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BUSINESS GUARDIAN www.guardian.co.tt APRIL 2015 • WEEK TWO
The world s growth
potential took a
big hit after the
financial crisis and is likely to
lag for years, implying that
interest rates should likely stay
low for quite a while, the
International Monetary Fund
said in a study on Tuesday.
Potential growth, which
gauges how fast economies
can grow over time without
hitting inflationary speed
bumps, already was slowing
in richer economies before
the financial crisis due to age-
ing populations and a drop
in technological innovation.
But declines in private
investment and employment
growth cut annual potential
growth in these countries to
1.3 per cent between 2008
and 2014, half a percentage
point lower than before the
crisis, according to the IMF
The study, part of the
Fund s twice-yearly World
Economic Outlook, could
frame the discussions over
how to boost growth when
the world s economic poli-
cymakers gather in Washing-
ton next week for the IMF
and World Bank s spring
Over the next five years,
advanced economies annual
growth potential should
increase to 1.6 per cent, still
below pre-crisis growth rates,
making it more difficult to
cut high public and private
debt, the IMF said.
With interest rates low,
"monetary policy in advanced
economies may again be con-
fronted with the problem of
the zero lower bound if
adverse growth shocks mate-
rialise," the IMF said.
It also said weak demand
in the euro zone and Japan
could prompt even lower
potential growth than fore-
cast. The study comes ahead
of the Fund s global economic
forecasts next week.
In emerging markets,
potential annual growth fell
to 6.5 per cent from 2008 to
2014, about two percentage
points lower than before the
crisis, and is expected to fall
further to 5.2 per cent over
the next five years as popu-
lations age, structural con-
straints curb capital growth,
and productivity slows.
A projected drop in growth
potential for China, the
world s second largest econ-
omy, could be even deeper as
it transitions away from an
investment-led economy to
a consumption-based one,
the IMF said. Reuters
Rwanda has developed a strate-
gic plan for them. Myanmar
is embracing them as it opens
up. Countries that long have
been fans, from China to the
United Arab Emirates, are
doubling down. India s plans
in the area are "revolutionary"
and could add 2.0 per cent to its GDP, a minister
Special economic zones are all the rage among
governments hoping to pep up their trade and
investment numbers. Such havens are appearing
even within havens: The Cayman Islands has a new
"Any country that didn t have one 10 years ago
either does now or seems to be planning one," said
Thomas Farole of the World Bank.
Studying history may give eager trade ministers
pause. Special economic zones, enclaves in which
exporters and other investors receive tax, tariff and
regulatory incentives, create distortions within
economies. Other costs include required infrastruc-
ture investment and forgone tax revenues. The hope
is that these will be outweighed by the boost to
jobs and trade.
In reality many zones fail. Performance data are
elusive because the effects of zones are hard to dis-
entangle from other economic forces. However,
anecdotal evidence suggests that they fall into three
broad categories: a few runaway successes, a larger
number that come out marginally positive in cost-
benefit assessments and a long tail of failed zones
that either never got going, were poorly run or
attracted investors who gladly took tax breaks with-
out producing substantial employment or export
Special economic zones have a long pedigree:
The first free-trade zones were in ancient Phoenicia.
The first modern one was set up at Ireland s Shannon
Airport in 1959, but the idea took off in the 1980s
after China embraced them. There are now more
than 4,000 special zones. A study conducted in
2008 estimated that 68 million people worked in
them. They come in many forms, from basic "export
processing zones" to "charter cities," urban zones
that set their own regulations in all sorts of areas
that affect business.
The biggest success story is China, whose decision
in 1980 to create a zone in Shenzhen transformed
the city into an export powerhouse. Since then
dozens of zones have popped up across the country.
In March President Xi Jinping urged a faster pace
Other successes include Malaysia, South Korea
and the United Arab Emirates. The Philippines has
won praise for its "PEZA" zones, which offer a
streamlined permit process for foreign investors,
said Shang-Jin Wei of the Asian Development Bank.
Most economists agree that the zones catalyzed
liberalization in China, which used them to test
reforms that were seen as too hard to unveil nation-
wide. In the Dominican Republic they helped create
a sizable manufacturing sector in an economy pre-
viously reliant on agriculture.
The overall impact of the zones on trade is poorly
understood. A paper published in 2014 by economists
at Paris-Dauphine University found that, for a given
level of tariff protection, zones increase exports for
the countries they are in and for other countries
that provide intermediate goods or components.
This helps explain why the World Trade Organization
generally tolerates zones, even though many breach
its subsidy rules. However, the paper also concluded
that zones sometimes give countries an excuse to
retain protectionist barriers around the rest of the
More prosaic problems pop up too. Bureaucracy
can be excessive and the bureaucrats underfunded,
sometimes at the same time. Often too little is
spent on railways, roads and ports to link the zone
to the rest of the world. Many African zones have
struggled for such reasons. One in Senegal flopped
because of a combination of excessive bureaucracy,
high electricity costs and its distance from a good
Developers have withdrawn from 61 of the 139
approved zones in the Indian state of Maharashtra
because of capricious policymaking, a murky screen-
ing process and concern about economic prospects.
One survey found that companies sometimes had
to deal with 15 different agencies to do business in
an Indian zone. Violent protests by locals against
land acquisition for zones also have deterred
Moreover, governments sometimes embrace zones
for the wrong reason: to win praise for reform---
and votes---without having to risk full liberalisation.
Partial liberalisation also can be a way to preserve
some of the revenue earned elsewhere by shielding
businesses from competition.
Some officials see special economic zones as
vehicles for graft. In 2005 some 60 per cent of
companies in Indian zones reported having to make
"irregular" payments to zone authorities. Last month
Ukraine s prime minister said that he opposed zones
because of corruption. Zones in Nigeria were firmly
resisted by the customs agency, which did not want
to lose its clout. Another concern is the use of zones
to launder money by inflating export values.
This may go further, if privately run charter cities
and other so-called "special governance zones"
gain traction. The idea is to create enclaves that
write their own rules in all business matters, from
labor regulation to anti-corruption codes; "to look
at laws as services that companies demand," said
Lotta Moberg of George Mason University in Fairfax,
Va .Such ventures will provide competition more
effectively than zones focused on fiscal incentives,
said Shanker Singham, founder of Enterprise Cities.
Singham is in talks to develop sites in Bosnia, Colom-
bia, the Dominican Republic, India, Morocco and
Oman, but these are mostly at an early stage.
The most advanced charter-city project, backed
by a group of American libertarians, is in Honduras.
It has yet to start, however, and already is contro-
versial: Many Hondurans worry that it will operate
as a state within a state, milked by business interests.
In most countries such ventures are likely to
encounter political difficulties.
Whether or not such freewheeling zones catch
on, expect more experiments. South Korea and
Thailand are developing eco-industrial parks. Others
are considering zones for refugee populations.
For better or worse, the number of zones could
top 5,000 before long.
@2015 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
Special economic zones:
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