Friday, December 28, 2007

SEZs for Sri Lanka?

I was in India when the Nandigram incidents took place, it was around March and I was traveling all over North India. At the centre of the disputew were land acquisitions meant for a Special Economic Zone(SEZ), initiated by the West Bengal State Government (controlled by the Communist Party of India - Marxist, no less) for a chemical hub by a private company. The SEZ required the acquisition of 14,000 acres (57 km²) of land mostly from Nandigram. On this particular day (March 14, 2007) there was a standoff between policemen (some of whom were CPI(M) cadres in police uniform) and the villagers, ultimately resulting in 14 people being killed from police gunfire.

My work in India required me to be away from the TV most of the time, but I did manage to catch glimpses of the unfolding story and ever since I've kept a close-eye on news about SEZs.

Now, "Export Processing Zones" is hardly anything new , even Sri Lanka has what’s known as Free Trade Zones (FTZs). They are basically a designated area where the trade barriers are relaxed – tariffs lowered, duty slashed, etc. The area generally benefits from good infrastructure and what’s called an 'enabling environment' to promote exports and attract Foreign Direct Investment.

However SEZs, experimented quite extensively in India, China and elsewhere is a bit of a different animal. First of all they tend to be huge. Shenzhen – China’s first SEZ – spreads over a land area of about 334 km², that’s roughly about 9 times the city of Colombo. India, which now has approved nearly 400 SEZs in all of its states, has allowed for sites the size of 50km² for SEZs . So I repeat, they are HUGE, often covering the size of modern day cities. SEZs, like Free Trade Zones have relaxed trade rules, except they are more relaxed...much more relaxed. SEZs in India have been declared "foreign territory" for purposes of trade, duties and tariffs. They are exempt from customs, excise, service, Sales and local taxes. Most of them are run by private companies, including some foreign-owned ones. They have duty concessions on some imports, relaxed labor laws and the state government provides such services as electricity and water. I've seen some of them, they do look really pretty. So much so that Sri Lankan companies such as Brandix have invested in some of them.

On paper SEZs looks perfect - it would increase employment, help exports, encourage investment and provide a way for companies to escape illogical tariffs and taxes imposed on them and step into the world of free enteprise. Everything is great, except for the fact that setting up a SEZ involves land acquisitions, often forced on people not willing to move out from their property. This is where it gets messy, forcible land acquisitions creates a whole host of problems - displacement, inadequate compensation, loss of livelihood for the people involved to mention a few.

These issues have made SEZs a subject of much criticism from across the political spectrum. For the people on the left, this is part of the latest Capitalist conspiracy to satisfy their greedy lust for money at the expense of the poor. For the people to the right, its a violation of private property rights (see Shruti Rajgopalan's excellent critique here)- the one thing that's so critical to the effective function of the free-market system, that people like Hernando De Soto have written books about it.

Being a student of the subject I have met many people falling into both these camps, with one the one unified conclusion - SEZs are just bad. Except of course many people I've not met, including the Times of India columnist, Swaminathan Aiyar who has argued (here and elsewhere) that SEZs could be good thing, if handled properly. He recommends leaving the residential areas intact when developing the SEZs, and making affected people equity holders of the new projects, making the villagers landlords and companies their tenants. Quite a transformation.

Although, I'd principally defend property rights, I can back Aiyar's suggestions. So can the model be replicated in Sri Lanka ? Absolutely. Especially for a president, who like to harp on development and seems to want (genuinely or not I don't know) to develop both the South (primarily Hambantota) and the Eastern province, SEZs should definitely be a development tool which needs to be explored. Both provinces have natural ports and certainly the Eastern province can use a bit of accelerated growth.

Personally, I'd prefer Free Economic Zones, that is large designated areas with much like the rules of SEZs but not necessarily a privately managed chunk of land, a Hong-Kong experiment of sorts. Designated SEZs can still exist, of course. The East (in a world where a degree of rule of law is established) would be a perfect candidate for something like this. Trincomalee port can be made into a privately owned freeport. But now I'm just taking it a bit too far.. or is it?

Related Articles :


Anonymous said...

privatizing the port is unacceptable, Mahinda Chintana is a good programme, targeted towards agriculture, why economic zone, or whatever you are talking for that? we have to help our farmer, give them good price, give them good conditions, etc. only problem is this corrupt politicians are not giving the subsidy properly, they are stealing. we have to replace it with good people.

Deane said...

Why not give it for private management.. or just slash the duties and taxes.

So many other countries have done it (including pakistan see Gwadar ), i think it was even proposed colombo was to become a free port, i dont know what happened to that.

Sure mahinda might have an agrarian agenda, but that's frankly idiotic. subsidy, price fixing is actually the problem, rather than the solution. Dream on for 'good people'.