SEZs – To Have or Not: A Case of Opportunity Costs

Ever since India started on the liberalization in 1991, policies regarding the establishment of Special Economic Zones (SEZ) have been fraught with controversy. Simply put, firms in SEZ location allows the developer to get the land, infrastructure, water, electricity and tax concessions thus enabling him to set up manufacturing and processing units in SEZ as opposed to in another location. Further the SEZ remains outside the jurisdiction of the national laws on labour and environment, firms secure an advantage) over non-SEZ locations. 

Debate between proponents and opponents has rested upon the utility of these SEZs to the economy and the society. Proponents have claimed that SEZ enable channelizing of investment in sectors that hitherto had not attracted sufficient attention.  Studies have shown better wages and the forward and the backward linkages create spillovers in terms of greater infrastructure access to the local economy.

However there are several costs attached to it. One needs to look beyond the explicit costs factoring in the opportunity costs. SEZ are often developed on agricultural land. The costs of conversion of this land and the loss of occupation and dislocation of the local communities are often ignored. Besides the process of acquiring the land, often opaque and unstructured, threatens the traditional social network and the subsequent spillovers.  With SEZs exempt from customs duties, income tax, sales tax, excise duties and service tax, the loss to the exchequer is high. This implies a loss of revenue and critics feel that these tax incentives are way in excess of what is necessary.

Further, since SEZs are exempt from environmental laws, environment degradation may set in and also alter for the worse the local community-environment dependencies. Critics citing the example of China and Philippines, SEZs result in creation denationalized territories threatening the domestic sovereignty in those territories.

Critics opine that these costs are far higher than these benefits the SEZs are likely to generate. A perfect for analyzing opportunity costs in the economy.

Source: http://democracyconnect.wikispaces.com/Cons+of+SEZ+Policy accessed on Jan 26,2011; Naomi Klein, “No Logo”, 2001;