International development gains are often won when we can both reduce poverty and encourage economic growth. But what happens when one path to said growth is actively detrimental to human development?
This week, we decided to dive into the complexity of Special Economic Zones (SEZs). Often pitched as a mechanism for foreign investment, they’re seen as one avenue for economic growth and investment by marking geographical areas within a country that have different rules for business. But are they doing more harm than good? Recent reports of illegal activity bring into question their overall benefit to communities.
Sitting in this complexity, this week we asked the experts: what challenges do SEZs pose to development? Here’s what they had to say.
Countries across Southeast Asia have created dozens of essentially self-governing so-called Special Economic Zones or SEZs the past 10 to 20 years, largely around borders and ports. Initially promoted by development banks and partners to spur economic development in less developed countries, SEZs in theory are meant to attract foreign direct investment and create employment. But the reality is that many SEZs in Southeast Asia, and in particular in the Mekong region in Cambodia, Laos and Myanmar along the borders of Thailand and to a lesser extent Viet Nam, remained empty for years without investment.
In the past decade criminal organizations under pressure in Asia started exploring where they could relocate operations, in essence seeking safe havens where state interference would be minimal. SEZs in Southeast Asia and especially the Mekong fit the bill, and in 2014 there was a noticeable increase in SEZ investment, largely casinos, but also related businesses including junket operators, hotels with entertainment complexes and brothels. Some of these same businesses adapted to pandemic border closures by adopting technology and going online, and more recently some have morphed into scam operations with global reach.
In short, criminals went looking for a business-friendly environment with minimal oversight and law enforcement, and they found SEZs. And in some SEZs governments allow self-policing with private security, essentially ceding authority to enforce the rule of law at the boundaries of SEZs. At this point in time there is urgency to address the situation, and governments in the Mekong need to step-in and assert sovereignty over, and enforce the rule of law in, SEZs. Failure to so will allow criminals to continue to adapt, become more sophisticated and powerful.
Jeremy is UNODC’s representative for Southeast Asia and the Pacific, especially on matters of rule of law, non-traditional security threats, law enforcement, criminal justice and drug-related supply and health issues. He’s also liaison to China, Korea, Japan and Mongolia, Association of Southeast Asian Nations and the Pacific Islands Forum Secretariat. At the Lab we’re really impressed by Jeremy and the team’s appetite for tackling some seriously intractable issues and sharing their golden insights along the way.
SEZs pose a range of challenges to development - from breaches of labour law and rights to unionise, unequal power structures and gender inequalities, environmental issues and ‘enclaving’ (whereby the greatest beneficiaries of a SEZ are often the foreign investors (FDI) investing in the zone, as opposed to the local community around it). These are all serious and complex issues that NGOs, policy makers and campaigners have been working on for decades and will continue to require sustained and urgent action.
However, at its core a SEZ is an inherently economic strategy. Consequently, it is also vital to consider how the answer to the question changes when we add the word “economic” before the word “development”. SEZs are created to primarily attract FDI to (often low-income) countries, tap them into global value chains, enhance exports and imports, and reduce bottlenecks on employment. For many actors working under an economic framework the question quickly shifts to “what opportunities can a SEZ provide to development?”
The point is not that SEZs are a fool proof economic strategy (a debate in itself), but that there is a disjunction between these two framings of SEZs – in research, policy making and public understanding. In my own research, I examine increasing examples whereby SEZs are being reframed as a strategy to lead to the Sustainable Development Goals thus ostensibly building a bridge between these two frameworks.
Indeed, in the context whereby SEZ popularity in low-income countries is increasing, especially along the Belt and Road, and in a rapidly changing and “financialised” political economy of development, conceptualising SEZs as inherent challenges to development is not incorrect – but also not pragmatic. Millions of individuals work in SEZs globally, with over 50% and up to 90% normally being women. Instead, we need to critically engage with SEZs and reflect upon the reasons they exist. Indeed, let us not forget that we are inherently tied to SEZs as consumers ourselves - with high-income countries like Australia often providing the export markets for SEZs in the first place.
Hannah is conducting research on the impact of the Belt and Road Initiative, the ‘Second’ Global Cold War and competition for infrastructure financing in Special Economic Zones in Cambodia. Also affiliated with the Global Development Institute and working at the Australian International Development Network, the Lab is stunned by Hannah’s round-the-clock contributions to insight and best practice in development sector.
SEZs are designed to stimulate trade, attract investment and create jobs by providing tax incentives, trade benefits, deregulation and other investment privileges. However, it is becoming increasingly clear that they also facilitate organized criminal activities by offering the space to generate and launder illicit proceeds in a multitude of ways, thereby undermining development. The lax regulatory oversight within SEZs makes the zones hubs for illicit activities such as the manufacturing of counterfeit goods; the trafficking of drugs, drug precursors, flora and fauna; tax evasion, and money laundering. In Southeast Asia, SEZs have also been linked to so-called cyber-scam operations, with tens of thousands of victims being trafficked into these areas and forced to operate online scams.
SEZs, particularly those linked to major infrastructure investments, do not operate in isolation. Illicit trade and associated webs of corrupt and criminal networks can have profound ripple effects, leading to a more significant cross-border threat in terms of enabling criminal activity. The situation is made more acute as some SEZs are treated as ‘lawless zones’ where national governments may decide not to exercise authority and, as a result, there is little to no cooperation between the zone, and customs and law enforcement authorities.
It is time to question the long-standing belief that increased oversight and streamlined economic efficiency cannot go together, and to take a closer look at SEZs and whether they have a net benefit to development. This needs to be combined with more political will to take on illicit activities in and around SEZs.
Kristina works at GI-TOC conducting research on organized crime and corruption in the Asia-Pacific. She’s particularly interested in illicit financial flows, money laundering and how to foster civil society resilience against organized crime and corruption in the region. At the Lab, we first met Kristina while working in Bangkok and we were blown away by her cut-through analysis of transnational crime.