Special economic zones can be a driving force for increased trade, investment and economic reforms in Asia at a time the region is experiencing a slowdown in trade, the Asian Development Bank said in a report Tuesday.
The Manila-based multilateral bank said in its Asian Economic Integration Report this would be possible, if the right business environments and policies were put in place.
The report examined current trends in trade, finance, migration, remittances and other economic activities in the region, with a special chapter on the role of SEZs.
“The expansion in the number of SEZs from about 500 in 1995 to over 4,300 in 2015 shows the strong and rising interest to this form of policy experiment, though the success record is somewhat mixed,” ADB chief economist Shang-Jin Wei said.
“If designed right, SEZs can become drivers for increased trade, foreign direct investment and better economic policymaking and reforms. Moreover, as countries develop, areas with SEZs can be transformed from mere manufacturing sites to hubs for innovation and modern services,” he said.
The report said in the case of the Philippines, special economic zones accounted for 15 percent of FDIs, 73 percent of exports and 2 percent of employment.
“The Philippines has been able to attract FDI in its zones, but still needs to enhance benefits of technological spillovers and agglomeration—especially since enacting its more comprehensive 1995 SEZ policy,” it said.
“In general, the success in Asean has been relatively limited from a lack of linkages to the wider economy. There is a risk that the footloose investment these economies attract might move to other economies which have natural advantage in these activities. This calls for strong state support in boosting domestic capabilities,” it said.
ADB said the establishment of export processing zones in the Philippines such as the Bataan Processing Zone, the Foreign Trade Zone Authority, the Cavite Export Processing Zone, the Mactan Export Processing Zone and the Baguio City Export Processing Zone encouraged FDI flows despite import-substitution regime.
It said the share of the Philippines’ EPZs in attracting FDIs and in merchandise exports grew considerably.
“However, expansion was horizontal rather than vertical. The Special Economic Zone Act of 1995 created ‘eco zones’ to be managed by the new Philippine Economic Zone Authority and expanded incentives offered to foreign investors—shifting focus away from government-developed EPZs to private industrial zones,” ADB said.
“Peza data show steady increases in investments, exports, and employment; although there remains a lack of vertical expansion—as the country increasingly relies on low- to medium-end services,” it said.
The report also found that in developing Asia, countries with SEZs attracted significantly more FDIs, with the existence of SEZs corresponding to 82 percent greater FDI levels.