Myanmar, for the better part of the past 50 years, has been better known for its stoic military leaders and its retrogressive economy, which developed into something of an anomaly in south-east Asia. Having been in the doldrums as recently as 2008, with a GDP growth of just 3.6% in a region that grew by 6% in the same year, according to the International Monetary Fund, the country was largely seen as a pariah state, bypassed by investors who sought opportunities elsewhere in the Asia-Pacific region.
Free zone roadmap
Yet Myanmar’s unprecedented move to jointly launch a special economic zone (SEZ) with Japan in the Yangon region this year marked a clear departure from its previous protectionist stance. The decision by the government-run Myanmar Thilawa SEZ Development Public Company to officially agree a roadmap in May 2013 for what will be the country’s newest SEZ suggests that free economic zones will be a significant part of the government’s reform agenda.
Since Myanmar president Thein Sein entered office in 2011, the country's government has set about accelerating its growth by attracting private enterprise. As such, the Thilawa SEZ will be crucial in counteracting negative investor preconceptions about doing business in the country by offering foreign businesses in the SEZ the much-needed infrastructure and legal protection that are absent in its wider economy. Market-oriented initiatives such as this SEZ, which will expand the country’s high-tech, textiles and manufacturing industries, also prompted the Asian Development Bank to predict a GDP growth of 6.5% this year for Myanmar.
For Dan Griswold, the president of the US National Association of Foreign-Trade Zones, free economic zones historically have been viewed as a strategic way to accelerate development. As a result, frontier markets are increasingly using them as a platform to attract FDI. “Free-trade zones are a valuable development tool globally,” says Mr Griswold. “They allow governments to create an inviting platform for companies that want to move goods in and out of the country, and in some cases to get around domestic regulations that otherwise stifle free enterprise.”
Myanmar’s shift in many ways replicated North Korea’s decision in June 2011 to jointly launch a free economic zone with China to boost FDI into the country. Located near its border with China, in the Hwanggumphyong and Wihwado islands, this economic zone was developed as a visa-free zone for foreign investors, offering prospective companies preferential treatment in the payment of tariffs, taxes and land use. According to analysis and research journal East Asia Forum, China has already invested $3bn in developing port facilities and roads in North Korea’s Rason Economic and Trade Zone, so is expected to also funnel significant amounts of capital into this new zone.
The cases of Myanmar and North Korea illustrate that free economic zones have become popular for regimes that wish to attract FDI, yet are reluctant to make sweeping political or financial concessions. Emulating China, which initially used its free zones in the 1980s to gradually reverse its economic isolation, both countries have looked to lessons from China’s past to lure new investors.
Free economic zones have also become popular among low-income economies that lack the capital to develop countrywide infrastructure to support local and foreign business operations. Investing in a smaller, geographically delineated area, and providing a one-stop shop to service a business’ administrative requirements, has become a popular instrument for growth.
Pointing to Africa in particular, Juan Torrents, president of Fédération Mondiale des Zones Franches, a non-governmental organisation that assists in developing free zones around the world, maintains there has been a marked increase in new free zones across the continent. “Africa [is notable] as many African countries do not have good infrastructure. A free economic zone project, near a port or an airport, is the best and probably the only option to attract FDI,” he says.
The Kigali SEZ (KSEZ), which was launched in April this year, demonstrates how the small, landlocked country of Rwanda has worked to diversify its agricultural base, as well as position the country as a trade and logistics hub. Lacking extensive capital reserves to finance Rwanda's infrastructure deficit, the KSEZ has formed part of the government’s efforts to develop the country’s seed and plant storage facilities for agricultural products, as well as increase its appeal as one of east Africa’s main trading points.
“This is a huge project… and the country will be able to pass on skills to our neighbours,” Alex Ruzibukira, chairman of the taskforce that implemented the project, told local reporters. “[The zone will] increase the influx of people from neighbouring countries who enter to purchase goods inside the zone.”
Botswana appears to be following Rwanda’s lead as, despite developing a robust economy off the back of its natural resources, economic diversification and job creation are pressing problems for the country. While 80% of Botswana’s exports are diamonds, diamond mining accounts for just 5% of total employment, according to intergovernmental agency the Commonwealth Secretariat. In a country with an unemployment rate of 17.6%, this is a key concern. As a result, Botswana has engaged in masterplanning its first free economic zone.
While the government is yet to announce its expected completion date, Letsebe Sejoe, the chief executive of the Botswana Investment and Trade Centre, maintains that the free economic zone, which will seek value-added FDI in the mining sector, as well as investments in manufacturing and financial services, is already at an advanced stage of planning.
“At a strategic level, [addressing] issues related to the ease of doing business has been one of the key objectives of our [prospective] SEZ,” says Mr Sejoe. “The focus also has been to try and establish other industries. So the emphasis of the new zone will lie in finding other drivers of growth to complement [the revenues] that the diamonds are bringing in.”
Employment generation will remain a prominent factor in fuelling the creation of economic zones, and as a result, Viktor Mizo, chief executive of Macedonia’s Directorate for Technological Industrial Development Zones, expects that governments will become a significant driving force in establishing free economic zones in coming years. Indeed Haiti’s decision in February 2012 to launch a free zone in Thor, close the capital Port-au-Prince, was part of president Michel Martelly’s promise to create 50,000 jobs during his five-year tenure. According to newspaper Haiti Libre, the economic zone, named Free Zone des Palmiers, will cost $8m and it is expected to develop Haiti’s textile industry, as well as generate 3000 jobs.
“Although the new free zones are a mixture of privately developed free zones and government-managed ones, it must be noted that zones will be key for governments whose main goal is to create jobs and stimulate economic development,” says Mr Mizo. “That is a relatively short-term goal, so these zones will lean towards promoting labour-intensive industries.”
In Brazil, although the decision by the north-eastern state of Ceará to develop an export processing zone (EPZ) in 2010 was also government-led, the EPZ was part of a wider initiative to rejuvenate the country’s economy, which has been stuttering in recent years. Despite ranking among the world’s fastest growing economies in the past decade, its central bank has predicted that Brazil’s GDP will expand by less than 3% in 2013. Thus, the move by the state of Ceará to launch ZPA Ceará, which is aimed partly at offsetting the economy’s deceleration by clustering specific sectors to generate FDI.
“We will develop a cluster of base industries [within the EPZ], with a refinery, steel processing and iron [refining] capability for prospective companies,” says Eduardo Macedo, the president of ZPA Ceará. “The state’s government will turn the industrial and port complex at the seaport of Pecém in Ceará into a key point for exports for steel companies such as Vale Pecém, which already operate in Ceará.”
Although the EPZ is yet to open to foreign companies, Mr Macedo is confident it will give the state a much-needed FDI boost once it is ready, given its strategic location on the Atlantic Ocean, and with its relative proximity to Central and North America. “This EPZ is an important development because of its power to attract industries to our region,” says Mr Macedo. “ZPA Ceará will be attractive for foreign investors who wish to export their goods through our ports to other parts of Brazil or neighbouring countries.”
Yet far from being a panacea, the World Bank has cautioned that the ‘build it and they will come’ assumption over SEZs will not guarantee investor interest. Pointing to the patchy performance of free economic zones in Africa, it maintains that the region’s zones have experienced difficulty in competing internationally, despite investing in infrastructure to support FDI.
Gambia’s J22 Business Park is one such case. Despite receiving $6m in infrastructure investments since its inception in 2006, the park is yet to attain the desired level of investor occupancy. “[Our] business park, originally called a free economic zone, is a mixed-use zone,” says Fatou Jallow, the chief executive of Gambia’s Investment and Export Promotion Agency. “Although with funding from the World Bank the government invested $6m to develop part of the business park, what we desired has not materialised.”
For Mr Torrents, a significant setback that free economic zones continue to face is that while governments are quick to launch them with great fanfare, a lack of ongoing support afterwards hinders the zone from developing to a competitive and world-class standard. “Unfortunately, many projects remain just that – a project,” he says. “For example, the Île Mandji project in Gabon was launched in 2001, yet nothing happened after the launch. The government still talks about it as a [prospective] project.”
Additionally, while the idea of clustering several companies from a few specific sectors sounds promising on paper, Mr Mizo maintains that in practice this can be detrimental to foreign enterprises. “If too many companies from same type of industry are set up in one particular location, those companies may run into a problem,” says Mr Mizo. “Placing companies that are fairly similar, or are competitors, next to each other is a potential drawback that every zone operator should look into.”
Yet the rate at which new free economic zones are being established seems far from abating. The Gambian government’s decision to legally enable companies to operate as standalone zones, whereby businesses are permitted to enjoy the benefits of being a ‘free zone’ entity without having to establish in the country’s business park, could enable Gambia to attract investors who wish to have a greater degree of choice over the location of their premises.
“A company can be a standalone in Gambia, as long as you meet certain criteria,” says Ms Jallow. “We believe that as time goes on, we will see more applications for standalone zones. We currently have one company that we are about to designate as a standalone zone and two others that are in the pipeline. In the next three months we will have three standalone zones.”
As the global competition between free economic zones intensifies, Ms Jallow maintains that governments will have to become more innovative in differentiating themselves. As the case of Gambia illustrates, free economic zone operators that can adapt to address individual investor requirements may manage to keep up in a race that is increasingly being crowded out by newer players.