CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE PROBLEM

Special Economic Zones are delimited geographic areas located within a country’s borders where the rules for doing business are different than they are throughout the rest of the territory. These differences pertain primarily to conditions for investing, international trade, and customs; as well as taxes and regulations. Accordingly, the idea is to endow the zone with a more liberal (from the political and economic standpoint) and effective (from the administrative standpoint) business environment than that which can be found anywhere else in the country (Farole and Akinci, 2011). Although the incentive packages are very similar to those found in Export Processing Zones (EPZ),2 the economic activities in SEZs are far more comprehensive, ranging across not only manufacturing activities but also to agriculture, tourism, trade, and real estate development (Wong and Chu, 1984).

Although this industrial policy model is not new,3 its impact on economic growth, improved income levels, and labor conditions, as well as an overall boost in welfare in regions throughout the world where it has been successfully implemented, all continue to be reason enough for many developing countries to continue implementing it.4 Nevertheless, the context in which these zones developed has shifted drastically. Likewise, the success attained by several of these zones in East Asia and Latin America has not been uniform. There are even examples in which SEZs have not been successful in achieving their objectives, bringing to the fore the degree to which these programs are largely dependent on the specific context in which they are introduced and the effectiveness in how they are designed, implemented, and managed (Farole, 2011).

International experience has underscored the importance of both physical and non-physical factors involved in raising the likelihood of success. Some of the top-ranking factors include the geographic location of the zone, availability of ports and airports, terrain, workers, and infrastructure and support services for companies. The non-physical factors are related to having a reliable investment environment, including both political and economic stability, as well as efficient governance so that the zones can operate with a minimum amount of bureaucracy (Wong and Chu, 1984).

Special economic zones (SEZs) are often regarded by policymakers as an instrument not only to stimulate investments and generate exports and employment, but also to dynamize the economy of surrounding territories. They, thus, often form part of broader development strategies. The fiscal and non-fiscal incentives offered by governments to firms aiming to locate in an SEZ are not given just with the aim of securing new investments and jobs within the zones, but also with the objective of achieving greater overall returns in regional development. Zones are, therefore, expected to create growth spillovers that can be reaped by economic agents in the local, regional and national economies. By attracting new businesses and providing them with a favourable investment climate, governments expect SEZ incentives to payoff through spillovers to local economies and economic growth in the long term (Farole, 2011; Picarelli, 2016; Zeng, 2016).

However, despite the popularity of SEZs as a policy tool in virtually all developing countries, little is known about the extent to which SEZs contribute to dynamizing the economy of the areas that surround them or whether their influence is simply bounded to within their borders. A systematic analysis of this question has mainly been hindered by data limitations and has generally been restricted to individual country case studies (see, for example, Alder et al., 2016; Picarelli, 2016; Wang, 2013). This paper aims to shed light on this under-researched topic by quantitatively analysing the impact of the growth of 346 SEZs in 22 emerging countries on the economic performance of their surrounding areas. In order to overcome the lack of reliable economic indicators when measuring SEZ performance, the analysis uses night light data as a proxy for SEZ performance as well as for the economic performance of the surrounding area. It furthermore relies on a novel data set of SEZ characteristics in order to understand how far those impinge on the economic fortunes of the surrounding areas.

SEZs have a long-established role in international trade. However, it was only in the 1970s and 1980s, starting with East Asia and Latin America, that zones became a cornerstone of trade and investment policy. In 1986, the International Labour Organization (ILO) reported 176 zones in 47 countries. By 2006, this had risen to 3,500 zones in 130 countries (Boyenge 2007).

Neumark and Simpson (2015) demonstrate that local welfare effects may differ substantially from aggregate effects of place-based policies. Positive agglomeration externalities in a targeted location could come at an expense of other areas not participating in the place-based programs. In addition, while theory suggests that place-based policies could result in new highproductivity equilibria in targeted locations, it is plausible that some locations may revert to their previous steady states over time.

1. STATEMENT OF THE PROBLEM

SEZs are designed as instruments of trade, investment, and spatial industrial policy. They are generally established with a few specific, but by no means exclusive, policy goals, with export promotion and foreign direct investment (FDI) attraction central to almost all zones (FIAS 2008). They also unlock agglomeration economies by concentrating economic infrastructure and public goods in one geographic area, allowing industries to overcome minimum size thresholds and begin to leverage scale economies (Collier, 2009).

Despite the theoretical advantages of SEZs and high-profile success stories like China, SEZs have a decidedly mixed record. Investments in zone infrastructure have in many cases resulted in ‘white elephants’, which cost more to maintain than the benefits that they bring. SEZs can become zones where investors take advantage of tax breaks without delivering substantial employment or export earnings. Many traditional EPZs have been successful in attracting investment and creating employment in the short term, yet failed to sustain competitiveness in the face of rising wages or eroding trade preferences. Empirical research shows that many SEZs have been successful in generating exports and employment, and come out marginally positive in cost-benefit assessments (Warr 1989; Chen 1993; Jayanthakumaran 2003; Arce-Alpazer, Monge-González, and J. Rosales-Tijerino 2005; Wang 2013). However, as they give preferences to specific firms and distort markets, economists view zones as a second-best solution to policies promoting competitiveness more generally (Hamada 1974; World Bank 1992; Madani 1999). Another concern is that zones, by and large, have failed to extend benefits outside their enclaves or to contribute to upgrading of the domestic skills and the production base (Kaplinsky 1993). The SEZs in Africa are by no means shielded from these problems. In the light of the above, the study will try to examine the impact of special economic zones in the development of the Nigeria economy.

1. AIM AND OBJECTIVES OF THE STUDY

The aim of this study will be to examine the relationship effect of special economic zones and economic development of Nigeria.

Specifically, the study seeks to:

1. Ascertain the positive effect of special economic zones in the development of the Nigeria economy
2. Ascertain the negative effect of special economic zones in the development of the Nigeria economy
3. Examine the role of special economic zones in the development of the Nigeria economy
4. Provide measures of promoting and encouraging special economic zones in the development of Nigeria economy

1. RESEARCH QUESTIONS

Arising from the research questions, the following research questions will address in the study:

1. What is the positive effect of special economic zones in the development of the Nigeria economy?
2. What is the negative effect of special economic zones in the development of the Nigeria economy?
3. What are the roles of special economic zones in the development of the Nigeria economy?
4. What measures can promote and encourage special economic zones in the development of Nigeria economy?
   1. RESEARCH HYPOTHESIS

H0 there is no relationship effect of special economic zones and economic development of Nigeria

H1 there is relationship effect of special economic zones and economic development of Nigeria

1. SIGNIFICANCE OF THE STUDY

This is highly important because it will reveal whether special economic zones have contributed either positive or negative to the development of economy of Nigeria.

The findings of this study enable the economist, developmentalist and policy makers of the State to come out with a holistic policy that will determine the partnership of Nigeria and Africa at large with SEZs.

Ultimately, it helps the nation on their decision dependence on special economic zones for economic development, as the role of the special economic zones towards economic development of Nigeria will be critically analyze, evaluate and ascertain.

1.7 SCOPE OF THE STUDY

The study is on the impact of special economic zones (SEZs) in the development of the Nigeria economy. The study is limited to the roles of SEZs in the development of Nigeria economy. It will also be limited to the positive and negative effect of special economic zones in the development of Nigeria economy.

1. LIMITATION OF THE STUDY

TIME CONSTRAINTS: One the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

FINANCIAL CONSTRAINTS: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1. DEFINITION OF TERMS

Special economic zones

A special economic zone is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration.

Economic growth

Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP.

Economic development

Economic development has been understood by non-practitioners since the World War II to involve economic growth, namely the increases in per capita income, and (if currently absent) the attainment of a standard of living equivalent to that of industrialized countries.[6][7] Economic development can also be considered as a static theory that documents the state of an economy at a certain time. According to Schumpeter and Backhaus (2003), the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.