Economic zones: a quick fix?

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The author holds a PhD from Massey University, New Zealand. He teaches at Malakand University.

Industrialization, particularly the development of Special Economic Zones (SEZs), has become a buzzword lately. Under the CPEC, Pakistan has prioritized 10 SEZs including Rashakai and Mohmand in Khyber Pakhtunkhwa (KP), Faisalabad in Punjab, Bostan and Gwadar in Balochistan, Port Qasim and Dhabeji in Sindh, Mirpur in Azad Jammu and Kashmir (AJK) Moqpondass in Gilgit -Baltistan (GB) and ICT Model Industrial Zone in Islamabad.

CPEC investments in transport infrastructure and industrialization in SEZ are expected to lead to technology and skills transfer, job creation, trade promotion and poverty alleviation in the long term. Should we be optimistic that industrialization and special economic zones will achieve the desired results and transform the country’s industrial prospects? What has Pakistan learned from its own political economy of industrial development? Is the development of SEZs really a panacea and can this SEZ experiment simply be repeated in the country with the expectation that it would bear similar fruits as in other successful economies?

Pakistan’s past experiences with industrial areas provide some interesting insights. There are a total of 71 business parks across the country, including 11 in Khyber Pakhtunkhwa, 26 in Punjab, seven in Balochistan and 27 in Sindh. Despite being part of the same institutional and managerial environment and work culture, some of these business parks have fared quite well, while others have faced multiple challenges, leading to the closure of numerous ‘sick’ units.

For example, if Faisalabad, Sialkot and Gujranwala are examples of successful industries, Gadoon Amazai in Swabi, KP is one of the famous examples of a failed industrial area. The Gadoon Amazai Industrial Zone was established in 1988 to create employment opportunities and bring socio-economic development to an area popular for poppy cultivation. It was a thriving industrial area that attracted investments of over US$53.83 billion.

There were over three hundred functional industrial units, which simultaneously employed 14,843 people. However, when the then newly elected government withdrew the incentives in 1992, over a hundred units were shut down, leaving over a thousand people unemployed. The zone had no access to major cities and lacked infrastructure and other Allied facilities. Therefore, high transportation costs and other expenses made companies less profitable after the incentives were withdrawn. A comprehensive qualitative and quantitative analysis of the success and failure factors prior to the initiation of new business parks and SEZs under CPEC is crucial.

At the time of independence, Pakistan lacked a robust industrial base as the country inherited only 34 industrial units out of a total of 921 industrial plants operating on the subcontinent. To encourage post-independence industrialization, the government established Pakistan Industrial Finance Corporation (PIFC), Pakistan Industrial Credit and Investment Corporation (PICIC), and Pakistan Industrial Development Corporation (PIDC).

The government offered incentives to industrialists, including differentiated tariffs, overvalued exchange rates, and a substantial amount of credit at subsidized interest rates. These policies paid off as the manufacturing sector’s share of GDP rose from 6.9 percent in 1950 to 11.9 percent in 1965. The pace of industrialization was slowed in the early 1970s by nationalization (34 major industrial units were nationalized) and politics affected instability and the debacle of East Pakistan.

According to one study, the industrial growth rate declined from around 11.9 percent in the 1960s to 2 percent in the 1970s due to nationalization. Since then, the role and performance of the industrial sector has remained lackluster and patchy due to various factors including political instability, inconsistency of government policies, unavailability of quality hard and soft infrastructure, lack of good governance and the rent-seeking approach of industrialists/investors.

Pakistan can reap maximum dividends from industrial zones and SEZs provided it carefully implements industry and SEZ policies in the right context and in the most appropriate locations. This careful implementation requires a thorough understanding and determination of the key success factors of the particular areas in which these SEZs are to operate. To this end, an analysis of provincial-level industrial production provides a thought-provoking scenario. For example, Faisalabad’s contribution to Punjab’s total production is 14 percent, which is only three percent less than Lahore’s contribution (17 percent). The four districts of Karachi (Centre, East, West and Malir) contribute 71 percent of Sindh’s total production.

KP’s industrial production is even more curious, as data shows that Haripur produces three times more than Peshawar (33 percent vs. 11 percent). At the same time, food and beverages (41 percent) and non-metallic mineral products (25 percent) account for more than 65 percent of Haripur’s production. Nowshera, where a 1,000-acre Rashakai Priority Special Economic Zone is being developed, produces 27 percent of KP’s total manufacturing output, of which 95 percent is accounted for by the two industries of “food and tobacco” (76 percent) and “non-metallic mineral products.” (19 percent). According to its website, the Rashakai Special Economic Zone aims to develop clusters including “processing and manufacturing, home appliances, pharmaceuticals, home building materials, automobiles and parts, agriculture and horticulture, and wholesale markets/specialty mills” (it likely wants to list as many products as possible, regardless of the comparative advantage of the area).

In Balochistan, only Lasbela accounts for 87 percent of the province’s total industrial output. These statistics speak volumes about the leading industrial production centers in each province. Because some districts are part of the same institutional framework, they exhibit much better industrial functioning than others, indicating that the success or failure of industrial districts is a complex phenomenon that needs to be thoroughly studied before SEZ planning.

While each country has its own unique characteristics and one should not blindly follow a one-size-fits-all approach, some lessons from international practices can be recognized and appropriately tailored to a particular country’s specific needs and circumstances. In this context, a detailed study on Special Economic Zones entitled ‘If Africa nests, will the birds come? Comparative Study on Special Economic Zones in Africa and China’, provides some recommendations applicable to Pakistan.

Based on a comprehensive assessment of SEZs in China and three African countries – Ethiopia, Nigeria and Zambia – the study claims that governments and SEZ developers in these countries have encountered similar challenges, such as in relation to creating links with the local economy.

The study suggests that it is crucial to ensure high-level political commitment and support for effective inter-ministerial cooperation; integrate SEZ programs into national development strategies and plans; and ensure sufficient funding for infrastructure development inside and outside the SEZ prior to SEZ approval. Similarly, it has recommended providing incentives for establishing joint ventures between foreign SEZ companies and local companies.

Also, concrete efforts need to be made to respond to the labor needs of the SEZ by aligning the curricula of universities and Technical Vocational Education Institutions (TVET).

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