Special Economic Zones (SEZs):

The Paradise of Capitalism

- Sundaram

T hough SEZs have become a buzzword among advocates of India 's economic liberalization in recent years, they are not entirely a new concept and are basically modelled on the Export Processing Zones (EPZ) that came up nearly five decades ago.

The original idea behind the creation of EPZs was to allow employers to import materials to be worked on and then re-exported without having to pay duty. It was seen as a cheap way of creating jobs without spending scarce taxpayers' money and avoiding a bureaucratic system of reimbursing import taxes on goods intended for export. However, from the beginning, this seductive idea had a major drawback. It requires the sealing off of the zone or of designated factories, often behind high fences, to prevent untaxed goods being smuggled into the rest of the economy.

The first EPZ was established in 1959 in Ireland but it was in East and South East Asia that the idea found most enthusiastic support. Countries like Taiwan , Singapore , Malaysia and the British colony of Hong Kong embraced the concept that economic growth can be promoted best through encouraging exports rather than through import substitution.

Thus setting up exclusive, privileged zones with a liberal tax and labour regime would attract investors from developed countries interested in taking advantage of cheaper costs and fewer regulations to set up manufacturing units that would send back products for sale to richer markets. Importantly, these zones were used as a ‘test base' for liberalisation of trade, tax and other policies that were then gradually applied to the rest of the economy. (More about this later)

In the sixties there were just 10 such zones around the world, which by the mid-eighties had increased to 176 zones across 47 countries. In 2003, the number of zones increased to over 3000 across 116 countries.

As the EPZ concept spread around the world, governments found that they had to add more and more incentives to attract footloose investors to their enclave; subsidised factory buildings, telecommunication links, energy supplies and most worrying of all, guarantees that the labour force would stay cheap and uncomplaining.

Keeping the intense global competition for attracting Foreign Direct Investment (FDI) in mind the Chinese government in the eighties pioneered the concept of Special Economic Zones that offered much greater incentives than the EPZs had done till then.

The one-time fishing village of Shenzhen , singled out by late Chinese leader Deng Xiaoping, was the first of the Special Economic Zones of China . In the past two decades, more than US$30 billion has been invested by outsiders in Shenzhen, which has become the showcase of capitalist reforms in China .

EPZs and SEZs in India

In India , the first zone was set up in Kandla as early as 1965. It was followed by the Santacruz export processing zone which came into operation in 1973. The government set up five more zones during the late 1980s. These were at Noida (Uttar Pradesh), Falta (West Bengal) Cochin (Kerala), Chennai (Tamil Nadu) and Visakhapatnam (Andhra Pradesh). The EPZ in Surat became operational in 1998.

The idea of the so-called Special Economic Zones (SEZs) was first mooted by the Ministry of Commerce's Export-Import Policy, 2000, in an obvious attempt to copy the model evolved in China . In 2005 the SEZ Act was passed by the Indian parliament and came into force from February 10, 2006 .

According to the Indian Ministry of Commerce's website, the SEZ is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purpose of trade operations, duties and tariffs.

Under the new Act SEZs are permitted to be set up in the public, private, joint sector or by the State Governments with a minimum size of not less than 1000 hectares. The SEZ is supposed to be an almost self-contained area with high-class infrastructure for commercial as well as residential inhabitation. The SEZs will have their own security, operation and maintenance rules and all environmental and labour clearances vested with the Development Commissioner of that SEZ.

Following this policy the existing EPZs were all converted into SEZs, and at present there are eight functional Special Economic Zones located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) in India. A SEZ at Indore (Madhya Pradesh ) is also now ready for operation.

In addition 18 approvals have been given for setting up of SEZs at Positra (Gujarat), Navi Mumbai and Kopata (Maharashtra), Nanguneri (Tamil Nadu), Kulpi and Salt Lake (West Bengal), Paradeep and Gopalpur (Orissa), Bhadohi, Kanpur, Moradabad and Greater Noida (U.P.), Vishakhapatnam and Kakinada (Andhra Pradesh), Vallarpadam/Puthuvypeen (Kerala), Hassan (Karnataka), Jaipur and Jodhpur (Rajasthan), on the basis of proposals received from the State Governments.

Objectives of the EPZs and SEZs

In 1989, a report of the Comptroller and Auditor General of India clarified that EPZs were meant for earning foreign exchange, develop export oriented industries, stimulate investment and generate employment opportunities beside creating an internationally competitive environment for export production at low cost. The SEZ Act 2005 also considers ‘promotion of foreign trade in goods and services' the most important objective of SEZs.

According to its advocates, a well-implemented and designed SEZ can bring about many desired benefits for a host-country: increases in employment, greater FDI, general economic growth, foreign exchange earnings, international exposure, and the transfer of new technologies and skills.

The Commerce and Industry Minister, Mr Kamal Nath, has hopes of drawing Rs. 1,00,000 crore worth of investments over the next three years with an employment potential of over five lakh, besides indirect employment during the construction period of the SEZs: investments in sectors such as information technology, pharmaceuticals, biotechnology, textiles, petro-chemicals and auto parts.

The incentives:

As mentioned earlier the number of incentives offered to investors for setting up and operating in SEZs are far more liberal than was the case with the EPZs. Among the non-fiscal incentives offered in Indian SEZs for example, are:

· Exemption from industrial licensing for manufacture of items reserved for Small Scale Industries (SSI)

· 100 per cent FDI investment through automatic route to manufacturing SEZ units

· Facility to realize and repatriate export proceeds within 12 months

· No cap on foreign investment for SSI reserved items

· “Write-off” of unrealised export bills upto 5%

· Profits allowed to be repatriated freely without any dividend balancing requirement

· Full freedom for subcontracting, including subcontracting abroad.

The main attraction of these zones lies however in the fiscal incentives given, which are usually used to manipulate accounts and to show profit/loss, export/import figures that add to the company's profits in ways that mere manufacturing and exports never can. Some of the fiscal incentives provided to investors in Indian SEZs are:

· 100% income tax exemption for a block of five years, 50% tax exemptions for two years and upto 50% of the Profits ploughed back for next 3 years

· Supplies from Domestic Trade Area to SEZ to be treated as exports

· Carrying forward of losses

· 100% Income-tax exemption for 3 years & 50% for 2 years for off-shore banking units.

· Exemption from Central Excise duty on procurement of capital goods, raw materials, consumable spares etc. from the domestic market.

· Reimbursement of Central Sales Tax paid on domestic purchases.

As if all these were not already enough, this capitalist dream list drawn up by the Indian liberalisers goes on and on. According to the Ministry of Commerce website, state governments supporting private sector proposals or making one on their own for setting up a SEZ need to give the following commitments:

· That the area incorporated in the proposed Special Economic Zone is free from environmental restrictions;

· That water, electricity and other services would be provided as required;

· That the units would be given full exemption in electricity duty and tax on sale of electricity for self generated and purchased power;

· To allow generation, transmission and distribution of power within the SEZ;

· To exempt from State sales tax, octroi, mandi tax, turnover tax and any other duty/cess or levies on the supply of goods from Domestic Tariff Area to SEZ units;

· That for units inside the Zone, the powers under the Industrial Disputes Act and other related labour Acts would be delegated to the Development Commissioner and that the units will be declared as a Public Utility Service under Industrial Disputes Act.

· That single point clearances system and minimum inspections requirement under State Laws/Rules would be provided.

The Indian EPZ experience:

EPZ exports increased in India from less than Rs.1 million in 1966 to over Rs. 97727 million in 2002. Over the same period, total employment increased from 70 to around 89,000, net foreign exchange earnings increased from Rs. 0.16 million to Rs. 43195 million and value addition increased from 21% to 44%.

While these big figures seem impressive a closer look at the details reveals several serious problems. First of all the average annual growth rate of value addition in the EPZs was as low as 2.9% which means that the companies operating in these zones were basically exporting out almost as much as they imported without significant addition to the value of goods produced. The EPZs thus contributed little to improvement of skills or transfer of technical know-how in the domestic market.

Again despite the overall growth of exports from EPZs in absolute terms their actual share in total national exports and manufactured exports increased from .07% and .14% respectively in 1973 to just 4.3 % and 5.6% respectively in 2001. This is in contrast to countries like Bangladesh and Sri Lanka , where EPZs contributed to over 20 percent of overall exports by the year 2000 or to Mexico where they make up 40 percent of national export figures. The Indian EPZs clearly failed to induce dynamism in the overall export performance of the national economy.

On the employment front too after an initial spurt in numbers of people getting jobs in the EPZs there has been a general decline and even stagnation. So for example while employment in the EPZs grew at the rate of over 50.2 percent between 1966 and 1970 it declined to a mere 5.2 percent between 2000 and 2002.

Even assuming that the EPZ/SEZs do result in an increase in exports and even hard currency earnings their real performance can be measured only by taking into account the amount of revenues foregone by the government in the form of various incentives. According to an internal assessment of the Union Finance Ministry in 2005, the government had to forgo about Rs. 90,000 crore in direct and indirect taxes over a period of four years on account of the SEZs.

If one takes into account the money spent by the government on actual construction and maintenance of these EPZ/SEZs the situation is even worse. The 1998 Comptroller and Auditor-General Report on EPZs, stated that "customs duty amounting to Rs.7, 500 crore was forgone for achieving net foreign exchange earnings of Rs. 4,700 crore and the government does not seem to have made any cost benefit analysis."

The Worker's Nightmare

Globally EPZs and SEZs have become notorious for many things in particular violation of environmental norms, tax evasion and for exploitation of labour. As a report brought out in the mid-nineties by the International Confederation of Free Trade Unions (ICFTU puts it aptly "in these 'free' trade zones, it is the employers who run free - like a fox in a henhouse".

The report points out that enterprises in the zones gain their comparative advantage really through worker exploitation and anti-union repression. Most of these enterprises are out to break their competitors in the price war, and they don't mind breaking the backs of their workers, and the union, to achieve that, it says.

"Behind the concentration camp style fences in many countries, unscrupulous employers are abusing the basic rights of a predominantly young female workforce. In some countries basic labour legislation and core workers' rights are set aside in the zones. In others the zone managers simply use a system of pass controls to exclude union organisers and workers who try to join a union. Many of the worst of these so-called 'free zones' allow employers the freedom to exploit without restraint but restrict basic workers' rights to freedom of association."

In the Indian context the EPZs of old were supposed to comply with local labour laws and there was no relaxation of these laws allowed as such. With the new SEZ Act, 2005 the zones have been declared a ‘public utility service' a categorization that imposes restrictions on workers going on strike. Moreover the delegation of the powers of the state labour commissioner to the specially appointed Development Commissioners is expected to make industrial relations more ‘flexible'.

Despite all these measures, most employers with units in the EPZ/SEZs surveyed by research organizations have demanded even greater freedom to ‘hire and fire' and claimed the current labour regulations are ‘too stringent'.

Challenge to National Sovereignty

On one hand, EPZs and SEZs are but a manifestation of the phenomenon known as ‘globalization' which at its core involves capital seeking easier and easier ways of making high returns on its investment irrespective of the price paid by those it ‘invests in'. With manufacturing in many industries neatly divided up so as to parcel out different parts of the process to different parts of the world that offer greatest comparative advantage, such zones have become popular with multinational firms all over.

As the ICFTU report puts it, "The zones are seductive to investors precisely because they are an enclave, in other words because they are physically, economically and socially separate from the rest of the country. This ‘apartheid' explains why the advantages offered to foreign investors - freed from the burden of bureaucracy, taxation, lack of infrastructure and the application of the labour code - do not necessarily translate into corresponding benefits for the host country."

In a sense, these zones are really small fiefdoms controlled by global corporations, that are carved out from within countries which in the long run can only result in the weakening of the basic tenets of the nation state itself, including its sovereignty. In many ways this is not very different from the kind of special, privileged enclaves that western powers established in the early colonial period to facilitate their ‘trading activities' which, as we know, finally resulted in their gobbling up entire continents. (It has been pointed out by some observers that the special economic zones in China "are often located where concessions had been obtained in the Chinese Empire by the great powers using gunboat diplomacy in the 19th and beginning of the 20th century.")

The Trojan Horse of liberalisation

Irrespective of their actual performance in specific contexts the idea of the EPZs and SEZs has found great support among proponents of neo-liberal economic policy because they see these zones clearly as a way to prise open so called ‘protected economies'.

As one paper on the subject puts it, "SEZs should be viewed as a vehicle for introducing policy and institutional reform that are difficult to introduce more generally but could be feasible in these limited areas". According to proponents of this view, "SEZs function as test-cases for liberalizing reforms, the development of best-practices" and conditions which apply within these zones should gradually become the norm everywhere.

Race to the Bottom

However, instead of achieving this grandiose objective of making entire countries into EPZs (like in small city states like Singapore or Hong Kong), what has happened world over is that these zones have become a sort of black hole taking in as many incentives as it is possible for any state to give. While the proponents of EPZs have argued that after a few years the incentives could be done away with and the enclave reintegrated into the rest of the country, but as the incentive packages got bigger and more zones were created in other countries it has become harder to wean investors off their special advantages.

Instead pressure has increased to constantly improve the attractions to stop companies relocating to other still cheaper locations. While these zones certainly do boost the profits of the companies involved, this is at the expense of other businesses and employment outside the zones or in other countries.

Even in conventional capitalist economic terms EPZs are essentially a distortion in the global market place which encourages a "slash and burn" pattern of development rather than sound long term investment and the transfer of technology. At best, the country gets a few years worth of low wage low productivity jobs before the export processors move on to another country. At worst, the country and its workers become trapped at the wrong end of a long international chain of production, dependent on some of the world's most vicious employers competing in a cut-throat business for the bottom end of the global market.

Dens of Speculation

One of the intriguing aspects of the new SEZ Act is its insistence that the new zones have at least 1000 acres or more of land at its disposal. This is all the more strange because the experience of the much smaller EPZs in India so far shows that most of them are still under utilized and have not attracted as many industrial/export processing units as they can accommodate.

The Santacruz EPZ (now SEZ), near Mumbai, for example, with an area of 93 acres had 197 units in 2002- the most among all zones in the country. The number of units in other zones around the country, which were much larger than Santacruz was even smaller. In fact the number of units has actually declined in many zones in recent years. So why should the new SEZs have over 1000 acres when much smaller ones are yet to be filled up properly?

One of the obvious reasons for allocating such large portions of land to the new SEZs is that they are in fact meant for setting up real estate projects which today have much larger returns on investment than manufacturing. In other words SEZs will be hubs for speculative investment in real estate and not for exports as such. While initially these residential units will be aimed at overseas investors there is no doubt that gradually the rules will be relaxed to sell them to domestic buyers too.

This explains why for example the two Ambani brothers - Anil and Mukesh - whose companies ostensibly plan to set up power plants and SEZs in Uttar Pradesh and Haryana- have both chosen sites that are close to the national capital New Delhi . With real estate prices soaring in Delhi the acquisition of large tracts of land nearby under any pretext makes commercial sense for the Ambanis though this has nothing to do with the lofty pretexts with which the Indian state has forced farmers to give away their lands to them.

What Next?

In the past decade and a half of so called Liberalisation, Privatisation, Globalisation the Indian ruling class has created its own ‘shining' special zones divorced from the fate and future of the rest of the country. Already steeped in the apartheid hierarchy of the Indian caste system, and with complete contempt for the working masses the idea of SEZs - special zones that cater to the already rich and privileged - obviously fits neatly into the worldview of the Indian elites.

And it is precisely for this reason that opposing the formation of SEZs is an important part of the larger struggle to tear down the high security castles the rich are building on the backs of the India 's poor and underprivileged. Allowing them to flourish will be the first step towards the destruction of whatever little democracy there is left in this country and a defeat of the very ideas of equality and justice.