Thursday, March 3, 2016

The CEZs will be no different

Preferential treatment industrial enclaves like Export Processing Zones (EPZs) and Special Economic Zones (SEZs) have been a staple of industrial and export promotion policy in India for decades. The Business Standard has an unflattering assessment of their legacy,
A CAG report in 2014 sampled 152 SEZs and found under-performance on targets in exports (ranging from 46 per cent to 93 per cent), employment (ranging from 65 per cent to 96 per cent) and investment (ranging from 24 per cent to 75 per cent). In case of exports, the CAG reported that there is a shortfall of almost 75 per cent in actual exports (Rs 100,579 crore) vis-a-vis projected figures (Rs 395,547 crore) in 84 developers/units in nine states between 2006-07 and 2012-13. Land appeared to be the most crucial and attractive component of the SEZ Act. Of 45,635.63 hectares notified for SEZ purposes, operations commenced in only 28,488 ha (62 per cent). Around half of the land allotted remained idle despite approval in 2006. The CAG observed that SEZs in India took tax concessions worth Rs 83,104 crore between 2006-07 and 2012-13. Further, a ministry of finance study estimated the loss from tax holidays granted to SEZs between 2004 and 2010 at Rs 175,487 crore.
The latest repackaging of clusters comes in the form of the proposal to create mega Coastal Economic Zones (CEZs) to promote industrial export growth. But the paper's prescriptions to improve effectiveness and increase the output of CEZs is unlikely to make much difference. This is because, fundamentally, SEZs and similar enclaves in India are marketed (by governments) and perceived (by businesses) as fiscal concession zones instead of reform zones which can be scaled across the zone borders. And such fiscal concessions can impact, and that too marginally, only already planned investment decisions, most often inducing them to shift to these zones. Rarely do businesses make new investment decisions because an SEZs has come up. 

In fact, there is a rich body of research surrounding such clusters which find that their success depends primarily on unique geographical and other locational advantages rather than conscious policy decisions. Accordingly, policy making to promote industrial clusters in developed economies, with its logic of economies of scale in backward and forward linkages and informational spillovers, may be another classic example of logical consistency conflicting with real world evidence. 

In his recent book, Other People's Money, John Kay highlights the difficulty of replicating economic clusters by examining the growth of the three main models of start-up/SME financing – the Silicon Valley VC-based financing, mainly focused on IT and technology services; the local bank finance based German Mittlestands; and the Israeli relationships based electronics SMEs. Each, he says, is the result of “particularities of history, culture, and environment which are probably irreproducible elsewhere”. This, coupled with Ronald Coase and Ning Wang's excellent refutation of the top-down Chinese SEZs growth narrative, hold compelling arguments against pitching industrial policy around cluster-based investments and growth. It is difficult not to agree.

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