An increase in the number of special economic zones (SEZs), or geographically designated trade areas, can help Asia revitalize its economy amid a protracted trade slowdown, according to the Asian Development Bank (ADB).
"According to estimations conducted on Asian economies, the number and presence of SEZs in an economy is positively related to overall export performance and volume of inward foreign direct investment (FDI)," the organization said in a new report on Tuesday.
On average, a 10 percent increase in the number of SEZs increases manufacturing exports by 1.1 percent, the report found.
From an estimated 500 SEZs in 1995, the region now boasts 4,300 spread out over 130 countries but the ADB wants that number to increase as Asian trade growth lags behind overall economic output. Intermediate goods [i.e. semi-finished products], which makes up almost 60 percent of overall trade, declined 2.6 percent in value last year while the region's gross domestic product expanded over 5 percent during the same period.
While the 1.1 percent export boost may seem small, the benefit of increased SEZs lies in the bigger picture.
"SEZs have paid high dividends in job creation, increased exports, and larger FDI—-even if over-ambition or lack of strategic focus at times led to failure. SEZs were also used as testing grounds for incentives and structural reforms that could later spread across the economy to overcome development constraints," the ADB report said.
Moreover, SEZs can become a major engine for national development through backward and forward linkages with the rest of the domestic economy, offering significant opportunities for knowledge sharing, innovation and skills. This makes them essential to a government's development strategy, the ADB argued, citing successful examples in China, South Korea, and Malaysia.
SEZs are no longer solely product-driven either.
"Zones for services [such as logistics, finance, and information technology] appear to be the wave of the future, mirroring the preponderance of services in GDP and their rising share in trade," the ADB said. That's true even for lower middle-income economies, where export-oriented industrial strategies dominate, it added.
SEZs can also help spawn more smart cities, making them vital to a government's longer-term urban development, the ADB notes.
For example, the smart city of Songdo in South Korea's Incheon Free Economic Zone caters to the commercial, medical, education and hospitality industries while Shanghai is promoting an SEZ that will host an international financial center.
"The concept of urban development and creation of smart cities will increasingly be an integral part of high-technology and knowledge based SEZs by combining R&D centers, e-governance, skilled labor and other commercial and recreational centers."
SEZs could prove to be especially relevant for Southeast Asia ahead of the long-awaited ASEAN [Association of Southeast Asian Nations] Economic Community.
According to the ADB, SEZs can further regional cooperation, but nations must promote joint ventures that increase the chances of entry into regional value chains and implement regulatory measures in areas of trade and taxation.