Why Pakistan Needs Special Economic Zones?

The onset of pandemic COVID-19 has affected the global economy including Pakistan. As a result of the lockdown imposed to control the spread of the virus, the country’s exports fell March 2020 onwards to as low as USD 0.96 Billion. A regional comparative view shows a decline of 13.7% and 17% in exports of India and Bangladesh respectively. Pakistan is amongst one of the few countries that witnessed an increase in exports post-lockdown; on a month on month basis, this figure increased 26% to USD 2 billion in July 2020. The overall trade balance reduced by negative 14.7% as it stood at USD 1.542 Billion in July 2020 compared to USD 1.8 billion in same month of 2019.

Here it is pertinent to note that the low value-added nature of exports has been a consistent limitation. Limited focus on structural issues historically is a key reason for this; these include the lack of focus on developing human capital necessary for high value-added production, a lack of emphasis on ensuring industry-wide standardisation, poor linkages between high-tech industries and private sector, and the limited access to regional markets.

One policy option is modernisation of the primary sector. For example, learnings from the Green Revolution of the 70’s can be utilized for the agriculture sector, which contributes around 18% to the GDP and constitutes 75% of total exports revenue. However, in addition it requires adoption of latest techniques, tools and equipment. This particular case presents a trade-off: the debate remains of small land holding and farmers’ welfare vs large holdings.

The second option is to diversify the economy as per global trends and upcoming market demand. It means developing the local structure for varying sectors to gain competitiveness. Chile, for example, exports more than 2,800 distinct products to more than 120 different countries.

The third option is progression to the “Zones 3.0” – Special Economic Zones (SEZs) with an integrated solution that addresses global new trends in green growth as well as trade and investment policies with domestic institutional frameworks, industries and communities.

As a brief background, the first modern SEZ was established in Ireland in 1959. In the 1970s, East Asian and Latin American regions began establishing such zones – initially mostly in the form of Export Processing Zones or “Zones 1.0”. The results maybe mixed from notable success in Latin America to policy disappointments in Sub-Saharan Africa; In China, for example, national level SEZs (including industrial parks) account for more than 30 Million jobs and about 22% of national GDP, 46% of FDI and 60% of exports. The transformative effect of SEZs can be gauged by the fact that the average technological commercialization rate in China is around 10% while this rate is 60% in industrial parks and the average technological development in agriculture is 55.2% while in agriculture demonstration zones and agro-tech parks, this rate is up to 70%.

Other countries such as Malaysia and Philippines present the scope of SEZs for a different economic stage.

In Pakistan, industrial estates have been established in all four provinces in the past. Some of the newly established industrial estates are: Value Addition City (Sheikhupura-Faisalabad Expressway), M3 Industrial City (Faisalabad), and Quaid-e-Azam Apparel Park (M-2 Lahore). Over the years, there exists a portfolio of economic facilitation clusters including city-wide industrial clusters, industrial parks, SEZs and CPEC related SEZs. Examples of city-wide industrial clusters are textiles cluster in Faisalabad and sports & surgical clusters in Sialkot. Some Industrial Parks in Pakistan are Rachna Industrial Park (Lahore), Marble City (Lahore), and Textile City (Port Qasim).

With China-Pakistan Economic Corridor (CPEC) entering its next phase, tax exemption for Gwadar’s economic zones are legally in place, agreements for two hydroelectric power plant projects (around USD 4 Billion in cost) have been signed, and the Mainline-1 Railway Project has been approved as a revised cost of USD 6.8 Billion. At present, nine CPEC SEZs have been set up and these include Rashakai Economic Zone (Nowshera) and Moqpondass SEZ (Gilgit-Baltistan).

The CPEC offers a promising opportunity to uplift the economy especially in terms of infrastructure development and FDI, but it truly depends on how equipped Pakistan is strategically to take advantage of this. This is Pakistan’s opportunity to enter the advanced stage of economic zones and move towards the league of fast-developing economies. This could be Pakistan’s leap towards economic stability. Imagine entering a SEZ, a garden-like township similar to Singapore’s Sino-Singapore Suzhou Industrial Park (SIP), known for its modern and safe living environment and sound industrial-urban integration. Its design and planning makes the zone not just an industrial area but a liveable city, attracting high-end investments and talent.

In the past, Export Processing Zones and Industrial Estates have contributed to the economy through setting up of industry, job creation, and increase in exports. However, a widespread criticism of industrial zones is that the development process has not been all encompassing or inclusive. Where cluster based zones have meant higher efficiency, it needs to be supported by advanced technology for global competitiveness. This in turn requires facilitation of the local IT sector.

Pakistan’s growing IT sector paints a promising picture; employing around 150,000 people, it earned USD 1.4 Billion by providing services in over 100 countries during 2019-2020, a YoY growth of 20.72%. Developing an IT SEZ has multiple advantages. A non-exhaustive list includes entrance of global tech companies that bring knowledge and experience, promotion of innovation and technology based creativity, increase in number of tech companies based on the ease of initial setting up and operations, reasonable supply of high-skill workforce, sharing of experience and resources, and most importantly, support for the local SME sector in terms of corporate innovation.

Prime Minister Imran Khan has shown keen interest in the development of Specialized Technology Zones for the IT sector, which displays political will and alignment with his vision of a better Pakistan. On an institutional level, Pakistan Software Houses Association (P@SHA) has taken a lead to represent the IT sector for this matter and has put forth proposals for ease of business, affordable infrastructure and domestic demand through the Make in Pakistan campaign.

COVID-19 has left the world in social and economic uncertainty. In this nature-induced pause is a massive opportunity – reflect, plan and execute or one would be pushed further back to a more challenging position. Pakistan has an IT exports target of USD 5 Billion for year 2023 and a national exports target of USD 46 Billion for year 2025. Without making infrastructural changes and providing sector-wide facilitative catalyst, Pakistan will miss out on this opportunity. To uplift itself from a historic economic dependence on the primary sector, and move towards high-value products and services, Pakistan needs Special Economic Zones.