Special economic zones (SEZs) can serve as a catalyst for the region’s economic development, provided the right business environment and policies are put in place, the Asian Development Bank (ADB) said.
In its Asian Economic Integration Report 2015, the Manila-based lender said SEZs could facilitate trade, investment and policy reform amid a regional slowdown.
With SEZs in Asia having expanded to over 4,300 this year from about 500 in 1995, the ADB said this shows the strong and rising interest in this form of policy experiment.
The Philippines, in particular, was said to have 460 SEZs, of which 92 percent are private and 8 percent owned by the public.
The number of SEZs in an economy is also positively related to overall export performance in the region, the ADB noted. In developing Asia, countries with SEZs attract more—about 82 percent—foreign direct investments (FDI), it added.
To be successful, the ADB said SEZs should establish strong backward and forward linkages with the overall economy. Effective SEZs must be an integral part of dynamic national development strategies and evolve as economies develop by transforming from manufacturing bases to technological platforms for innovation and modern services, it added.
“If designed right, SEZs can become drivers for increased trade, foreign direct investment and better economic policymaking and reforms. Moreover, as countries develop, areas with SEZs can be transformed from mere manufacturing sites to hubs for innovation and modern services,” ADB economist Shang Jin Wei said.
The lender also provided an analysis on Asian trade, with the region’s income elasticity of trade said to have declined from 2.69 before the global financial crisis to 1.30 afterwards and the value of intermediate goods trade—almost 60 percent of total trade—having contracted 2.6 percent in 2014.
“Structural factors behind these include a general trend of rebalancing away from export and investment toward consumption and services, the slowdown in the expansion of global and regional value chains after decades of rapid expansion, and the People’s Republic of China’s growth moderation,” it said.
The ADB noted that regional trade integration was moving steadily and that Asia in general traded more with regional partners than outside the region.
Inflows to Asia from outside and within the region were up 9 percent in 2014 from 2013 ($495 billion), reaching 40 percent of the global total.
About 80 percent of Asia’s inflows went to East Asia ($247 billion) and to Southeast Asia ($133 billion), with multinational corporations (MNCs) providing much of the investment.
The report also outlined how Asia had become an important source of outbound investment, with FDI outflows outstripping inflows by growing over 45 percent between 2010 and 2014. Outflows from Asia were up 19 percent in 2014 ($512 billion) from 2013 ($432 billion).
“Asia is investing abroad more than any other region. According to the UNCTAD (United Nations Conference on Trade and Development) World Investment Report 2015, MNCs from Asia became the world’s largest investors, accounting for almost one-third of the global total ($1.4 trillion),” the report stated.
For instance, FDI outflows from Asia were primarily from East Asia ($416 billion) and Southeast Asia ($80 billion) as MNCs expanded foreign operations through greenfield investments and cross-border mergers and acquisitions
Asia’s intraregional FDI also increased in 2014—to an estimated $255 billion from $230 billion in 2013—and remained 52.6 percent of Asia’s total FDI inflows.
FDI inflows in 2014 increased in all subregions except Central Asia. Proactive regional investment cooperation efforts in East and Southeast Asia contributed to the rise in intraregional FDI inflows, the report said.
The bulk of Southeast Asian FDI inflows went to Indonesia, the Philippines, Cambodia and the Lao People’s Democratic Republic, mainly because of these economies’ improved Ease of Doing Business ranking, the ADB said.
“For the Philippines, its Doing Business score increased to 62.08 in 2014 from 55.95 in 2013 as reforms on construction permits, obtaining credit, and paying taxes were implemented. Better macroeconomic fundamentals and higher credit agency ratings may have also attracted more investments,” it said.