Old Road but Hard to Start

 

As developing countries are struggling to draw foreign investment, Vietnam needs to set up special economic zones (SEZs). Currently, the world has about 3,000 special economic zones in 120 countries, which employ more than 50 million workers and contribute hundreds of billions of US dollars to economies. Being superior to existing economic zones, SEZs with freer business law systems and more open management institutions will magnetise foreign investment capital and technologies. SEZs not only attract foreign investors in search of more effective investment sectors but also help domestic industries boost exports through partnership channels with foreign investors in SEZs. The ultimate goal of SEZs is to lure FDI, develop services, attract foreign currencies, and facilitate the formation of public - private partnership (PPP) to speed up the construction of modern infrastructure, create more jobs and improve workforce quality.

 

SEZ benefits are quite clear and much repeated on mass media but they also have certain drawbacks.

 

First, the large area will result in the shrinkage of agricultural land. The loss of agricultural land may cause supply-demand disturbances and even threaten food security in the region. Besides, land compensation must be reconsidered and based on market development to protect the interest of farmers who need important investment to change their careers which are quite different from their old ones.

 

Second, poor planning may give rise to unbalanced and unsustainable development and SEZs only generate an illusion of a prosperous region. In the world, many countries only focus on developing the inside of SEZs while leaving behind surrounding areas and this dark side of development mirrored by the development of SEZs and non-SEZ areas and widening income gaps.

 

Third, countries and localities where SEZs are located are unlikely to benefit from foreign investors. Tax incentives and preferential land rents will bring about concerns over tax revenue. Many investors come to SEZs to accumulate land and wait for higher prices to sell when infrastructure is completed rather than spend their money on doing actual business.

 

Fourth, the huge appeal of SEZs may not only draw new capital flows but also entice tenants in industrial parks and export processing zones to allocate their investment capital into new SEZs. If this occurs on a large scale, it will lead to the loss of investment capital and skilful labour inside a very country and make other areas less appealing than SEZs. Ignored areas will gradually become backward.

 

Fifth, the flooding of investment capital into SEZs amidst unsupportable infrastructure may affect the exploitation of natural resources and the environment. The supply of energy, electricity, oil and water of waste treatment capacity is likely ignored or sketchily mentioned when a investment licence is granted. The ignore of these factors from the starting may cause products made in SEZs fail to meet environmental standard requirements imposed by customers from developed nations.

 

Without doubt, the formation of SEZs is the right, but not rosy, path. On a cautious view, to minimise the risk of failure and increase the chance of success of SEZs, we need to take into account some issues.

 

First, big investment value for infrastructure and main projects will not be able to generate high profits in the short-term. Investors must endure in a long-term and have a long vision to enjoy gains in the future. These investors may receive top-rate incentives for their leading roles in drawing other investment flows. According to experience from some countries, they increase preferences for domestic industries or approach investment capital from powerful industrial empires or, at a national level, pledge incentives for investors via bilateral agreements. Thus, the first challenge is to create momentums for SEZs by attracting capable investors.

 

Second, a strong commitment from all levels of leadership and management is necessary to to successful establish and operate an SEZ. The management must play a vital role in creating planning visions concerning traffic infrastructure, energy, and technical standardisation. Besides, the management must set clear criteria for SEZ objectives, its contributions to the overall growth and its ability to attract capital, create jobs and pay taxes. The determination from the highest leadership is the guarantee for policy stability in early days of SEZs and is an extremely important factor in improving the business environment to attract investors into SEZs.

 

Third, the SEZ management must proactively call for investors with most advanced technologies and bring those technologies into the country. It should give priority and incentives for research facilities and academics to acquire advanced technologies, receive technologies, master and further develop technologies.

 

Fourth, the formation and development of an SEZ is a long-term process and depends on specific economic circumstances of each period. Economic and political developments in the world and the region have a great influence on the success of an SEZ. Therefore, it is necessary to adapt to changes in the business environment, with the ultimate goal of minimising risks to economy, politics and society.

 

Fifth, legal regulations on economic, social and managerial behaviours in SEZs must be made into law because SEZs are a sort of special institutional unit. These laws take a lot of time to make but they are fundamental to the operation and success of SEZs.

 

According to plan, Vietnam will have three SEZs, namely Van Don in the north (Quang Ninh province), Bac Van Phong in the central region (Khanh Hoa province) and Phu Quoc in the south (Kien Giang province). All three SEZs meet such criteria as sea-looking location, abundant and cheap labour sources, abundant land funds, and little impacts on local residents.

 

However, Vietnam has to delay the Law on Special Administrative - Economic Units because policymakers need more time to study on this. Or in other words, we are not ready to step on this new way. All knows that SEZs will compete with each other in laws, economic regulations, and preferences in taxes, properties, infrastructure construction, and employment. But, the willingness to accept the degree of opening is a big challenge for our policy guideline and legal system.

 

In addition, we also need to double-think all factors to choose the operation model for three SEZs. For example, if we take the low-cost model to attract investment capital, we may be quickly successful in the short term but this advantage will disappear when costs grow in a longer term. For that reason, policymakers and investors need to find out the best model for long-term sustainable development and success of SEZs.