Special Economic Zones (SEZs) began acquiring prominence in the 1960s at a time when protectionism was the norm, global trade was barnacled with barriers, and in most countries, industrialization was often hamstrung by bureaucratic red tape. Because abolishing the many impediments in one go was deemed impossible, policymakers attempted to sidestep the many political and institutional obstacles by carving out enclaves subject to a different system of rules. It was rightly assumed that by pruning the regulatory rent-generating thicket and easing the weight of taxes and tariffs in these locations, foreign investors would be attracted, and they in turn would stimulate domestic business activity. This worked for the early movers but in the decades since, economies have opened up and the developmental landscape has changed enormously. However, countries developed and developing continue to bet on SEZs to improve their industrial prospects. The question is why. The answer presented in this note is that they are a handy and politically expedient instrument of regional and industrial policies, and too often, countries continue to establish zones although they have ceased to deliver the outcomes they once may have done in a few East Asian countries.
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