SEZs in Myanmar should learn from international experience

A ship docks at Thilawa port. Photo: The Myanmar Times

SPECIAL Economic Zones (SEZs) in Myanmar should encourage policy experimentation and focus on tech spillovers, an economist told The Myanmar Times. By early June, 95 percent of the land plots in Thilawa SEZ zone A had been sold and the building of manufacturing plants is ongoing, while zone B is already under construction. At the same time, Dawei SEZ has been further delayed, whereas a Memorandum of Understanding (MoU) for Kyaukphyu SEZ is expected to take place very soon.

A central component of the government’s strategy, under U Thein Sein, to bolster the manufacturing sector is through the establishment of SEZs. However, so far the three SEZs have differed drastically in their progress, and in the level of controversies they have attracted.

 SEZs may have promising effects in theory, but their success as an engine of economic growth, import facilitation and as a hub for FDIs is not guaranteed. The Myanmar Times sat down with economists from the International Growth Centre (IGC) on June 19 to talk about their research on SEZs.

The IGC is a research centre based at the London School of Economics and Political Science in partnership with the University of Oxford. It is headquartered in London and has an office in Yangon. In April last year, the IGC published Special Economic Zones for Myanmar, seeking to inform decision-makers, the public and stakeholders on the potential impact of SEZs on Myanmar’s economy.

Written by Amit Khandelwal and Matthieu Teachout, the policy note examines the current state of Myanmar’s industrial sector, draws comparisons to its neighbouring countries and evaluates the use of SEZs in the country.

A key finding is that Myanmar’s economy, even relative to other comparable countries in the region, is dominated by commodity and natural resource sectors. Its manufacturing industry is characterised by low levels of productivity and attracts only a fraction of the foreign investment. Domestic businesses are less internationally engaged than manufacturing companies in other countries and face particularly high import and export costs.

The report argues that Myanmar’s SEZ policy has the potential to reduce these trade costs, trigger productivity improvements, and jumpstart manufacturing activity.

According to the IGC, three common features of successful SEZs are identified.

In the short run, SEZs should create a favourable business climate to attract international and domestic investors. The classic way to do so is to offer benefits through tax incentives, tax holidays, and drawbacks which enable businesses to import without paying duties.

Reforms such as new tax rates or labour laws can more easily be enacted within SEZs and, if evaluated and deemed successful, gradually rolled out across the country. – Cormac Mangan, International Growth Centre

In the long run, they should encourage policy experimentation, trying out rules and regulations, in order to understand which policies can best stimulate growth and be implemented beyond the SEZ. SEZs should generate externalities to justify the pecuniary incentives governments offer companies to relocate. These externalities are important for ensuring that SEZs are not isolated islands within the national economy, simply shifting employment from other parts of the country.

Cormac Mangan, country economist at IGC Myanmar, told The Myanmar Times that Thilawa SEZ has illustrated that two preconditions are essential for an SEZ to create employment opportunities and facilitate economic growth.

“Thilawa has demonstrated that SEZs can be successful and spur job creation in Myanmar contingent on two important factors.

“First, that there are strong economic fundamentals in place in terms of infrastructure, land and labour supply. Second, that the government delegates a highly skilled SEZ management team which is able to work closely with investors but also holds sway within the right government ministries.

“When developing new SEZs it’s critical that these preconditions are first in place,” he said. Another issue often missing from the discourse on SEZs, he added, is policy experimentation.

“One benefit of SEZs that’s often overlooked is that they provide a perfect testing ground for new government policies, especially in transition economies.

“Reforms such as new tax rates or labour laws can more easily be enacted within SEZs and, if evaluated and deemed successful, gradually rolled out across the country.

“In fact, if reforms cannot be envisioned as permanent national policies, it’s likely that they are merely concessions rather than sustainable reforms,” the economist continued.

Mr Mangan also highlighted the significance of tech spillovers.

“One of the keys to economic growth in Myanmar will be increasing productivity through the adoption of more sophisticated technologies.

“SEZs tend to attract more technologically sophisticated firms and foster the transfer of skills and knowledge to the rest of the economy.

“Even just working with such firms as a supplier has been shown to improve productivity.

“The most prominent example of this is China, which has grown a domestic electronics industry partly through technology transfers from SEZs,” he stressed. Successful SEZs are those which generate spillovers and foster institutional reforms in the broader economy.

“Myanmar’s SEZs are at early stages of development and the time is ripe for the country to capitalise on this promising opportunity to foster economic growth,” Special Economic Zones for Myanmar concluded.

What makes an SEZ successful?
Three key features of successful SEZs identified by the IGC’s report:1- SEZs should create a favourable business climate which attracts investment from domestic and foreign businesses.2- Given that specifics of policies necessary to foster growth are not ex ante known, the SEZs should be a laboratory for policy experimentation. They should encourage experimentation with rules and regulations to understand which policies can spur economic growth and be scaled up.

3- SEZs should produce externalities to justify the pecuniary incentives which are offered to companies. These externalities ensure that the SEZs do not become isolated islands within the economy which merely steal employment from other parts of the country’s economy.

 

By: Thompson Chau, The Myanmar Times

Published on: 30 August 2017


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