What's wrong with SEZs?

Nandigram in West Bengal is boiling. At least 11 protesters were killed in police firing yesterday. Nandigram, where the state government plans to acquire 10,000 acres of land for Indonesia's Salim group, has been out of bounds for the police for the past few weeks and yesterday's violence erupted when police attempted to enter the area.

Nandigram is grabbing headlines. Another project that has not been in the news but is also facing trouble is Reliance's proposed SEZ in Jhajjar district in Haryana. In the past week, locals have held demonstrations to protest planned land acquisition in the area.

Land acquisition is the most controversial part of SEZs and I have touched upon this in earlier posts. But from an economist's standpiont too, SEZs pose problems, as Nitin Desai points out in a well-argued article in today's Business Standard.

The primary problem is not just the tax concessions extended to SEZs and potential loss of revenue to the government. As the Commerce ministry has pointed out, this loss is temporary and can be more than made up over time once the tax-free period ends. The problem, as Desai points out, is that SEZs take us back to the era of discretionary government powers and lobbying by industrial houses.

The SEZs involve discrimination and discretion. The discrimination is between the policy regimes that apply to producing units within the domestic tariff area and those within the SEZs. The discretion lies in the case-by-case approval of proposals to set up these SEZs. Both of these involve a significant departure from a market-friendly system. Sooner or later they degenerate into what we politely call rent-seeking by politicians, bureaucrats and their business cronies. In some ways the SEZ policy marks a reversal of a trend towards non-discriminatory and non-discretionary regulatory regimes that started in 1991.

The SEZs are meant to drive rapid export expansion. But export production and production for the domestic market should not be separated in a sensibly-run economy. In an open trade regime with low tariffs there is no essential distinction between the two.

SEZs, Desai says, are "business-friendly" but they are not "market-friendly". In a market-friendly policy regime, any businessman would be able to avail of the facilities and regulations that apply to SEZs- infrastructure, low tariffs, relaxed environmental and labour regulations, etc. Government is not able to make these generally available. So, it makes these available at select places- and to select businessmen.

But doesn't China have SEZs? Desai addresses this favourite argument of those who want to push through their schemes. China has six large SEZs- Shenzen is 50,000 hectares in size. We plan to have SEZs in hundreds, many of them quite small, some only 40 hectares in size.

Secondly, China's SEZs were meant to confine economic liberalisation to a few pockets; for the most part, the public-sector dominated economy was to be protected. That is not our idea of liberalisation. Our objective is to liberalise across the board but gradually. The two approaches are not comparable.

The bottom line is that the SEZs do not address and in fact work against what is really needed—an economic policy that promotes competition, innovation and growth throughout the economy, an urban policy that focuses on affordable housing and services for all, a social policy that actively expands opportunities for all regions and classes and a political policy that bridges the divide between those who support continuing reform in the role of government and those who fear the rigours of liberal capitalism.