Conference theme

Liberalization, free trade and economic development through foreign trade are the mantra among those who would promote growth in developing countries and emerging market economies. The prescribed medicine is for these countries to open-up their borders to foreign direct investment (FDI) from anywhere in the world. The basis for the cure is also being laid by a complex web of International Investment Agreements and Free Trade Agreements (FTAs), chief of which are the now popular Bilateral Investment Agreements (BITs).

With or without FTAs and BITs, one of the most popular forms of foreign direct investment is for companies (whether multi-national, trans-national or domestic) to establish themselves in so-called SEZs - special economic zones - by exploiting the various policy instruments of subsidies, loans and other incentives provided by host countries to attract FDI. SEZs are also known by various other names, which attempt to describe their specialties ranging from free-trade zones, export processing zones, duty-free zones, free-export zones, free-investment zones, free-economic zones, free-enterprise zones, free-manufacturing zones, economic and technology development zones, and industrial estates, to industrial or science parks. Bonded warehouses, free ports, duty-free shops, free banking zones and free insurance zones can also be regarded as special kinds of zones, where services are at the core of economic activities. In reality, most zones are involved in or support manufacturing specifically tailored for export.

By whatever name, these zones have one thing in common: they are geographically defined areas set apart from the rest of the country or region and endowed with policy incentives by a national or regional government(s) to entice foreign investors. In short, they are localities that offer companies what the World Bank (1992, 2) called “free trade conditions and a liberal regulatory environment”.

It was predicted that, following the founding of the World Trade Organisation (WTO) in January 1995, the concept of SEZs would become redundant. For the WTO promised global free trade conditions: all national trade barriers would be removed as member states opened their industries, services and borders to each other as “Most Favoured Nation” or as they at least abided by multi-lateral rules. For the WTO’s Agreement on Subsidies and Countervailing Measures, promised to put a stop to many of the trade promotion policies which support SEZs. In short, the “liberal regulatory environment” was expected to be harmonized under the new multilateral rules.

However, instead of becoming redundant, SEZs have proliferated. Whereas there were only about 500 in 73 countries in 1995, the ILO (1998) registered about 850 special zones worldwide three years after the start of the WTO. Over a decade later and with the Doha Round of the WTO negotiations in disarray, the number of SEZs is closer to 3000 in about 120 countries.

For instance, under the 2005 SEZ Act, India has granted formal approval to 462 SEZs, 222 of which have been notified, while hundreds await approval (http://sezindia.nic.in/HTMLS/about.htm). China, where only six SEZs were created at the beginning of the 1980s, now accounts for several hundred zones, parks and estates, so much so that new government policies now seem to have turned the entire country into one huge SEZ. Without great ceremony, China has been imitating establishment of its own thirty-year-old SEZs and planting their clones in various parts of Africa and South America as well as in Pakistan. The Chinese innovation is that in many cases the sole foreign investors are Chinese enterprises, not MNEs from anywhere in the world.

Governments of countries as diverse as Russia, South Korea, Ukraine, the Philippines, Vietnam, Iran, Poland, Jordan and Kazakhstan have either announced plans or are already implementing plans for SEZs, sometimes in private-public partnerships, sometimes alone. However, today, most operating SEZs exist in Asia, and the majority of them still specialize in manufacturing for export. The claim is that liberalization through SEZs results in economic development and poverty alleviation. Nowhere is that apparently more evident than in China (Krugman & Obstfelt 1991; Wei 1993; Ge 1999; Park 1997), India (Kundra 2000; Leong 2007) and in the Asian Tigers (World Bank 1993). That is why the focus of this study is SEZs in Asia.

The purpose of this research project is not to dispute the efficacy or lack thereof of SEZs as a tool of liberalization, economic development and poverty alleviation. That has been done elsewhere, especially in relation to SEZs in China (World Bank 1994), Eastern Europe (United Nations 1991), China and India (Leong 2007). Devereux and Chen (1995) summarize the literature while arguing that it does not provide useful general insights owing to the heterogeneity and disparity of the zones studied. For the seminal article on the welfare effects of SEZs, see Hamada (1974); and for a favourable modeling framework, see Schweinberger (2003).

But given that SEZs are proliferating, and given the competition between countries to attract foreign investors, and the proverbial ‘race to the bottom’ (Louis Brandeis in the 1933 case, Ligget Co. v. Lee (288 U.S. 517, 558-559), the question is, has the time come to regulate SEZs? In other words, should the current framework for International Investment Law be improved or some other forum founded to accommodate the regulation, accreditation or certification of SEZs in order to ensure their accountability and economic, environmental and social sustainability?
The revenue of many MNEs is huge in relation to the national income of the host countries in which they do business. Thus it is not always easy for host countries to enforce national or local laws on MNEs or huge domestic companies. Striking a balance between what governments and civil society want from companies and what companies want from host countries in the context of a highly competitive world market is not an easy proposition. And there are also other stakeholders, who must be appeased. Who are the stakeholders and what are their roles and expectations in the arena of SEZs?
These and other questions around the accountability and sustainability of the SEZ concept and practice provide a rare opportunity for organizing a dialogue between scholars working on similar themes. The first conference will be held at Kyushu University, Fukuoka in Japan, from 14-15th, February 2009. The purpose of the Kyushu conference is to identify the key stakeholders in SEZ practice and attempt to uncover their roles and expectations regarding law, policy, regulation, sustainability and outcomes in relation to SEZs.

It is hoped that the Kyushu conference will be the first step in a series of workshops, research papers and multi-disciplinary dialogues which might well culminate in a formal proposal for certification or international regulation of SEZs.