Heyday of the Zones

Workers at a doll factory, Shenzhen Special Economic Zone, China

The Enduring Appeal Of “Special” Zones
by Jonathan Adams
Far Eastern Economic Review, March 2007

If you had to pick a spot as the birthplace of globalization in Asia, a 72-hectare sliver of reclaimed land in Taiwan’s Kaohsiung harbor wouldn’t be a bad choice.

Here, 40 years ago, the government cracked open its protected economy to lure foreign investment with an eager pool of cheap labor and duty-free import of raw materials for export-only production. They called it an “export-processing zone”: one of Asia’s first, and a model for other such zones the world over.

For Taiwan and some of its Asian neighbors such as South Korea, the rest is history. The success of such zones helped convince these countries to embrace a strategy of export-led development—leading to decades of high growth and newfound prosperity that became known as the “East Asian miracle.”

Today, living proof of that success is on display in Kaohsiung. If you had come to this balmy port city in the late 1960s, you would have seen thousands of Taiwanese— mostly unskilled female laborers—crowding into the zone on bicycles every morning to stitch and assemble export-only clothes and cheap plastic toys for foreign firms.

Now, the zone is packed with the scooters and sedans of comfortably middle-class employees, who work primarily for Taiwanese firms specializing in the booming flat-panel sector.

In the cafeteria of one such firm last December, employees in their twenties and thirties chattered on cell- phones and played foosball during their lunch break. Outside, by the harbor’s edge, sat stacked rows of shipping containers— some arriving with materials for making liquid-crystal-display panels, others leaving with panel modules bound for mainland China or points abroad.

Some economists thought that zones like Kaohsiung’s would be obsolete by now. That was especially true after 1995, when the founding of the WTO promised to bring trade barriers crashing down and usher in a new golden age of globalization. Such “special” zones were to be expanded to entire countries, regions and ultimately, the world.

Instead, zones similar to Kaohsiung’s have had an enduring appeal—even in mostly open economies such as Taiwan’s.

In fact, their numbers are booming: In 1995, there were 500 in 73 countries; by 2002, there were 3,000 in 116 countries. India is fiercely debating a plan to create hundreds of new special zones. Scores of export zones now dot Vietnam, powering its emergence as Asia’s newest economic tiger. Cambodia is building zones on its border with Thailand, and has asked Taiwan’s advice on running them.

Says World Economic Processing Zones Association director Robert Haywood: “When the WTO was created in 1995, the World Bank and IMF argued that zones were going to disappear, because the world was moving toward free trade. In actual fact, the WTO isn’t moving toward free trade. I predicted there would be an explosion of zones, and that has taken place.”

Not everyone is happy about the zones’ tenacity. Global labor-rights activists have long seen them as the bane of exploited workers and the boon of footloose, cost- cutting capitalists—ghettos on the vanguard of a global “race to the bottom” between investment-thirsty nations.

Farmers in West Bengal are hopping mad that the government is seizing their land and lavishing incentives on multinational firms. Violent protests against the zones have raged since January, leaving at least six dead and scores injured.

And in India and elsewhere, economists still can’t agree on whether special zones are good or bad.

“I would ask whether subsidized export-led growth is either necessary for India, or likely to be viable in the long run,” said former IMF chief economist Raghuram Rajan. He says such zones deplete government coffers through overgenerous tax holidays and may create “islands of prosperity”cut off from the rest of the country.

Economists do agree on one thing: zones like Taiwan’s aren’t a magic bullet for successfully opening up an economy.

“For every zone out there that has worked, you have another one—at least—that hasn’t worked,” says Asian Development Bank economist Jesus Felipe.

In Asia, the type of zones that have worked so well in Taiwan, South Korea, China and Vietnam have been less successful in the Philippines, Thailand and Indonesia.

“Let’s face it: If you create a few square miles of infrastructure of plants and roads, you won’t reverse the overall effect of the economy,” says Peter Petri, a senior fellow at the East-West Center in Honolulu.

Experts credit the success of Taiwan’s zones to good infrastructure, political stability, the government’s commitment to broader liberalization, and strong links between foreign firms inside the zones and domestic ones outside.

Despite their decidedly mixed track record, special zones remain an attractive option—albeit one that economists insist is second-best to broader liberalization.

They’re ideal for authoritarian regimes that want a high degree of control over how their economies open (such as Taiwan in the 1960s, China in the 1970s and Vietnam in the 1980s). And they also provide a shortcut to development in a small area, when bigger reforms are too painful or slow-moving.

In Cambodia, economic planners have prioritized special zones to meet what they call an urgent need for foreign investment, as nationwide legal reforms and infrastructure building grind on.

“Governments can’t change the environment in the entire country overnight,” said economist Mr. Rajan. “It’s easier to create islands of good governance through focused intervention rather than the harder—and ultimately necessary—task of creating good governance everywhere.”

Such zones can also be a quick way to create jobs. Indian Commerce Secretary G.K. Pillai has claimed that the first 64 approved zone projects alone will generate $13.4 billion in investment and create 890,000 jobs by 2009. Vietnam’s Tan Thuan Export Processing Zone, which opened with 20,000 laborers, now employs 55,000—and that number could double by 2015 (Such is their success that Vietnam’s zones are now actually facing a labor shortage).

And through the zones, planners can get experience in navigating the maze of trade rules. As some trade barriers have come down, others have gone up— such as the EU’s strict country-of-origin requirements.

Another example: by WTO rules, special zones can’t offer all of the same perks as before, because some are now considered prohibited “export subsidies.” By 2010, only the poorest wto members—under $1,000 per capita—will be able to offer duty-free import and export rights in a specific zone, says Mr. Petri. Such privileges must either be extended to an entire country, or zones can offer different incentives such as tax breaks (some of which are still allowed) and full foreign ownership rights.

Finally, special zones allow bureaucracy-heavy countries to cut red tape by devolving power. That was one clear benefit in Vietnam, where Taiwanese money helped launch the Tan Thuan zone after the doi moi reforms in the 1980s opened the country to foreign investment. The zone’s one-stop regulatory approval cut the average waiting period for new projects from 18 months to 60 days, said Albert Ting, director of the joint-venture corporation that runs Tan Thuan.

Even in countries which have successfully opened their economies, the zones have endured, by adapting. Taiwan’s zones have morphed into industrial clusters of high-tech manufacturers: liquid-crystal display panels in Kaohsiung, semiconductors in Nantze and digital cameras in Taichung.

That reinvention has saved the zones from extinction: manufacturing flight cut their total jobs sharply (from a high of 90,000 in 1987 to just 50,000 in 1994); that figure has since climbed back steadily, to 70,000 in 2005. But such is the extent of the zones’ change that planners aren’t even sure what to call them now: “Economic value-added industrial park ( jingji jia zhi yuan qu)” is one clunky name they’re toying with.

And they’re already thinking ahead to the next incarnation—one idea is to tout the zones as logistics hubs—and dreaming up new incentives. One example: Tseng Sheng-bao, the official who oversees Taiwan’s zones, launched a campaign to make the zones more appealing to investors and their employees by adding green space— parks, walking paths, gardens.

Thanks in part to such beautification, Taiwan’s zones are far from the Dickensian dystopias described by some labor activists. But they’re still soulless places, which mostly empty out after dark when workers trickle home.

In the Nantze zone one early evening last December, a few Filipina employees bicycled outside their dorm. Asked about her life in the zone, 30year-old chip plant worker Jonah Obejero said it wasn’t ideal, but that the job was helping her save up to move to the U.S. or Canada.

“We can earn more here than in the Philippines,” said Ms. Obejero, before heading to work on the night shift. “It’s a stepping stone.”

The same could be said for the zones themselves. And until the arrival of an ideal “flat” world of free trade, economic planners are likely to continue relying on them—for better and for worse.