Special Economic Zones in the OIC Region:
Learning from Experience
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for occupiers and for governments to implement more stringent environmental monitoring and
enforcement practices. In addition, investors have begun to require greater environmental
management within zone development.
3.4.3 Economic Reform
Employment generation is often a key driver of SEZ implementation, however some critics have
argued that where SEZs are developed as ‘pressure values’ against high rates of unemployment,
they reduce the incentive for countrywide economic reform and instead divert reform energies
potentially creating isolated free market enclaves. SEZs need to be grounded within wider
economic development strategies, within which SEZs are a key element in order to successfully
stimulate wider economic performance, linkages with domestic economy and economic reform.
SEZ programmes result in markedly different treatment of enterprises within and outside of
economic zones and this can lead to imbalances where domestic firms are not protected from
the incentives afforded to firms within SEZs. Typically these advantages are addressed through
restrictions such as limiting exports from SEZ producers to the domestic economy.
Where enclave markets are created it is noted that the long-term effects of the SEZs on the
domestic economy are significantly reduced, and the much vaunted backward and forward
linkages41 and technology transfer spill overs are minimal. In particular it is observed that
where SEZs are focused on low-skilled, assembly type operations, these activities are not
typically conducive to technology transfer. In addition, where higher value added operations
such as advanced production activities, software or business services are clustered, enclaves are
often formed de-linking the zones from the rest of the economy with the exception of the labour
force it directly services.42
A key example of this was the establishment of the first industrial free zone in the Dominican
Republic. It was recorded that of the 500 businesses within the zone, only a very small
percentage of material inputs from domestic customs areas demonstrating the difficulties in
establishing backward linkages between the zone and the local economy.43
41 Backward linkages are defined as linkages which create demand for intermediate inputs from the domestic economy, i.e.
where enterprises within the domestic economy supply MNCs within SEZs. Forward linkages are established where a supply
of intermediate inputs for domestic enterprise are created, i.e. firms within an SEZ provide inputs for downstream MNCs
within the domestic economy.
42 Milbery, W (2007) Export Processing Zones, Industrial Upgrading and Economic Development: A Survey.
43 FIAS, (2008) Special Economic Zones: Performance, Lessons Learned and Implications for Zone Development.