as an industrial strategy, when the incentives offered create a competitive private sector within them. Alternatively, we should tie all the incentives offered within SEZs to the efficiency of the enterprises. Given the history of incentives in Pakistan, industrialists have long been taking advantage of them; however, they wind up their businesses once the incentives are exhausted. This is one of the main reasons for the failure of industrial estates in Pakistan. Many industries in the country stay inefficient and small, even after decades of official protection through incentives.

The obvious examples are the sugar, flour, car and textile industries which are still nourished on subsidies. The persistent protection entails three issues. First, subsidies once provided are difficult to remove. This issue is crucial when the institutional framework is weaker, and governments are made up of the elite. Second, subsidies create interest groups and, consequently, these groups lobby for the extension of such subsidies. Finally, a good fraction of the subsidies are spent by the related interest groups on the continuation of such protection. Thus, in weak states, subsidies result in rent-seeking because in such states it is hard to resist corruption. In short, incentives in SEZs should not result in rent-seeking on part of the industrialist in Pakistan; rather, they should result in healthy competition between the enterprises.

Finally, one of the basic objectives of CPEC is to obtain access to the markets of Middle East, Central Asian Republics (CARs) and Africa, besides others. The performance of SEZs clearly depends upon the achievement of this objective. However, access to markets is rather a political issue. To have greater market access and, accordingly, successful SEZs, we should ensure both external and internal security. In this regard, relationships with Iran, Afghanistan and India are of upmost importance.

This is since market mechanism works only when it is supported by the right institutional mechanism. Alternatively, geo-political position, combined with the supporting institutional framework would ensure the success of SEZs, market access, and the infrastructure projects under CPEC. In addition, internal security in terms of peace in FATA, Khyber-Pakhtunkhwa, Balochistan and, even, in Afghanistan would pave the way for successful operations of SEZs. Finally, Pakistan’s market access is highly vulnerable to ethnic and sectarian tensions, especially those in Karachi and other areas of the country. We must resolve these tensions to be in a beneficial position with SEZs and CPEC.

Thus, to be successful with SEZs as an industrial development and growth strategy, we should focus on the organizational efficiency of the development and operation of SEZs. Likewise, effective labour policy would not only generate employment; but it would also result in skill advancement of the domestic labour. In addition, control over the rent-seeking of industrial class, as far as the incentives within SEZs are concerned, would result in the development of competitive private sector. Finally, the internal and external security is deemed as an essential for good performance within SEZs.

Dr Karim Khan is an Assistant Professor at the Pakistan Institute of Development Economics and can be contacted at Email: karim.khan@pide.org.pk.

Published in Daily Times, August 14^th 2018.