Into the Zone: SEZs in the Mekong Region, Income…or Instability? (Part 1)

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Mekong Eye, Bangkok, Thailand

The Mekong region is abuzz with news about special economic zones (SEZs). From Thailand’s prime minister telling US business leaders  that the Kingdom’s SEZs are a cornerstone to his economic reforms, to Ho Chi Minh City’s mayor wanting 890 km2 designated as an SEZ to revive his city’s economic leadership, to Myanmar’s newly elected government facing increasing pressure to review the outgoing-junta-approved SEZs now underway there—these foreign-investment magnets are picking up steam as ASEAN integration progresses within the Greater Mekong Subregion.

But what’s so special about these zones? Can they unlock new pathways to region’s economic potential, or as the Bangkok Post warned recently, should policy-makers proceed with caution given the immense complexities to securing SEZs’ desired benefits?

The 2011 book, Special Economic Zones, published by the World Bank defines SEZs as a broad range of “demarcated geographic areas contained within a country’s national boundaries where the rules of business are different from those that prevail in the national territory.”  Special Economic Zone occupants generally find the abolition of import and export duties, no foreign exchange controls, facilitated licensing and other regulatory processes, enhanced infrastructure, along with less stringent labour legislation.

With such incentives, SEZs can take many forms. There’s the basic manufacturing model, like Cambodia’s first SEZ, the Taiwanese-owned Manhattan SEZ occupying 1.8 km2 and employing some 20,000 people. They can be scaled-up to the massive 200 km2 proposed build-out for Myanmar’s Dawei SEZ to include residential enclaves, multiuse commercial centers and municipal, health and educational services all to support extensive industrial and export activities in what are ostensibly modern day company towns for hundreds of thousands of people. They can be tourist destinations full of resort facilities and even casinos, such as the Golden Triangle SEZ in Laos or even financial or other services related industries as contemplated in Vietnam.

 

infograph SEZs 2

 

And of course, with new sectors and industries, SEZs need plenty of infrastructure support. They often require factories, housing, power plants, dams and reservoirs, seaports, roads and bridges – all needing land, water and other resources to build and sustain them. (See The Mekong Eye’s infographic: “SEZs: On the Move in the Lower Mekong Countries”) Depending on what form these projects take, the SEZ could force economic and environmental tradeoffs on countries, companies and communities.

But it’s not so much the form that draws investors. It’s the function: direct foreign investment, jobs, and a bridge to a stronger economic foundation popularized by the transformation of Shenzhen – China’s once small fishing village near Hong Kong – which within a generation became an economic metropolis of 14 million, credited as the seed to China’s economic miracle.

 

China's success story from Shenzhen SEZ is a source of inspiration for GMS leaders' economic development vision

China’s success story from Shenzhen SEZ is a source of inspiration for GMS leaders’ economic development vision (Image: https://www.flickr.com/photos/yotut/4966794939)

Chasing that miracle can be costly not just because many SEZs fail to deliver their economic benefits, but also because they bring with them the same basket of social and environmental risks that often accompany the courtship of foreign investment, though with even fewer regulations and controls.

It often starts with land grabbing and lack of compensation for lost livelihoods. Then comes the destruction of pristine forests and coastlines to make way for industrial development – which is compounded by the roads, airports and seaports needed to access the SEZs. The promised jobs are often elusive to locals as locals either lack the skills or cannot compete with the lower wages accepted by economic migrants. On top of this is the potential for corruption and lawlessness spawned by the decreased regulatory climate and willingness to look the other way so long as investments keep flowing.

As the Economist reported last year, “The craze for SEZs suggests that governments too often see them as an easy win: make an announcement, set aside some land, offer tax breaks, and—hey presto!—deprived regions or struggling industries are healed. If only it were that easy.”

 

Of Bicycles and Bandits: Cambodia and Laos hit the SEZ Trail

 Many SEZs in the GMS are struggling to find their footing as their social and economic benefits are not always as lucrative as promised. Employment gains may be occurring, but there’s been little evidence to indicate that the public investment and regulatory concessions are leveraging local and national economies per their intent. As one of the region’s leading SEZ researchers points out, the region’s patronage culture tends to preclude SEZs from becoming nodes of growth, and instead creating islands of profit-taking.

An ADB Working Paper on Cambodia’s SEZs published last October found that: first, SEZs there invest less in research and development than non-SEZ firms; second, skills’ formation may benefit local economies, but not necessarily more so than firms outside the zones, and third, linkages to the larger economy are very small because SEZ firms import most of their inputs and export most of their output. In general, backward and forward linkages to Cambodia’s overall economy are easier to find with developments outside its SEZs than inside them.

Cambodian’s SEZs’ role in bicycle manufacturing – now the second largest exporter to the EU after Taiwan –illustrates the challenge. Exports from Cambodia are now facing the loss of EU import exemptions for not creating domestic supply chains, also a key objective for their SEZs. The EU’s Generalized Scheme of Preferences (GSP) requires that 30 per cent of a bicycle must be manufactured with local materials in order to qualify for duty-free entry. A July 2014 extension of the requirement allows it to utilize Malaysian and Singaporean materials – an arrangement that is set to run out next year.

And though a more free hand with labor and wage rates often pervades SEZ culture, Cambodian garment workers are bucking the trend, as the lower wages that attracted firms initially, are now frustrating the workforce. Last December two of Cambodia’s largest SEZs – employing more than 34,000 workers – were forced to shut down due to strikes over wages. Two months prior, the government had raised their minimum wages from $128 to $140 per month, but workers were demanding $160, ultimately leading to a week of clashes with police prior to the shutdown.

 

Authorities inspect a construction site for Bin Hai SEZ in Preah Sihanouk province in February after discovering hectares of mangrove forest had been filled in with soil.

Authorities inspect a construction site for Bin Hai SEZ in Preah Sihanouk province in February after discovering hectares of mangrove forest had been filled in with soil. (Image: Phnom Penh Post)

Meanwhile, locals are protesting the downing of a 1,000 hectare mangrove forest to make way for the Bin Hai Special Economic Zone, fearing that unchecked development will decrease fish populations “exponentially”, and spread poverty to nearby communities. And logging concessions granted for the Thmodar Special Economic Zone (SEZ) allowed for encroachment into the Virachey National Park.

Upstream along the Mekong, other social costs have taken root within Laos’s SEZs. Graft and money laundering have proven difficult to contain reports World Political Review. Chinese companies, they describe as particularly problematic:

“Most of the Chinese investment was slated to go into the mining and construction sectors, but before long it became clear that few businesses were being developed in most of the SEZs. Instead, many Chinese investors simply bribed government and party officials to be able to park and launder money in Laos. If there was any activity at all, money meant to boost rural development had gone into dubious projects of little or no value to the local population.”

The Golden Triangle SEZ, with its casino and focus on tourism has garnered widespread coverage for a “lawless” spirit and little benefit to locals.

This culture prompted international law enforcement agencies to pressure Lao authorities to crack down on money laundering. As a result, a financial intelligence unit was set up within Laos’ state bank, though not a single money-laundering case has made it to court since its creation.

The Golden Triangle SEZ has also been identified as a key contributor to trafficking in endangered species, with ivory widely available and restaurants serving bear and tiger paws. Moreover, the introduced banana species covering much of the zone, say locals, “… are not your typical Lao variety; they’re the ones you find in supermarkets in Beijing… grown with lots of fertilizer, lots of pesticides…. We’ve heard of many people getting sick from exposure to pesticides.”

Chiang Mai University’s anthropologist Pinkaew Laungaramsri adds that the Golden Triangle SEZ is illustrative of an often overlooked challenge: clashes with local people are not merely about the taking of land and lack of compensation, but related to what she describes as ‘civilizing missions” advancing pro-market policies without consultation amongst those wishing to maintain communal rights and livelihoods. In her chapter, Commodifying Sovereignty: Special Economic Zone and the Neoliberalization of the Lao Frontier, from the 2015 book, Impact of China’s Rise on the Mekong Region, she concludes that the Golden Triangle SEZ has failed to protect affected communities: “Local refusal to be turned into ‘a good quality population’ designed by the Chinese and endorsed by the Lao state reflects the unsettling/contesting ideas about civilization between the powerful developer and the Lao villagers.”

 

Savan-Seno SEZ is Laos government's prime economic development project into prosperity

Savan-Seno SEZ is Laos government’s prime economic development project into prosperity (Image: www.savancitylaos.com)

At Laos’ Savan-Seno Special Economic Zone, in Savannakhet province, a more traditional business culture is prevailing, and more traditional progress is being made. Located along Route 9, which forms the Mekong Subregion’s East/West Economic Corridor linking Laos to Thailand and Vietnam, companies are taking advantage of logistical benefits to move goods to neighboring Thailand and Vietnam, as well as further afield through those two countries respective seaports. In 2014, the US State Department noted that Savan-Seno is “legitimately developing as a production, supply, and distribution center with increasingly sophisticated manufacturing businesses and advanced infrastructure.” Sixty-five companies now operate there, including recently recruited Nikon and Toyota from Japan, employing some 4,500 locals. Nonetheless, authorities have been slow to ensure locals are sufficiently compensated.

Moreover, as discussed below, Thailand has moved forward on its own SEZ across the River in Mukdahan province and elsewhere, creating competition. An SEZ official fears the development could take foreign investment away from Savan-Seno SEZ, and attract Lao workers wanting better pay. Such concerns caused Lao officials last year to seek formal bilateral cooperationbetween the two countries.

SEZs in Laos also face a human resource challenge fitting locals into all these SEZ jobs. As Richard Noonan surmised last year, domestic education and training shortfalls cannot be ignored when filling SEZ employment roles. “There is no shortage of traditional and unskilled labor in Laos, but modern towns and modern economic activity require modern human resources with modern knowledge, attitudes, and skills.”

Nonetheless, Laos sees SEZs as cornerstone of its current economic development strategy, with new SEZs getting underway in Pakse in the south aimed at Japanese investors, and another at the popular tourist destination of Luang Prabang in the north. The Lao government hopes to have up to 58 SEZs operating by 2020.

 

Old Models and Old Challenges: Can Thailand find the Right SEZ Handle?

In her 2016 book, ASEAN Economic Community: A Model for Asia-wide Regional Integration?,Nathalie Fau argues that not only are Lao and Cambodia’s SEZs not contributing effectively to local development, but that Thailand’s initial SEZ foray has too been a bit of a struggle.

”… in spite of tax exemptions and preferential loans for firms choosing to decentralize their activities more than 50 kilometers from Bangkok, the effect of this border industrialization policy is still limited: the Chiang Rai SEZ, the country’s first, or the Mukdahan logistics center and industrial zone are having difficulty taking off. The only exception is the Mae Sot SEZ on the Burmese border: it attracts industries on account of low cost of Burmese labor which represents the majority of the workforce, and its easy access to Bangkok.”

 

Villagers ordained landmark trees in area designated for Chiang Rai SEZ

Villagers ordained landmark trees in area designated for Chiang Rai SEZ (Image: GreenNews TV)

As a middle income country which has already proven its manufacturing prowess, this low-wage-led approach is seen as a throwback for Thailand. A core tenet of SEZ deployment is incubating new approaches that if successful can be replicated. For younger economies like Laos and Cambodia it’s meant granting concessions to accelerate the establishment of a manufacturing base. Myanmar too is looking to leverage its human and natural resources to jump-start a range of industries.

Thailand’s ten SEZs announced last year, five of which are now moving forward, are also slated for low-value manufacturing activities near border areas. Because Thai labor rates are no longer competitive with its neighbors, these SEZs will be structured to facilitate use of migrant workers. As a result, there will be less direct employment benefits for the rural communities hosting the SEZs. Additionally, because of the growth of SEZs bringing a growth in manufacturing and economic opportunities in migrant workers’ home countries, Thailand is already experiencing a migrant labor shortage, which could affect its new SEZ strategy.

Thailand’s leading independent research institute, TDRI, fears this approach will tighten the snare of the middle-income trap. Offering privileges to labour-intensive industries and employing unskilled foreign workers, “misses the mark… Thailand should stress development of SEZs as manufacturing bases for high-value-added products and services instead of promoting labour-intensive industries. This means the government should transform SEZs into ‘special innovation zones’ by focusing on the knowledge-based sector such as software, design, and research and development,” TDRI concludes.

Thailand’s SEZ are also facing fierce local opposition on the ground. Many fear lax environmental standards will result in pollution, deforestation and the destruction of fish and agriculture. However, the government contends these SEZs will not house high-polluting industries. More immediate, however, is the land annexation for the SEZs themselves and land-grabbing in the surrounding areas by real-estate speculators.

The Commerce Ministry recently reported that Thai firms are recruiting foreign shareholdersfor the purposes of acquiring land around SEZ’s with the foreign capital, which is forbidden by Thailand’s foreign business laws.  Also discouraging, say many of those directly affected as well as some outside observers, is that these SEZs are moving ahead without much public discourse, transparency or environmental review. In March, Thailand’s National Human Right Commission reported that exclusion of public participation in SEZ planning is a major problem, with citizens having little recourse but to protest, which resulted in threats from authorities.

 

Part two in our two-part series will examine the promises and challenges of SEZs in Myanmar and Vietnam, and the potential across ASEAN.