Please Don't Listen To What They Sez


Dr. Sorab Sadri
Research Professor
Indira School of Business Studies
Tathwade, Pune-411 033

Since the last decade there has been a lot of brouhaha in certain circles on the question and value of setting up a Special Economic Zone (SEZ) essentially in view of the (supposed) benefits it brings to the national economy. For anyone interested in sustainable business excellence the issue of SEZ needs to be squarely addressed and a candid opinion needs to be posited. Whatever be the position one takes let him/her stand up and be counted. That is what I am doing and hence this piece is so entitled.

Essentially an SEZ is an enclave within a country but treated as a foreign territory for the purpose of duties and tariffs. It was a fiscal breathing space that gave exporting bodies and industries a competitive edge vis-ŗ-vis other national industries in the first instance and localised foreign competition in the second, especially since the unit located in an SEZ does not have to pay customs duty for goods that it imports as well as it exports, or local levies like octroi on goods bought from rest of the country. By and large, SEZs tend to have more liberal trade and labour laws since direct foreign investment inflows need to be promoted and export outflows need to be encouraged. In the process a special policy and legal environment is automatically created.

Special zones for trade were allocated as far back as during the reign of Cyrus the Great of Persia and later set up by Frederick the Great of Prussia. Chanakya had advocated a variation of it in his political treatise Arthashastra, when he asked the king to make special allowances for traders who brought in revenue for the State. In the post modern era, the first recorded SEZ dates back to 1947 when industrial parks were set up to attract investment from the mainland of USA into the country of Puerto Rico. In 1960 both Taiwan and Ireland set up their first SEZs.  Quick to copy, Indian policy makers started toying with the idea of SEZs as far back as in 1965 when the Kandla Export Processing Zone (EPZ) was set up in Gujarat. Unfortunately the EPZ fell short on deliverables. However, it was only in the 1980s that the SEZs gained global currency. It was a great success in Guangzhou and Shenzhen when a socialist Peoples Republic of China (PRC) leveraged its growth in the post Mao Zedong era using SEZs. The PRC was not a democracy and could easily control labour as well as capital mobility alongside of profits and wages, which gave it an extra edge. Taking the cue from the PRC experiment, India drafted a new EXIM policy in 2000 allowing SEZs to be set up in both the private and the joint sectors. Accordingly, 8 existing EPZs were converted into SEZs and as of October 2006 some 267 SEZs have obtained formal or in-principle approval from the Government of India. Additionally, Indian SEZs will not have to pay income tax for the first five years and pay 50% of their tax liability for the next two.  A tax holiday for a ten-year period is furthermore awarded to SEZ developers under the new policy. The 2000 EXIM policy provides more sops. SEZs for IT, biotech, gems and jewellery can occupy an area as small as 35 hectares.  At least 35% of the multi-product SEZs must be used for exports purposes and adequate space for malls, hotels and educational institutions is duly provided.

On the face of it, setting up an SEZ seems to be a jolly good idea. But there is more than meets the eye if we look a wee bit deeper and sustain our critical gaze a mite longer. Is it really a panacea for India's economic ills or just another example of copycat policy?

The economic rationale for having Special Economic Zones can be traced to the theoretical debate between the strategists and the purists. In point of fact, the debate that raged in Hong Kong between Edward K Y Chen of the Hong Kong University and Sorab Sadri of the University of East Asia marked a flash point in South Asian Economic thought. (See various issues of the Bulletin de Sinologie 1989 that had carried the Chen-Sadri debate). The former maintained that export led growth was the panacea for developing economies. Chen and his epigones argued that South Korea, Taiwan, Thailand, Singapore and Hong Kong had benefited from following such a view. The latter argued that since export in international economics, was by definition, a dependent variable it could not cause growth much less lead it. Sadri and other purists had pointed out that the South Eastern Economies benefited from the US-European largesse because of cheap labour on one hand and the need to contain the spread of socialism on the other (see China Report 1993).

History testifies that such cloney capitalist states were propped up by artificially created demand that in time had a cyclic effect on growth. Sadri argued further that it was because of the dependent nature of this export, that revenue fell when Eastern Europe gave up socialism and the EEC as well as the USA diverted their attention to Europe and away from Asia. Socialism was no longer a threat and so the political-economic compulsions were different. If however, the policy were one of growth led export, development would be more stable and could be sustained for a longer time (see Asian Economic Review 1997 and 1999). The economy itself would be robust and exports would generate aggregate disposable income, which would be cyclical, and with a positive multiplier in place developmental growth would be easily achieved. It would become easier for information technology to enable manufacturing sector output for sustainable progress if the growth generated export. Countries that adopted cloney capitalism as a state policy would need a Special Economic Zone (SEZ) so that Direct Foreign Investment could be targeted to specific regions where progress was beneficial to the developing world as well as the developing world. Countries that adopted robust all round growth would have no need for SEZ.

Laxity in labour legislation is a sure-fire way to exacerbate the appropriation of surplus value. I had earlier argued that the emasculation of trade unionism and the rising levels of unemployment since 1991 have denied the industrial sector of a countervailing tendency making primitive accumulation of wealth that much easier (see Indian Journal of Labour Economics 1994). The costs of setting up SEZs at least in the immediate and short run outweigh their benefits. In the long run they divert units that would otherwise have blossomed in other geo-physical areas into these tariff free zones. This means that the possibility for an all-round development is automatically negated. Instead of moving towards excellence the twin evils of unequal distribution of wealth and incomes on one hand and the uneven development of sectors and peoples on the other will raise their heads yet again.

Let me first paint the rosy picture. On the one hand, the Commerce Ministry has estimated that the first 150 SEZs will generate Rs 300,000 crores in profits and Rs 15, 00,000 crores of turnover and 5 lakhs jobs by the end of 2007. Such exuberance needs to be tempered with restraint and caution.  Furthermore, the Ministry of Commerce has claimed that for the first 181 zones spread over 25,000 hectares no farmland has been acquired.  Now let me now paint the other side of the story.  For the next 225 zones, spread over 75,000 hectares and awaiting clearance, it is another story. Obviously sops like share-holding rights and jobs will have to be offered to the farmers. But how many of these farmers can actually work in the InfoTech and Biotech sectors is a moot point. 

Let us assume that land acquisition does take place. Then unbridled real estate development will surely follow and this means that speculative profits will far outweigh actual growth. When the Government has so far failed to control or place curbs on land usage by industrial estates, how can we expect it to regulate building houses, shopping malls and hotels in the SEZs?

On the other hand, the concept of setting up an SEZ has an implied assumption: that capital and labour mobility can be controlled as in the PRC.  In India, this is not the case and some sectors and regions may benefit at the cost of others. Unequal development is bound to occur. One cannot overlook the fact that the chief reason why nobody has been able to topple the CPM Government in West Bengal is its consistent successful and sustained land reforms policy. Land acquisition will raise sentiments and therefore not be an easy task. Unfortunately the Government of India seems to be unclear on how the land for future SEZs will be procured. Vote hungry politicians in states, at least where the right wing parties are in power, moreover, would easily scuttle the idea of land procurement and ensure that the landowners be handsomely paid in exchange for assured votes. If this means paying hand over fist just to prove a point then the problem is further complicated.

I wonder if anyone has considered how the national exchequer will bear this additional burden due to land acquisition not to mention its political fallout. One must recall that it was precisely because three successive governments at the Centre waved off agricultural loans in return for votes that India went deep into the red in 1990 and needed a bailout from the IMF that ushered in the present spate of economic liberalisation. Marx reminds us that history repeats itself; on the first occasion it is a tragedy while on the second it is a farce. What kind of history are the political economic planners in New Delhi playing at writing?

Perhaps the Finance Ministry will be left with little option but to increase the tax burden on the rest of India just to give SEZs a tax holiday. This will further disequilibrate the economy. Contradictions moreover within the right wing political camps abound and these will no doubt stall the progress of SEZs. For instance, quite recently Sonia Gandhi made a declaration in Nainital that farmland will not be used for SEZs and soon thereafter the Chief Minister of Punjab, Amrinder Singh, stated that land acquisition was a contract to be negotiated between the farmers and the private SEZ developers.

How these negotiated free markets can work for land acquisition when in a democratic India, political parties are known to take money (as donations) from the rich only to pay for (buy) votes from the poor? State revenues will logically decline due to lower fiscal receipts, (estimated by the Finance Ministry to be a whopping loss of Rs 100,000 crores), when there will be no substantial increase in either employment or output. One shudders when one reads that India is planning to set up hundreds of SEZs in the years to come. Cloney capitalism, according this view, has perhaps come to stay. Let the protagonists of emulating the PRC example not forget that the SEZs have been set up the Government of India and will carry all the baggage of State Enterprise with it. What is the guarantee, for instance, that the lumpen bureaucracy as well as misguided political interference will not fester in the SEZs and thereby stymie any benefits that could perhaps be incurred from them?

The position I take is as follows:

  • SEZs without good governance will become venues for get-rich-quick mavericks and thereby increase the leakages from the circular flow of national income. This will defeat the very purpose for which they were set up. In fact, the concept of SEZs, if fully implemented, will retard progress instead of helping India to achieve sustainable excellence.
  • India must leverage its knowledge potential and needs so that holistic growth such that uneven development (of sectors and peoples) as well as un-equal distribution (of profits and incomes) becomes a thing of the past. In such a scenario the setting up of an SEZ is both uncalled for and regressive as it will breed uneven development and unequal distribution.
  • What India requires is a sustained growth in agricultural output since it is a sector on which 60% to 70% of the population depend. This must be supplemented by  a substantial quantity and range of competitive quality deliverables from the manufacturing sector, which can be further, enabled by InfoTech sector. SEZs have no role to play in this condition.
  • Strategy formulators as well as the strategy implementers across all sections of the economy must be empowered and accountable for projected quality and deliverables. For this to occur, good governance must be in place. If this happens India will emerge as an economic power without the accoutrement of SEZs having a competitive edge, which will be hard to beat.
  • What India needs for sustainable excellence is sound business ethics and good governance practices at the micro as well as macro levels rather than quick fix solutions like setting up SEZs.

In view of the above I firmly urge the strategists in the Government of India to stop playing copycat in respect of setting up SEZs just because the experiment was successful across the border in PRC. Explicitly I ask the macro level strategy implementers to sit up and think with a sense of historical responsibility and not get carried away by the hype created by the Ministry of Commerce and their epigones. Let them realise that China is a centrally planned socialist state in transition whereas India is a parliamentary democracy in transition, albeit both of a retarded variety. I tell them not to forget that what could be good for the goose may not be necessarily good for the gander.

Dr. Sorab Sadri
Research Professor
Indira School of Business Studies
Tathwade, Pune-411 033

Source: E-mail November 2, 2006


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