The Political Economy of Special Economic Zones
June 1, 2014
Forthcoming in The Journal of Institutional Economics
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.
Number of Pages in PDF File: 34
Keywords: Special Economic Zones, Political Economy, Economic Development, Economic Calculation, Rent-Seeking
JEL Classification: B52, B53, H25, O24, O43, P26
Date posted: July 26, 2013 ; Last revised: July 2, 2014