Economic zones: a quick fix?
The author holds a PhD from Massey University, New Zealand. He teaches at the University of Malakand.
Industrialization, especially the development of Special Economic Zones (SEZs), has recently become a “buzzword”. Under CPEC, Pakistan has prioritized 10 SEZs comprising Rashakai and Mohmand in Khyber Pakhtunkhwa (KP), Faisalabad in Punjab, Bostan and Gwadar in Balochistan, Port Qasim and Dhabeji in Sindh, Mirpur in Azad Jammu and Kashmir (AJK) Moqpondass in Gilgit -Baltistan (GB) and ICT Model Industrial Zone in Islamabad.
It is expected that CPEC’s investment in transport infrastructure and industrialization within the framework of the SEZs will lead in the long term to the transfer of technology and skills, the creation of jobs, the promotion of trade and poverty reduction. Should we be optimistic that industrialization and SEZs will achieve the desired results and transform the country’s industrial prospects? What has Pakistan learned from its own political economy of industrial development? Is the development of SEZs really a panacea and can this SEZ experience simply be replicated in the country hoping that it would bear the same fruits as in other successful economies?
Pakistan’s previous experience with industrial zones provides interesting insights. There are a total of 71 industrial zones across the country, including 11 in Khyber Pakhtunkhwa, 26 in Punjab, seven in Balochistan and 27 in Sindh. Regardless of being part of the same institutional and governance frameworks and work culture, some of these industrial parks have achieved quite good results while others have faced multiple challenges, resulting in the closure of many “sick” units.
For example, while Faisalabad, Sialkot and Gujranwala are examples of successful industries, Gadoon Amazai in Swabi, KP is one of the famous examples of a failed industrial area. Established in 1988 to generate employment opportunities and bring socio-economic development to a popular poppy-growing region, Gadoon Amazai Industrial Zone was a thriving industrial zone attracting more than 53.83 billion rupees before witness its dramatic decline.
There were over three hundred functional industrial units employing 14,843 people at a time. However, once the then newly elected government withdrew the incentives in 1992, over a hundred units were closed, leaving over a thousand people unemployed. The area had no access to major cities and lacked infrastructure and other Allied facilities. Consequently, high transportation costs and other expenses made businesses less profitable once the incentives were withdrawn. It is essential to have a comprehensive qualitative and quantitative analysis of the success and failure factors before launching new industrial zones and SEZs under the CPEC.
At the time of independence, Pakistan lacked a strong industrial base as the country inherited only 34 industrial units out of a total of 921 industrial plants operating in the subcontinent. To promote industrialization after independence, the government established the Pakistan Industrial Finance Corporation (PIFC), the Pakistan Industrial Credit and Investment Corporation (PICIC), and the Pakistan Industrial Development Corporation (PIDC).
The government offered incentives to industrialists, including tiered tariffs, an overvalued exchange rate, and a substantial amount of credit at subsidized rates. These policies paid off as the share of the industrial sector in GDP fell from 6.9% in 1950 to 11.9% in 1965. The pace of industrialization was affected in the early 1970s due to nationalization (34 key industrial units were nationalized), instability and the collapse of East Pakistan.
According to one study, the industrial growth rate fell to 2% in the 1970s from around 11.9% in the 1960s due to nationalization. Since then, the role and performance of the industrial sector has remained lackluster and uneven due to various factors including political instability, inconsistent government policies, non-availability of quality hard and soft infrastructure, lack of good governance and the rent-seeking approach of industrialists/investors.
Pakistan can reap maximum dividends from industrial zones and SEZs, provided it carefully implements industrial and SEZ policies in the right context and in the most appropriate places. This careful implementation requires a thorough understanding and determination of the key success factors of the respective areas in which these SEZs are planned to operate. To this end, an analysis of industrial production at the provincial level provides a sobering scenario. For example, Faisalabad’s contribution to Punjab’s total output is 14%, only 3% less than Lahore’s contribution (17%). Karachi’s four districts (Central, East, West and Malir) contribute 71% of Sindh’s total production.
KP’s industrial production is even more curious as data reveals that Haripur produces three times as much as Peshawar (33% vs. 11%). Meanwhile, more than 65% of production in Haripur consists of food and beverage products (41%) and non-metallic mineral products (25%). Nowshera, where a priority 1,000-acre Rashakai SEZ is under development, produces 27% of the KP’s total manufacturing output, 95% of which includes two industries “food and tobacco” (76%) and “non-metallic mineral products”. “. (19 percent). According to its website, the Rashakai SEZ aims to develop clusters including “processing and manufacturing, household appliances, pharmaceuticals, home building materials, automobiles and parts, agriculture and ‘horticulture and wholesale market/specialist factories’ (she probably wants to list as many products as possible, regardless of the region’s comparative advantage).
In Balochistan, Lasbela alone contributes 87% of the province’s total industrial output. These statistics tell a lot about the major centers of industrial production in the respective provinces. Being part of the same institutional frameworks, some districts have significantly better industrial functioning than others, indicating that the success or failure of industrial zones is a complex phenomenon that needs to be carefully considered before planning SEZs.
Although each country has its own characteristics and a one-size-fits-all approach should not be blindly followed, some lessons learned from international practice can be discerned and properly adapted to the specific needs and circumstances of a particular country. In this regard, a detailed study on SEZs, titled “If Africa Builds Nests, Will Birds Come? Comparative Study on Special Economic Zones in Africa and China”, offers some recommendations applicable to Pakistan.
Based on a comprehensive assessment of SEZs in China and three African countries – Ethiopia, Nigeria and Zambia, the study claims that governments and SEZ developers in these countries have faced similar challenges, such as complications associated with the coordination of several actors, obstacles to the financing of infrastructures and difficulties. concerning the creation of links with local economies.
The study suggests that ensuring high-level political commitment and support is essential for effective inter-ministerial collaboration; integrating SEZ programs into national development strategies and plans; and ensure sufficient funding for infrastructure development inside and outside the SEZ prior to SEZ approval. Similarly, he recommended the establishment of incentives for the creation of joint ventures between foreign companies in the SEZs and local companies.
In addition, tangible efforts should be made to meet the manpower needs of SEZs by aligning the curricula of universities and Technical Vocational Education and Training (TVET) institutes.
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