Special Economic Zones in Developing And/Or Transition Economies: A Policy Proposal
11 Pages Posted: 27 Oct 2003
Making use of a global partitioning (disintegration) approach, a novel necessary and sufficient condition for the creation of Pareto-improving special economic zones is derived. It is shown that the establishment of a special economic zone may be desirable even if foreign investment has an immiserization effect. The present approach allows not only for the use of mobile but also immobile domestically owned factors in the special economic zone. Adopting a political economy perspective, multihousehold economies with without the feasibility of lump-sum compensation are modeled. It is shown that, subject to a certain condition, the setting up of special economic zones accompanied by appropriate tax policies results in an increase in government revenue. The latter may be used to finance much-needed investment in infrastructure or the production of public goods.
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