Special Economic Zones were introduced in India in the year 2002. Being involved with feasibility and planning studies of few Special Economic Zones (SEZs) and experiencing the not so encouraging interest of private developers for investing in SEZs, I wrote an article in that year indicating that the much hyped dream of making SEZs a success story may prove to a bubble (that has burst!).
Three year later in 2005, SEZs are again in the news and this time not as a bubble but as a reality with a different flavor and economic connotations. The renewed interest of corporate houses in setting up SEZ has insinuated me to write again about SEZs and sustainable economic value created by such zones.
The Concept of Sustainable Value
Every product or service has a sustainability impact. The aim of product developers should be to maximize the Sustainable Value embedded in the product, and minimize the negative impacts. Strictly speaking one cannot have a sustainable business or product, in an unsustainable world but the business entity will have to define and understand its context, and explore strategies to maximize Sustainable Value. Each infrastructure or service should be designed to satisfy a human need.
Traditional marketing focuses on the ‘customer’, however various stakeholders have a relationship with products or services, e.g. Suppliers have a social and economic stake in the process through employment and profitability. What individuals buy, in reality, are not only the function but also all the processes used to deliver that product or service. These hugely complex relationships and issues are involved in the process of delivering sustainable products or services or Sustainable Value.
In the context of sustainable value creation, there has generally been recognition of three aspects of sustainable development.
An economically sustainable system must be able to produce goods and services on a continuing basis, to maintain manageable levels of debt, and to avoid extreme sectoral imbalances, which may damage agricultural or industrial production.
An environmentally sustainable system must maintain a stable resource base, avoiding over-exploitation of renewable resource systems or environmental sink functions, and depleting non-renewable resources only to the extent that investment is made in adequate substitutes. This includes maintenance of biodiversity, atmospheric stability, and other ecosystem functions not ordinarily classed as economic resources.
A socially sustainable system must achieve distributional equity, adequate provision of social services including health and education, gender equity, and political accountability and participation.
SEZs and Creation of Sustainable Value
The purpose of the special economic zones is conceived to be acceleration of economic development in a part of the country, mainly owing to external strategic investors, particularly by the realization of any one or all of the following objectives:
Development of a certain field of economic activity,
Development of new technological solutions and their use in national economy,
Development of export base,
Increasing competitiveness of products and services,
Making use of already existing industrial and economic infrastructure,
Creating new jobs,
Making use of natural resources with respect to natural environment.
The specified objectives of special economic zones suggest that the zones should be, on the one hand, an instrument of industrial policy and, on the other hand, a significant instrument of regional policy. One of the main objectives of the SEZs is to restructure the old industrial set up of the hinterland and to attract new entrepreneur with liberal laws. The above objectives indicate towards the creation of sustainable economic value in the economy in order to achieve higher levels of development and human welfare.
Special Economic Zones in India can be interpreted as possible catalysts for transition from a planned to market economy. The catalytic role of SEZs has two facets. First, SEZs positively contribute in achieving the objective of export led growth by facilitating the inflow of foreign direct investment (FDI) in the country. As one of the central problems of developing economies is lower level of investment, today, in their pursuit to pick up the investment in the economy, these countries are trying to lure the foreign direct investors through various incentives. SEZ is a concept in this direction. SEZ being conceptualized on an integrated format helps in attracting large amounts of FDI. Simultaneously, domestic investment also gets attracted to the SEZs. The renewed interest of big business houses of India in SEZs is an indication to it. Increased investment activity results in more economic value addition and output in the economy upfront as well as through multiplier mechanism.
Second, for the Northern and Central States of India that are lagging behind the coastal states in terms of industrialization as well as investment (including domestic and FDI) and resulting low growth in State Domestic Product, SEZs may play the role of catalyst to reverse this trend of economic slugging in these States.
SEZs are conceptualized to have a diversified bundle of economic activities spanning from services to various industry verticals and even more diversified individual activity components in each industry vertical having strong linkages with the existing industrial clusters in the hinterland. Such a conceptualization of SEZ fetches the following potential benefits:
Speeding up the slugging economic activity in the hinterland through strong backward linkages with local industrial clusters and forward linkages with the global markets. SEZs prove economically advantageous to all stakeholders involved- workers, firms and the region as a whole.
The local industrial clusters become good places for skilled workers. With the growth of industrial activity (induces by SEZ) in these clusters workers with relevant skills will have more opportunities to change employers and to pick jobs that suit their professional aspirations. Thus SEZs by speeding up the economic activity and resulting increase in employment opportunities leads to welfare of the workforce in the hinterland.
SEZs having interface with the global markets benefits the firms in existing industrial clusters in the hinterland in two ways. First, they generate the demand for the produce of these firms as an export plank and thus help them to benefit from the external economies emanating from the regional industrial clusters in terms of availability of a large pool of trained workers, the circulation of information through face-to-face contacts, and the existence of supporting industries. Second, they play the role of a gateway for flow of information and knowledge between global markets and local industry in the region.
The fallback of activation of SEZs and hinterland specific linkages translates in to benefits to the regional economy. Regions with industrial clusters often prosper because they attract companies from outside the region also and promote entrepreneurial activity.
SEZs are generally blamed to create imbalances in the economy and thus uneven income distribution. On the face, it may seem logical in the short run, but in the long run the development process that is speeded up by SEZs through their role as catalysts ultimately results in increased incomes and economic well-being leading to elimination of mass poverty.
SEZs benefit the society in various ways. The investment potential for SEZs is expected to create new jobs within SEZs plus the hinterland. Although, the SEZs are conceptualized as an entirely market oriented business proposition, but the economic activities in the SEZ having strong backward and forward hinterland linkages, provide an impetus to the investment and thus employment in the hinterland through investment and employment multiplier mechanism. Increased economic activity in the domestic tariff area leads to an increase in the earning per capita and thus well-being of the masses.
SEZs, having interface with the global markets, attract latest technology and business know-how. This inward flow of knowledge ultimately, percolates to the locals of the hinterland; and thus, widening their sphere of knowledge and capability that in turn translates to improved economic and social well being.
Keeping in view the increasing concerns about the sustainability of the existing production systems and the likely course of economic development on the earth, SEZs may generate sustainable value if conceptualized and planned comprehensively as a system based on sound sustainability principles encompassing economic, social and environmental sustainability. The economic activities proposed within the zones should have minimum adverse impact on the local environment and society. On the other hand, they should benefit the society in tremendous quantum. Thus, SEZs should be envisaged as a self-sustaining value creation proposition.