The Political Economy of Special Economic Zones: The Cases of Ethiopia and Vietnam

There were over 5,000 Special Economic Zones (SEZs) in the world, according to the  United Nations Conference on Trade and Development (UNCTAD) in 2019. About 75 percent of developing economies and almost all transition economies use SEZs in their early stages of industrialization. While countries identify SEZs in different ways, they are defined as geographically bound areas in which governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support. From 2014-2018, 1,000 SEZs were established and at least 507 additional SEZs were planned for the next five years.  

Why have SEZs traveled so far and fast globally, especially in the Global South? How does this policy vary when it enters different national contexts? 

In a new journal article published in the Review of International Political Economy, Keyi Tang develops an SEZ policy adoption framework for developing or transitioning countries to compare how Ethiopia and Vietnam have learned from mainland China and Taiwan’s SEZ policies. Drawing on field interviews with 53 key stakeholders, Tang argues that the recent wave of SEZ adoption among late industrializers is rooted in their desires to catch up, just as China and other Newly Industrialized Economies (NIEs) did. 

Main findings:

• The pressure brought by globalization has pushed states to intervene in industrialization through investor-friendly industrial policies. SEZs, which have helped many East Asian countries achieve structural transformation, are appealing to latecomers because of these countries’ fast growth and similar history of extreme poverty. 
• Following the three-stage policy framework developed by Tang, in the first-stage Ethiopia and Vietnam, under pressure of international competition and protectionism-led crises, political elites made policy changes and justified their legitimacy by opening markets for investment and trade. 
• In the second stage, both countries still lacked the financial resources and technical capabilities to build the essential infrastructure needed for industrial production, so the first SEZ in Ethiopia and Vietnam was respectively developed by Chinese and Taiwanese investors.
  • Political elites’ took lessons on legislative and administrative institutions brought by powerful foreign investors, who have a first-mover advantage in transferring their SEZ development lessons to late industrializers. 
• Finally, Ethiopia and Vietnam demonstrate distinct SEZ management styles in line with the different historical institutions as the countries gained more experiences in SEZ development over time. 
  • Ethiopia has a centralized SEZ management system, while Vietnam’s system is relatively decentralized. 
• The SEZ adoption in developing and transition economies is a prime example of policy transfer between NIEs and late industrializers. 
• While governments in the Global South use their agencies to emulate NIEs in using SEZ as a big push, industrial policy for fast economic growth, a coalition between NIE governments and investors plays a key role in transferring first-hand lessons on the initial institutionalization of SEZ legislation and administration. 
• The institutional settings of host countries, however, constrain their local variations of policy implementation, which may further affect these SEZs’ performance.

Tang demonstrates the importance of policy transfer as a driver of SEZ policy and highlights the critical role that emulation plays in late industrialization. She adds that further research can explore the factors affecting SEZ performance and whether an industrial policy like an SEZ can lead to structural transformation in the Global South.