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    An Update On Special Economic Zones in Bangladesh

    LightCastle Analytics Wing

    Special Economic Zones (SEZs) play an important role in the quest for economic growth. Their primary objective is attracting foreign direct investment (FDIs), generating employment, implementing economic reforms and experimenting with new policies. The actual number of economic zones in Bangladesh is in contention. However, as per data from Bangladesh Economic Zones Authority (BEZA) ,at present, there are a total of 88 economic zones across the country, of which 59 are government-owned and 29 are privately owned.[6]

    China is often cited as the most successful country in making an export-led growth strategy work through SEZs.[1] However, SEZs are often criticized for not uniformly distributing the benefits of economic growth across the country. In essence, their role in addressing regional disparities is now a topic of contention.1 As Bangladesh ramps up its development agenda, SEZs will soar in prominence as the government has announced its plans to establish a total of 100 SEZs by the year 2025.

    Economy of Bangladesh

    Sources: Asian Development Bank; Bangladesh Bank; Bangladesh Bureau of Statistics; United Nations Conference on Trade and Development
    GDP Growth Rate (FY2018-19) 8.13% Investment Contribution to GDP (FY2018-19) 31.23%
    GDP Per Capita Income $1,827 FDI Inflows (2018) $3.61
    Inflation Rate 5.6% Remittance Inflows (FY2018-19) $16.42 billion

    SEZs Boost Economic Growth in Bangladesh

    The Bangladesh Export Processing Zone Act of 1980 was aimed at spurring trade and industrialization by creating employment and attracting investment from overseas. It led to the creation of the semi-autonomous Bangladesh Export Processing Zones Authority (BEPZA). The Authority leases land to industrial tenants across the country, the bulk of which are from the apparel industry, otherwise known as the Ready Made Garment (RMG) sector.[2] The zones offer various benefits to investors such as tax holidays, duty-free imports and tax-exempt dividends. The zones also offer additional support to investors which helps them navigate through the local bureaucracy when it comes to doing business.[2] According to BEPZA, in the two decades until 2017, EPZs brought in $4.3 billion of investment and contributed $59.4 billion to export earnings (19 percent of the total export revenue in 2017).[2] The government is now planning to move away from the EPZ model due to its weaker domestic linkages. Instead, the current goal is to bring in more private participation within developing regions.[2]

    The Bangladesh Economic Zone Act and Hi-Tech Park Act of 2010 led to the creation of two semi-autonomous agencies–Bangladesh Economic Zone Authority (BEZA) and the Bangladesh Hi-Tech Park Authority (BHTPA). With overlapping mandates, these two authorities have been tasked with overseeing the expansion of special economic zones and hi-tech parks respectively.[2] They operate under different regulations from that of BEPZA and promote production that is aimed both at domestic and foreign markets. BEZA has been tasked with overseeing the establishment of 100 economic zones by 2025.[2] BEZA also differs from BEPZA in terms of its ownership structure. Whereas EPZs are owned publicly, BEZA and BHTPA would rely primarily on private capital and expertise to both build and operate these new zones.[2]

    SEZs Can Help Address Regional Disparities

    A number of reasons can drive regional disparities. Differing socio-economic outcomes by region can be predicated upon the historical legacy, the availability of natural resources, vulnerability to natural disasters, state of human capital and the condition of the local political economy.[1] Two leading explanations behind regional disparities include “the backwash effect” proposed by Swedish economist Gunnar Myrdal and “the new economic geography” model developed by Nobel Memorial Prize-winning American economist Paul Krugman.[1]

    • The Backwash Effect: Myrdal describes the backwash effect as the process of wealth relocation from less advanced regions to the central region. He argues that regional differences were the natural outcome of economic development and the conclusion of market forces that interact with initial locational conditions. His theory proposes that economic development begins in a region due to certain inherent locational advantages that the region offers such as an abundant supply of raw materials.1 This phenomenon then initiates a snowball effect, a process of cumulative causation by which more human capital and physical capital along with investment to gravitate towards this center.[1]
    • The New Economic Geography: Krugman adds a new perspective to the question of regional disparities. Using his “core-periphery” analytical framework, Krugman demonstrates how clustering forces create an uneven distribution of economic activity and income across regions.[1] Essentially, when economic incentives to set up production interact with regions with inherent locational advantages, economic activity concentrates there and scale economies start to develop. His analysis shows that when scale economies are present in production, regions–and even countries–may become locked into disadvantageous patterns of production. This is the result of the interaction between increasing returns, costs and factor price differences in these production centers. When scale economies are a major factor, regions with greater economic activities yield more returns and therefore attract more firms and producers. The net result is that production concentrates in only a few regions, or countries.[1]

    Special Economic Zones can be a useful tool in tackling regional disparities and promoting regional development via what is known as the “spread effect”.[1] Establishing SEZs in lagging regions–which are primarily from the western parts of Bangladesh–is an important first step towards bridging regional disparities. However, the benefits offered by SEZs in these lagging regions should be sufficiently more attractive than elsewhere to investors in order to overcome any locational disadvantages endemic to the area.[1] Bangladesh’s policy aims to add another $40 billion of exports from the SEZs. However, based on simulations by The Asia Foundation, these export earnings will concentrate in the better-off Dhaka and Chittagong regions. Additionally, their simulations also suggest that SEZs in lagging regions will have strong impacts on employment generation, especially for women.[1]

    Recent Developments

    24 new economic zones are set to be established of which 11 were inaugurated by the Prime Minister earlier this year.[3] These new zones fall under 65 new uplift schemes designed to further boost economic output in the country. The 11 inaugurated zones include Mongla Economic Zone at Mongla in Bagerhat district, Meghna Economic Zone and Meghna Economic Industrial Economic Zone at Sonargaon in Narayanganj, Abdul Monem Economic Zone at Gazaria in Munshiganj, Bay Economic Zone at Gazipur Sadar in Gazipur, Aman Economic Zone at Sonargaon in Narayanganj, City Economic Zone at Rupganj in Narayanganj, Kishoreganj Economic Zone at Pakundia in Kishoreganj, East West Special Economic Zone at Keraniganj in Dhaka, Karnaphuli Dry Dock Special Economic Zone at Anwara in Chittagong, and Sreehatta Economic Zone at Moulvibazar Sadar in Moulvibazar.

    Of particular interest is the Mirsarai Economic Zone, which is currently under construction. This is set to be largest industrial enclave in Bangladesh, aiming to bring in employment for 1.5 million people within the next 15 years and generate $15 billion of export earnings.[4] In addition to being the largest industrial enclave, it is also the first multi-sector economic zone in the country.

    A number of major local and foreign enterprises have expressed their eagerness to invest in the economic zone. Of note is BGMEA (Bangladesh Garment Manufacturers and Exporters Association), who have proposed to invest $2 billion to set RMG accessories factories at this park in order to generate employment for 500,000 people.[4] Kunming Iron & Steel Holding Company Limited, a state-owned Chinese company, is planning on investing $2.13 billion in order to set up the Iron and Steel Industries Park.[4]

    Challenges

    Despite the benefits they offer, SEZs and EPZs also pose some challenges that need to be overcome to fully utilize the potential these industrial enclaves offer. Some of the major challenges include the following:

    • The large number of public agencies with overlapping mandates make it difficult for foreign investors to navigate through the bureaucratic environment of Bangladesh.[2]
    • Apart from BEPZA, which has over 40 years of experience, all the other agencies tasked with the expansion of industrial infrastructure are young institutions that have not yet developed sufficient technological capacities to address all the needs of infrastructural expansion. Political interference in site-selection also poses a threat to investment decisions.[2]
    • Social and environmental safety standards are another key area of concern.[2] Apart from the famously poor safety standards of Bangladesh, climate change is now posing a serious threat to SEZs. As many zones are located near rivers due to scarcity of land, the destructive forces of the ongoing climate crisis on rivers is threatening the security of these SEZs.

    The Way Forward

    While there are certainly issues that need to be addressed if SEZs are to play the role they are meant in the context of the national economy, a number of key steps must be taken to address these points as well as build upon the existing positives. These steps can be enacted through sound policy-making and efficient legislation.

    Short Term Policies

    1. It is imperative to establish an internal task force with handpicked experts from international backgrounds who will be tasked with reviewing and assessing the performance of these various public agencies such as BEZA and BEPZA. By monitoring performance, wasteful investment decision making can be mitigated.[2]
    2. An environmental panel needs to be established to help bring in more effluent treatment plants and other environmental infrastructure to the right places with proper financing.[2]
    3. The incentive structure across SEZs needs to be standardized to create a level playing field where applicable, and certain SEZs need to be furnished with more enticing benefits so as to facilitate regional economic development and bridge regional economic inequality.[2]
    4. SEZs need to be equipped with efficient sea and land ports in order to effectively establish more efficient trade routes, and hence bring down logistic costs.[7]

    Long Term Policies

    1. Policies need to be tailored so as to integrate SEZ development plans with national strategy to build better infrastructure, facilitate skills transfers, and human resource development.[2]
    2. Review and revise the regulatory environment and the roles adopted by major public agencies such as BEZA, BEPZA and BHTPA in order to create synergies between them.[2] This would result in a joint vision shared by these authorities and would establish clear operating guidelines so as to avoid duplication of effort.[2]
    3. The aforementioned public agencies need to be granted full autonomy when it comes to their HR policies which is separate from those set up by the government. This will enable to freely recruit and fill positions with motivated technical personnel with the appropriate expertise in their respective fields.[2]
    4. A greater emphasis needs to be placed on export diversification in order to move into higher value goods, leading to a structural transformation of the economy.[7] This can help future-proof the economy when automation eventually takes over apparel manufacturing in export destination markets.

    Conclusion

    Special Economic Zones have established themselves as a stepping stone for economic prosperity and a cornerstone in the larger scheme of Bangladesh’s development agenda. While there exists much to be desired in terms of their role in addressing regional disparities, their role in boosting the economy cannot be denied. In order to further solidify their role in promoting economic growth, SEZs should focus on a few key things: focusing on developing strong and up-to-date infrastructure should be a major priority; in addition, SEZs should pay attention to improvements in business technology and infrastructure across other SEZs in the nation; all SEZs should be sufficiently equipped with appropriate technical capabilities.

    Also, the zones need to be connected to efficient sea and land ports. Port infrastructure plays a vital role in ensuring SEZs fulfill their objectives. Lastly, SEZs should also place special priority on export diversification, which ties in with a greater strategy to structurally transform the economy and move into producing high value goods.[7] If these points are addressed, Special Economic Zones should be well poised to set Bangladesh on a trajectory of rapid economic growth and into an ever more prosperous future.

    Shahreem Ahsan, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]

    References

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.