SEZs and why Pakistan needs them

Pakistan needs a thriving economy to convert its enormous pool of unskilled young labor into employable skilled labor with jobs on its road towards fast industrial development.

SEZs

PTI government has made the creation of jobs as a topmost priority. One major way to create these is via industrial development, and Special Economic Zones (SEZs) are being seen as the fastest route to achieving this. In China, SEZs are estimated to have created over 30 million jobs. By 2019, China had over 2540 SEZs, India has 373, and even Bangladesh has 39 (UNCTAD). In March 2020, PM Imran Khan approved ten new SEZs in the country.

We take a brief look at why SEZs matter.

How SEZs have Increased FDI into Countries

In 2019, Pakistan attracted only $1.73 billion from a total of $1.39 trillion global FDI; Pakistan has to do significantly more to attract foreign investors. SEZs, in this regard, have the potential to kick-start economic development by attracting foreign direct investment (FDI) and technology.

Investors can be drawn through special financial incentives such as tax reliefs and tariff reductions, among other factors. Bangladesh’s Economic Zone Authority (BEZA) has set an FDI target of $9.6 billion by 2030 into SEZs; the country’s annual average FDI flows were $2.2 billion in 2015–2017, 15-20 percent of which was attracted by its eight Export Processing Zones. China saw a massive increase in FDI from its SEZs.

Read more: Why Pakistan’s SEZ law may need fixing?

How SEZ’s have increased jobs

Pakistan has a sizeable proportion of its population living below the poverty line, and with one of the world’s youngest population, Pakistan needs a thriving economy to convert its enormous pool of unskilled young labor into employable skilled labor with jobs.

Zones can play a significant role in employment creation; in many countries, the rate of job creation in national SEZ programs has significantly outpaced employment growth in their overall economy.

SEZ

China SEZ transformed, Shenzhen, a fishing village of 30,000 into a 12 million people metropolis. Bangladesh’s BEZA’s mission is to establish 100 economic zones across the country between 2015 and 2030, to create 10 million jobs. Currently, it has 500,000 people employed in its eight export processing zones.

Read more: China and the history of its Special Economic Zones

It is estimated that four SEZs to be set up in Pakistan’s Khyber Pakhtunkhwa (KP), Punjab, Sindh and Baluchistan provinces will create up to 575,000 direct and 1 million indirect jobs (Malik, 2019).

SEZ’s have Increased Exports

Pakistan’s exports were roughly $24 billion as compared to its imports of $56 billion in 2018 (Finance Division), which led to a huge trade deficit of $32 billion. For Pakistan to get out of this whirlpool of economic instability, like many other countries, it is willing to imitate China’s economically successful SEZs model, the latter increased its exports to GDP ratio from 5% in 1979 to 38% in 2018.

Read more: SEZ policy of Pakistan

In the case of Bangladesh and Sri Lanka SEZs contribute roughly one-fifth and one-third of their total exports, and around 25% to India’s exports. Bangladesh has eight public and one private specialized EPZs focusing on apparel and textiles and aims to increase an extra $40bn exports from SEZs by 2030.

Pakistan needs to increase its Agricultural contribution to GDP

Pakistan is an agricultural country, and a large part of its labor is tied up in this sector (37%), but its contribution to GDP has dramatically decreased from 62.3% in 1947 to 18.9% today.

China, before its reforms, similar to Pakistan today had low agricultural productivity due to the lack of innovation and low R&D due to insufficient access to capital. This situation was reversed when Chinese SEZs set up agro-processing and storage units and served as conduits to technology and investment in agriculture. In China, SEZs increased the income of participating farmers by 30%.

Read more: SEZs: The Economic Gold Mines

The success of SEZs is often related to basic factors such as having a good site location that is close to an infrastructure hub or being near cities with large pools of labor. They need to have reliable power supplies; good zone design with quality facilities and maintenance; lack of cumbersome bureaucratic procedures; and robust governance structure without too many institutions involved in zone management.

SEZs if managed properly create forward and backward linkages into the country to make the flow of capital and technology much smoother. Special Economic Zones are considered a good second-best option for bringing about systematic structural transformation within a zone that may be difficult to achieve overall in the economy.


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