Shenzhen, the fourth largest city in China following Shanghai, Beijing, and Guangzhou celebrated its 40th anniversary three years ago. Unlike most other cities in China, with centuries of history behind them, Shenzhen didn’t exist before 1979. That was the year when Deng Xiaoping’s government decided to convert the rural fishing village into a Special Economic Zone (SEZ).
Now Shenzhen is a global centre in technology, research, manufacturing, business and economics, finance, tourism, and transportation. The Port of Shenzhen is the world’s fourth busiest container port. Its nominal GDP recently surpassed the neighbouring city of Guangzhou (formerly Canton). It also is now among the top ten largest international city economies. It is home to the secondlargest number of skyscrapers of any city. Among others, Huawei Technologies is one of the key international firms to be headquartered in Shenzhen. What was not more than some fishing villages fifty years ago, today is a model city, the Chinese government turning into for other cities in China to follow.
I n the early eighties, we were misinformed that China modelled their Special Economic Zones following the success of the Free Trade Zone at Katunayake. As a secondary school student, I was naïve enough to believe that, so far as to add this ‘fact’ to my school essays with pride. This is similar to the misconception that Lee Kuan Yew modelled independent Singapore after then Ceylon. Yet these misconceptions create grounds for comparison. Given the fact that they commenced almost simultaneously one can ask a valid question: where is Katunayake compared to Shenzhen SEZ.
The question becomes important if we revisit the topic of Special Economic Zones. Perhaps this is the perfect time for retrospection.
Why revisit SEZ? Sri Lanka is confronting the worst economic crisis after the coffee crisis in the early 1880s when as unfamiliar fungal disease Hemeleia Vastatrix (later aka ‘Devastating Emily’) destroyed the entire coffee cultivation – the main source of income in those days. Of 1,700 coffee planters, except 400 the rest left Ceylon emptyhanded. The recovery took longer than two years. Nothing of that magnitude happened for the next 125 years. Then came 2022.
This time the problem was unsustainable debt. The country has had to default on repayment of its foreign currency loans – a first, since 1831. The population also faces difficulties with shortages of almost every category of imported goods. They waste productive hours on gas and petrol queues. The Sri Lanka Rupee has depreciated 80% in a few months. Debt Restructuring and multilateral assistance pursuing measures are already on, but they will only provide short-term reliefs. Certainly – to avoid a long Westeros winter (as in Game of Thrones) – the country must regain its competitiveness and build on it to earn more and more Dollars.
What options do we have? I can imagine you asking. What kind of new businesses can the country support
Agriculture? Yes, if we get into commercial crops with agri-tech. There is absolutely no harm in attempting – as long as the products are aimed at the global market. Still better if we can be a part of strong international Agri supply chains.
Services? Yes, we have been doing fairly well in tourism until the Covid-19 pandemic hit. In 2018, the last full pre-Covid year, we recorded over 2.3 million visitor arrivals and an annual income of $4.4 billion from tourists. If the industry were to get back to pre-Covid-19 growth levels, we can rely on this sector for a sizeable GDP contribution. The rest of the service components are equally promising. For example, IT and IT-enabled services will earn at least $3 billion annually by 2025.
However, there are limits to what we can expect agriculture to deliver. The services sector is growing and plays its part. This leaves the industry sector, one that is capable of providing a sizeable input to the economy in long term.
There enters the solution: Special High Tech Economic Zones – areas that are subject to different economic regulations than other regions within the same country, typically created in order to facilitate rapid economic growth by providing a better business environment that exists in the rest of the country. They often offer tax incentives to attract foreign investment and spark technological advancement.
Ignoring our own experiences with local FTZs for a moment, let’s look at neighbouring India – perhaps the Asian nation with the longest history with SEZs. Asia’s first Export Promoting Zone was set up in Kandla in Gujarat in 1965. This wasn’t a success. The so-called ‘License Raj’ at the time and a socialist economic model.
Round two came much later, after liberalizing the Indian markets, addressing the shortcomings experienced such as multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime.
A fresh Special Economic Zones (SEZs) Policy was announced in April 2000. It was intended to make SEZs an engine for economic growth attracting direct foreign investments, supported by quality infrastructure and attractive fiscal incentives, both at the Centre and the State level, with the minimum possible regulations. This was followed by the Special Economic Zones Act of 2005, providing for a transformation of procedures and single window clearance on matters relating to central as well as state governments. The act also converted many existing EPZs to SEZs, with notable zones in Noida (Uttar Pradesh), Falta (West Bengal), Visakhapatnam (Andhra Pradesh), Chennai (Tamil Nadu), Cochin (Kerala), Santa Cruz (Maharashtra), Indore (Madhya Pradesh), as well as Kandla and Surat (Gujarat).
Two and a half decades after, the results, we find, are impressive. A total of 268 operational SEZs exist in different states, with another few hundred approved and already in the pipeline. Together they have attracted $83 billion in investments to India. That’s more than Sri Lanka’s annual GDP. For the year 2021, the export revenue reached $70 billion. SEZs also provide over 2.5 million employment opportunities.
One may well ask why Sri Lanka with its FTZs could not demonstrate such impressive results. Multiple reasons. India was a massive market with cheap labour plentiful. Also, incentives for setting up a sourcing or manufacturing platform within an Indian SEZ include duty-free import and domestic procurement of goods for the development, operation, and maintenance; full income tax exemption on export income for the first five years and 50% for five years thereafter; exemption from the GST and levies imposed by the state government; an exemption in even electricity charges and tax by certain states in India; the presence of customs officer in the SEZs to facilitate and expedite the trade processes; and offer of land some times to SEZ developers at concessional rates.
I can also suggest the best place for a new SEZ (or whatever we call it – can be another freetrade zone, export processing zone, free zone, industrial estate, free port, or urban enterprise zone) is Hambantota. In a recent article for Echelon (in March 2022) I wrote, ’Today, Hambantota district has the second-largest international airport on the island (at Mattala) and the second-largest seaport (Magampura). Talk about connections! Hambantota is now three hours drive from Colombo, with E01 Southern Expressway directly connecting it to the capital. The railway line has been extended to Beliatta from Matara; remarkable because it is the only newly built line after the occupying British left. Soon the line will connect Magampura Mahinda Rajapaksa Port in Hambantota, and phase three will reach Kataragama.’ Where else do we have this kind of infrastructure? The bonus will be the space. The population density of Hambantota and neighbouring Moneragala districts is low, so finding suitable land will not be an issue. If it is difficult to find a single land large enough, the SEZ may come as a collection of multiple facilities.
The next question will be how to find affordable labour. The unavailability of labour was one key reason for many investors to overlook Sri Lanka for investment. This is a complicated issue with many facets. On one side, with drastic Rupee depreciation and escalating economic issues, Sri Lankan labour will be cheaper in the future – at least for the next few years. That will be one advantage of a weak currency. Still, if that does not work, Sri Lanka should be ready to take some first-time measures to attract cheap labour from neighbouring countries. We already have Pakistanis and Bangladeshis doing odd jobs here on tourist visas. If it comes to that, we should be ready to introduce long and mediumterm work visa’s for South Asians. We cannot act as protectionists anymore if the country needs human resources. We may perhaps have to enter into trade agreements with neighbouring nations.
Find it unacceptable? It is more or less the same strategy used by the British when they brought South Indian labour to coffee plantations. When an ingredient is missing, that needs to be found elsewhere. If Korea could do it, Middle Eastern countries could do it there cannot be a reason for Sri Lanka cannot. After all, unprecedented problems demand unprecedented solutions.
The way ahead is not free of traps and pitfalls. One must certainly not miss focus. High-tech industries are where the high margins lie. Light industries like apparel can no longer take us anywhere. Fortunately, Sri Lanka is now amply geared for the former. Both state and non-state universities graduate people trained in tech who can be directly absorbed by the industries. According to the IT-BPM survey, by 2019 we had a digital workforce of 125,000 with 9,000 fresh graduates entering to field each year. The next layer is produced by the technical colleges. Again, where this capacity remains inadequate either we must produce or alternatively attract offshore professionals. These are not hurdles too large to hunk a national venture.
Finally, the elephant in the room. In the backdrop of Sri Lanka losing its financial credibility – we are one of the few countries to default on sovereign loans – will global financiers ever trust investing here? Maybe not.
Political and financial stability is the very base for SEZs. Nothing will happen until we establish a conducive economic environment. Investors are not interested in local politics. They do not bother who is in power as long as they can run the business smoothly
Political and financial stability is the very base for SEZs. Nothing will happen until we establish a conducive economic environment. Investors are not interested in local politics. They do not bother who is in power as long as they can run the business smoothly. What they hate is instability, political protests, and civil unrest. Investors also loathe red tape. A country does not have to be perfect for business, but it needs a degree of orderliness, predictability and businessfriendly policies. That is exactly why it becomes the responsibility of the government to establish that trust. Sooner the better.