SEZ

In a recent comment, Anirudh wrote: “I notice that the RISC model is in contrast to the development of SEZs( Special Economic Zones), where the focus is on developing certain areas, and giving them special privileges like tax cuts, etc… What do you think about SEZs, which were originally conceived as engines of economic growth? Should we have more of them?”

The RISC model is indeed distinct from “Special Economic Zones”. The RISC model is immersed in the prevailing economic rules. RISC is about what can be done under prevailing rules. SEZs are special, by definition. They have special rules.

I keep insisting that outcomes are a result of rules which govern economic activities — what’s allowed, what’s mandated, what’s prohibited. As I wrote in a recent post, “People as individuals are fairly indistinguishable across the world, save for their history, their culture, the geographies and so on. But as groups, their destinies are astonishingly diverse. I believe that this divergence is due to different set of rules. Rules and norms matter enormously.”

In the SEZs, the rules are different from those that apply in the rest of the economy. And therefore the outcomes are different. Moreover, the rules in SEZs are more liberal in that they allow activities that are prohibited in the non-SEZ areas. Generally in SEZs, production, import and export are granted exemptions from restrictions that apply to the rest of the economy. The question then arises: why the special dispensation for SEZs? The answer is that relaxing the restrictions allows faster economic gains.

That then immediately raises the question that if lifting restrictions on SEZs is good for economic progress, what prevents the lifting of restrictions on the non-SEZ areas? Why is it that what works in SEZs cannot work on the rest? Why isn’t the rest of the nation also allowed SEZ status?

If the relaxing of rules and regulations good for SEZs, why is it not good for the whole economy? Why isn’t the whole economy an SEZ? The answer is that those who make the rules stand to gain from the rules they make. They make rules that benefit them but are not concerned with the costs that those rules impose on the rest.

This claim is not quantum mechanics. The bureaucrats and the politicians they advise are self-interested, just like everyone else. They would impose rules that benefit them, say, $1 million even if those rules impose a cost of $1 billion on the economy. It’s not that complicated when the benefits are concentrated (on a few bureaucrats and politicians) and the costs are dispersed on millions of citizens who are not only uninformed but are too busy with their lives to take action.

SEZs are good in that they create wealth and therefore special. Why isn’t the whole economy “special” in that sense? Because the politicians and bureaucrats have a lot to lose if the whole nation becomes as SEZ.

 

 

 

 

Author: Atanu Dey

Economist.

2 thoughts on “SEZ”

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