Skip to main content

The political economy of special economic zones


This paper is a first attempt to apply a robust political economy framework to explain when Special Economic Zones (SEZs) can contribute to economic development. A robust political economy is one that channels the actions of self-interested individuals with limited information to promote economic progress. In the right institutional context, SEZs tend to promote economic growth. In the wrong institutional context, they can cause resource misallocation and rent-seeking. Policy makers introducing SEZs must overcome the knowledge problem to avoid misdirected economic planning. Yet, the scheme can only fulfill its purpose if it also prevents destructive rent-seeking behavior, both from businesses and from government authorities. The political economy framework of SEZs can be applied to judge their potential efficacy, something that orthodox studies of country features such as natural resources, infrastructure, and zone location fail to do. The Indian and Chinese experiences with SEZs illustrate these points.

Corresponding author
Hide All
Aggarwal A. (2005), ‘Performance of Export Processing Zones: A Comparative Analysis of India, Sri Lanka, and Bangladesh,’ Indian Council for Research on International Economic Relations (ICRIER) Working Paper No. 155, (accessed April 2014).
Aggarwal A. (2007), ‘Impact of Special Economic Zones on Employment, Poverty, and Human Development’, Indian Council for Research on International Economic Relations (ICRIER) Working Paper No. 194, (accessed April 2014).
Auty R. (2010), ‘The Potential of Early Reform Zones to Restructure Russia's Economic Geography’, Paper Prepared for the World Bank, March 26, 2010.
Auty R. (2011), ‘Early Reform Zones: Catalysts for Dynamic Market Economies in Africa’, in Farole T. and Akinci G. (eds.), Special Economic Zones: Progress, Emerging Challenges, and Future Directions, Washington, DC: The World Bank, pp. 207226.
Beaulier S. A. and Subrick J. R. (2006), ‘Poverty traps and the robust political economy of development assistance’, Review of Austrian Economics, 19 (2/3): 217226.
Basile A. and Germidis D. A. (1984), Investing in Free Export Processing Zones, OECD Publishing. Paris and Washington.
Beck P. and Maher M. W. (1986), ‘A Comparison of Bribery and Bidding in Thin Markets’, Economic Letters, 20 (1): 15.
Boettke P. J. and Leeson P. T. (2004), ‘Liberalism, Socialism, and Robust Political Economy’, Journal of Markets & Morality, 7 (1): 99111.
Burman A. (2006), ‘Special Economic Zones: Issues in Corporate Governance’. (accessed December 2012).
Carter C. and Harding A. (eds.) (2011), Special Economic Zones in Asian Market Economies. New York and London: Routledge.
Chaudhuri S. and Yabuuchi S. (2010), ‘Formation of Special Economic Zone, Liberalized FDI Policy and Agricultural Productivity’, International Review of Economics and Finance, 19 (4): 779788.
Chen K., Hillman A. L. and Gu Q. (2002), ‘From the Helping Hand to the Grabbing Hand: Fiscal Federalism and Corruption in China’, in Wong J. and Ding L., (eds.), China's Economy into the New Century: Structural Issues and Problems, Singapore: Mainland Press, pp. 193215.
Cling J. and Letilly G. (2001), ‘Export Processing Zones: A Threatened Instrument for Global Economy Insertion?’, DIAL Working paper DT/2001/17. (accessed December 2012).
Costachie S. (2008), ‘Free Zones, Some Theoretical Aspects’, Annals of the University of Craivora: Series Geography, 11: 138146.
Crane G. T. (1990), The political Economy of China's Special Economic Zones, Armonk, New York and London, England: M. E. Sharpe Inc.
Crane G. T. (1994), ‘Special Things in Special Ways: National Economic Identity and China's Special Economic Zones’, The Australian Journal of Chinese Affairs, 32: 7192.
Creskoff S. and Walkenhorst P. (2009), ‘Implications of WTO Disciplines for Special Economic Zones in Developing Countries’, The World Bank, Policy Research Working Paper No. 4892.
Davies H. and Ellis P.D. (2000), ‘Porter's ‘Competitive Advantage of Nations’: Time for a final judgment?’, Journal of Management Studies, 37 (8): 11891213.
Desrochers P. and Sautet F. (2004), ‘Cluster-Based Economic Strategy, Facilitation Policy and the Market Process’, The Review of Austrian Economics, 17 (2/3): 233245.
Easterly W. (2002), The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics, Cambridge, MA and London, England: The MIT Press.
Engman M. (2011), ‘Success and Stasis in Honduras’ Free Zones’ in Farole T. and Akinci G. (eds.), Special Economic Zones: Progress, Emerging Challenges, and Future Directions, Washington, DC: The World Bank.
Engman M., Onodera O. and Pinali E. (2007), ‘Export Processing Zones: Past And Future Role In Trade And Development’, OECD Trade Policy Working Paper, No. 53, OECD Trade Directorate.
Farole T. (2010), ‘Case Studies of Special Economic Zones: Ghana’, Mimeo, Washington DC: World Bank.
Farole T. (2011a), ‘Special Economic Zones What Have We Learned’, The World Bank: Economic Premise, No. 64.
Farole T. (2011b), Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience, Washington, DC: The World Bank.
Farole T. and Akinci G. (2011), Special Economic Zones: Progress, Emerging Challenges, and Future Directions, Washington, DC: The World Bank.
Farole T. and Kweka J. (2011), ‘Institutional Best Practices for Special Economic Zones: An Application to Tanzania’, Africa Trade Policy Note No: 25, The World Bank.,,contentMDK:22987846~pagePK:34004173~piPK:34003707~theSitePK:502469~isCURL:Y,00.html (access July 2013).
FIAS (2008), Special Economic Zones Performance, Lessons Learned, and Implications for Zone Development. Washington, DC: The World Bank Group.
Frye T. and Shleifer A. (1997), ‘The Invisible Hand and the Grabbing Hand’, The American Economic Review, 87 (2): 354358.
Gopalakrishnan S. (2011), ‘SEZs in India: An economic policy or a political intervention?’, in Carter C. and Harding A. (eds.), Special Economic Zones in Asian Market Economies, New York and London: Routledge.
Govardan D. and Srivastav V. (2012), ‘What SEZ? With Problems Galore, There's Nothing so Special about Special Economic Zones’ The Financial Chronicle, 23 November 23. (accessed May 2014).
Guangwen M. (2003), The Theory and Practice of Free Economic Zones: A Case Study of Tianjin, People's Republic of China, Peter Lang Pub. Inc. (accessed December 2012).
Haber S. (2002), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence, Hoover Institution Press.
Hamada K. (1974), ‘An Economic Analysis of Duty-free Zone’, Journal of International Economics, 4 (3): 225241.
Hamilton C. and Svensson L. E. O. (1982), ‘On the Welfare Effects of a Duty-Free Zone’, Journal of International Economics, 13 (1): 4564.
Harding A. (2011), ‘The Indian Special Economic Zones Act 2005: Implications for modeling the law and governance of SEZs’, in Carter C. and Harding A. (eds.), Special Economic Zones in Asian Market Economies, New York and London: Routledge.
Harrison B. (1992), ‘Industrial Districts: Old Wine in New Bottles?’, Regional Studies, 26 (5): 469483.
Hayek F. A. (1945), ‘The Use of Knowledge in Society’, The American Economic Review, 35 (4): 519530.
Haywood R. C. (2000), ‘Free Zones in the Modern World’, World Economic Processing Zones Association Publication, CFATF Meeting, Aruba, October 18, 2000.
He C. (2002), ‘Information Costs, Agglomeration Economies and the Location of Foreign Direct Investment in China’, Regional Studies, 36 (9): 10291036.
Hirschman A. O. (1970), Exit, voice, and loyalty: Responses to Decline in Firms, Organizations, and States. Cambridge, MA: Harvard University Press.
Ikeda S. (2005), ‘The Dynamics of Interventionism’ in P. Kurrild-Klitgaard (ed), Advances in Austrian Economics, Vol. 8: The Dynamics of Interventionism: Regulation and Redistribution in the Mixed Economy, pp 21–58.
ILO – International Labor Organization (2007), ‘Database on Export Processing Zones (Revised)’, Working Paper 251, Geneva, Switzerland: International Labour Office.
Jayanthakumaran K. (2003), ‘Benefit–cost Appraisals of Export Processing Zones: A Survey of the Literature’, Development Policy Review, 21 (1): 5165.
Johansson H. and Nilsson L. (1997), ‘Export Processing Zones as Catalysts’, World Development, 25 (12): 21152128.
Keshava S. (2008), ‘The Effect of FDI on India and Chinese Economy: A Comparative Analysis’, Second Singapore International Conference on Finance.
Khan S. (2008), ‘India's SEZ Business Zones Development: Economic Performance, Social/Environmental Impacts’. (accessed May 2014).
Kirzner I. M. (1985) [1979], ‘The Perils of Regulation: A Market-Process Approach’, in Discovery and the Capitalist Process, Chicago: University of Chicago Press, 119149.
Krueger A. O. (1993), Political Economy of Policy Reform in Developing Countries, MIT Press.
Kusago T. and Tzannatos Z. (1998), ‘Export Processing Zones: A Review in Need of Update’, Social Protection Group, Human Development Network, The World Bank.
Lavoie D. (1985), National Economic Planning: What is Left?, Cambridge MA, USA: Ballinger Publishing Company.
Lee Y. (1999), ‘Labor Shock and the Diversity of Transnational Corporate Strategy in Export Processing Zones Growth and Change’, 30(3): 337–365.
Leff N. (1964), ‘Economic Development through Bureaucratic Corruption’, American Behavioral Scientist, 8 (3): 814.
Levien M. (2011), ‘Special Economic Zones and Accumulation by Dispossession in India’, Journal of Agrarian Change, 11 (4): 454483.
Li S., Li S. and Zhang W. (2000), ‘The Road to Capitalism: Competition and Institutional Change in China’, Journal of Comparative Economics, 28 (2): 269292.
Litwack J. M. and Qian Y. (1998), ‘Balanced or Unbalanced Development: Special Economic Zones as Catalysts for TransitionJournal of Comparative Economics, 26 (1): 125.
Lui F. T. (1985), ‘An Equilibrium Queuing Model of Bribery’, Journal of Political Economy, 93 (4): 760–81.
Madani D. (1999), ‘A Review of the Role and Impact of Export Processing Zones’, The World Bank: Working Paper, No. 2238.
Martin R. and Sunley P. (2001), ‘Deconstructing Clusters: Chaotic Concept or Policy Panacea?’, Journal of Economic Geography, 3 (1): 535.
Mazumdar S. (2008), ‘Crony Capitalism and India: Before and After Liberalization’, MPRA Paper No. 19627. (accessed May 2014).
Miller R. and Côté M. (1985), ‘Growing the Next Silicon Valley’, Harvard Business Review, 63 (4): 114123.
Mises L. von (1977), A Critique of Interventionism, USA: Arlington House Publishers.
Mitra S. (2007), ‘Special Economic Zones in India: White Elephants or Race Horses’. (accessed May 2014).
Miyagiwa K. F. (1986), ‘A Reconsideration of the Welfare Economics of a Free-Trade Zone’, Journal of International Economics, 21 (3): 337350.
Moberg L. and Wagner R. E. (2014), ‘Default Without Capital Account: The Economics of Municipal Bankruptcy’, Public Finance and Management, 14 (1): 33.
Morriss A. P. and Moberg L. (2012), ‘Cartelizing Taxes: Understanding the OECD's Campaign Against ‘Harmful Tax Competition’, Columbia Journal of Tax Law, 4 (1): 164.
Niskanen W. A. (1971), Bureaucracy and Representative Governmen, Chicago, New York: Aldine Atherton.
Patil D. K. (2013), ‘Special Economic Zones in India’, Golden Research Thoughts, 3 (1): 4.
Palit A. and Bhattacharjee S. (2008), Special Economic Zones in India: Myths and Realities, Anthem Press.
Pennington M. (2011), Robust Political Economy: Classical Liberalism and the Future of Public Policy, Cheltenham, UK and Northampton, MA, USA: Edward Elgar.
Porter M. E. (1998), ‘Clusters and the New Economics of Competition’, Harvard Business Review, reprint 98609.
Porter M. E. (2000), ‘Location, Competition, and Economic Development: Local Clusters in a Global Economy’, Economic Development Quarterly, 14 (1): 1534.
Pradeep N. and Pradeep P. (2008), ‘SEZs as Growth Engines – India Vs China’. (accessed December 2012).
Prihodko S., Volovik N., Hecht A., Sharpe B. and Mandres M. (2007), ‘Special Economic Zones’, Consortium for Economic Policy Research and Advice, Moscow. (accessed December 2012).
Romer P. (1993), ‘Idea Gaps and Object Gaps in Economic Development’, Journal of Monetary Economics, 32 (3): 543573.
Rosenstein-Rodan P. N. (1943), ‘Problems of Industrialisation of Eastern and South-Eastern Europe’, The Economic Journal, 53 (210/211): 202211.
Roy A. (2009), ‘Why India Cannot Plan Its Cities: Informality, Insurgence and the Idiom of Urbanization’, Planning Theory, 8 (1): 7687.
Schrank A. (2001), ‘Export Processing Zones: Free Market Islands or Bridges to Structural Transformation?Development Policy Review, 19 (2): 223242.
Seshadri T. (2011a), ‘Is the Path to Higher Exports in India Paved with Export Zones?’, Journal of South Asian Development, 6 (1): 2541.
Seshadri T. (2011b), ‘Special Economic Zones in India: Landed Before Take-off’. (accesed May 2014).
Seshadri T. and Storr V. H. (2010), ‘Knowledge problems associated with creating export zones’, The Review of Austrian Economics, 23 (4): 347366.
Shleifer A. and Vishny R. (1993), ‘Corruption’, The Quarterly Journal of Economics, 108 (3): 599617.
Sit V. S. F. (1985), ‘The Special Economic Zones of China: A New Type of Export Processing Zone?’, The Developing Economies, 23 (1): 6987.
Strong M. and Himber R. (2009), ‘The Legal Autonomy of the Dubai International Financial Centre: A Scalable Strategy for Global Free-Market Reforms’, Economic Affairs, 29 (2): 3641.
The Freeport Area of Bataan (2013), homepage link ‘FAB History’. (accessed October 2013).
TI – Transparency International (2011), ‘Daily Lives and Corruption: Public Opinion in South Asia’. (accessed July 2013).
Tullock G. (1965), The Politics of Bureaucracy, Lanham, New York, London: Public Affairs Press.
Tuominen K. and Lamminen E. (2008), ‘Russian Special Economic Zones’, Electronic Publications of Pan-European Institute 18/2008, ISSN 1795–5076. (accessed December 2012).
Wallis J. J. (2006), ‘The Concept of Systematic Corruption in American History’, in Glaeser E. L. and Goldin C. (eds.), Corruption and Reform: Lessons from America's Economic History, University of Chicago Press.
Wang J. (2013), ‘The Economic Impact of Special Economic Zones: Evidence from Chinese Municipalities’, Journal of Development Economics, 101: 133147.
Warr P. G. (1987), ‘Export Promotion via Industrial Enclaves: The Philippines’ Bataan Export Processing Zone’, The Journal of Development Studies, 23 (2): 220241.
Warr P. G. (1989), ‘Export Processing Zones: The Economics of Enclave Manufacturing’, The World Bank Research Observer, 4 (1): 6588.
Wei S. (1999), ‘Special Governance Zone: A Practical Entry-Point for a Winnable Anti-Corruption Program’, 9th International Anti-Corruption Conference, Durban, South Africa, 10–15 December, 1999. (accessed July 2013).
Weingast B. R., Montinola G. and Qian Y. (1995), ‘Federalism, Chinese Style: The Political Basis for Economic Success’, World Politics, 48 (1): 5081.
World Bank (WB), The (1992), ‘Export Processing Zones’, Policy and Research Series, 20, Washington, DC: The World Bank.
Xu C. (2011), ‘The Fundamental Institutions of China's Reforms and Development’, Journal of Economic Literature, 49 (4): 10761151.
Yuan J. and Eden L. (1992), ‘Export Processing Zones in Asia: A Comparative Study’, Asian Survey, 32 (11): 10261045.
Zeng D. Z. (2011), ‘How do Special Economic Zones and Industrial Clusters Drive China's Rapid Development?’, World Bank, Policy Research Working Paper No. 5583.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Institutional Economics
  • ISSN: 1744-1374
  • EISSN: 1744-1382
  • URL: /core/journals/journal-of-institutional-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Altmetric attention score

Full text views

Total number of HTML views: 17
Total number of PDF views: 224 *
Loading metrics...

Abstract views

Total abstract views: 1282 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 24th November 2017. This data will be updated every 24 hours.