SEZ numbers game: The US and Chinese models are better

The 46 new special economic zones (SEZ) cleared by the government
takes the total to 150, the ceiling set by the empowered group of
ministers. The government is still to decide on the many remaining
proposals. A major fear is that unrestricted entry would lead to large
revenue losses. Concerns also arise about processing area norms,
directly related to export production, which is just 35% of the total
area. This would mean a large part of the zones is used for physical and
social infrastructure, mainly townships, houses, educational, health and
recreational facilities, whose real estate potential can side-track
export promotion aims. And so it would do no harm, as we have argued
earlier in this column, to re-assess the SEZ route to export
competitiveness.
But if boosting SEZ numbers and exports remains the best option, there
is no point in dallying and laying down arbitrary norms, with no
economic rationale, on the number of zones. Policy aims would be best
served if the government lays down the broad guidelines, like land area,
minimum investments and export norms, and leave the rest to market
forces. And we have some attractive models to choose from the global
experience. On one side is the regulated United States model, which lays
down broad criteria that help restrain numbers, but also allows adequate
flexibility. Called free trade zones, the US allows only one in each
port of entry, and any additions require applicants to justify the need
in terms of the local economy and overall development objectives. Even
sub-zones are allowed if applicants prove a substantial public benefit.
This has helped the US to restrict the numbers to around 250, even while
ensuring that new viable zones do come up irrespective of earlier caps.

On the other hand, we have the much more liberal Chinese model, which
pushed up the numbers from a handful of zones in the 80s to more than
4,000 in recent years, including national, provincial, prefectural and
city-level SEZs, creating severe regulatory problems. The boom was so
intense that it even led to rampant growth of illegitimate SEZs, without
proper legal authority, forcing the government to cull the numbers by
half. India would do well to choose between these models, which avoid
any arbitrary number fixing and provides enough opportunities to new
investors with viable projects. Frame a few broad guidelines and leave
the rest to the market. Else, it will only take us back to the licence
raj era, with all its irrationalities and rent-seeking.

http://www.financialexpress.com/fe_full_story.php?content_id=138187