The need to stimulate economic growth within run down parts of cities has increasingly led to governments creating a number of incentives for businesses to relocate. While direct investment in infrastructure is one way of boosting a poor area, specially designated areas of low tax and regulation are being used by countries around the world to attract businesses to otherwise undesirable areas.

Special economic zones (SEZs) – also known as enterprise zones – are areas that governments allow relaxed regulations, minimal corporation tax and bureaucracy for a temporary period in order to encourage private investment. Designed to inspire private firms and entrepreneurs to spur on development that the government may not be able to afford, they have experienced mixed success since becoming popular in the 1970s.

Many of these SEZs offer no business taxes whatsoever, allowing businesses to set up in the area free from the constraints of the taxman. The idea is that the companies will heavily invest the money saved from not paying tax into improving the area around them. The relaxed regulations also encourage entrepreneurs to grow their businesses in a newly thriving environment.

In urban areas, these incentivised locations are known as enterprise zones, and were developed in the UK and US. Until the 1970s, most governments invested directly in areas to spur growth. However, after the recessions of those decades, a new way of thinking for urban regeneration emerged, with both the British Centre for Policy Studies and the American Heritage Foundation suggesting Keynesian-style policies be abandoned in favour of reduced tax, deregulation and other incentives.

It was the decline of the industrial regions of both these countries that spurred them to find an alternative way of restoring cities. Industrial jobs relocated away from cities that depended on them, decimating communities. The US developed a range of enterprise zones in key cities, such as San Diego and Baltimore, as well as parts of South Boston and New Jersey.

One particularly successful enterprise zone was found in Evansville, Indiana. Established in 1984, it offers businesses tax credits within a 2.1 square mile area. In a study in 1989, the area was shown to have been exceptionally cost-effective, and had boosted employment in the area considerably. However, the experience in the US hasn’t all been successful. In 2001, another study showed that an enterprise zone in Louisville, Kentucky had predominantly benefited larger businesses over local entrepreneurs, while not helping the local communities.

Reversing the manufacturing decline
The UK’s use of enterprise zones dates back to the 1980s, in the aftermath of the decline manufacturing industry throughout the country, although the level of their success has been somewhat mixed. While the London Docklands regeneration that transformed a dilapidated area near the River Thames – formerly the world’s largest port – is held up as a prime success story, the UK is littered with less than successful attempts of urban renewal.

The Docklands saw Canary Wharf developed into one of the world’s leading financial services hub, sporting a new airport, rail line and many plush, sky-rise offices. In 1993, one year after its enterprise zone status had expired, the area employed 7,000 people. Today it employs 90,000, emphasising how transformative these zones can be if done right.

Between 1981 and 1986, the UK spent almost £300m on enterprise zones predominantly in areas that had lost their manufacturing bases. According to a study carried out in 1987, only 2,800 new companies were established as a result of them, and after local transfer of workers into account, just 13,000 jobs had been created.

This hasn’t deterred the current British government, however, who announced last year plans to create 24 new enterprise zones across England, including in Liverpool, Sheffield, Manchester, Cornwall and London. The re-emergence over this type of urban regeneration might have something to do with the dire state of the UK government’s finances and the need to encourage businesses to pick up the slack.

Problems with corruption
In 2000, India’s government enthusiastically announced plans for enterprise zones across the country, with an SEZ Act announced in 2005 to prove the government’s commitment to the policies, coming into force a year later. The objectives of the policy were to generate additional economic activity, promote exports, attract foreign and domestic investment, create jobs, and enhance infrastructure. Compliance was simplified, while a number of tax incentives and concessions were made.

Although the SEZs have tended to focus on urban regions that require infrastructure improvements, the government has also created a number of larger SEZ’s that stretch across a number of regions, such as the Delhi to Mumbai Industrial Corridor. Many of the country’s SEZ’s have come in for serious criticism, with charges of corruption against some of the businesses operating in them.

The industries that have benefited most from SEZs include the IT sector, electronic hardware, chemical and pharmaceuticals, and gems and jewellery, while the regions that have created the most employment include Gujarat and Maharashtra in the west and Tamil Nadhu, Andhra Pradesh and Karnataka in the south.

There has also reportedly been friction between the Finance Ministry and the Commerce Ministry over inflated performance figures in the SEZs. A senior commerce department official told the country’s Business Standard newspaper: “There has always been some tension between the two ministries over the success of SEZs. So, we are doing a study by a neutral organisation on whether it has been able to measure up to its objectives. [Otherwise], we see no point in continuing with this scheme and giving them tax subsidies.”

According to government figures, exports from SEZs have risen by nearly 30 percent to $88bn over the last year. India’s government has approved 577 SEZ’s, although currently there are just 170 in operation. The re-evaluation of the policy, however, comes after suggestions of real estate corruption, with developers making quick money on buildings that are exempt from tax.

Dr Arpita Mukherjee, a professor at the Indian Council for Research on International Relations (ICRIER), is currently undertaking a review into India’s SEZ policy on behalf of the Commerce Ministry. He told European CEO that subsidies and tax incentives have been abused to a “substantial extent”. The many levels of Indian government – and the bureaucracy that comes with it – also meant that there was potential for corruption.

Mukherjee said: “Land taken under the SEZ policy is sometimes misused. States have their own SEZ act, which sometimes differs from the central act. Multi-layered government and multiple policies create scope for corruption. Too many SEZs have been awarded and government continues to award SEZs in spite of the fact that existing ones are not performing.

“Corruption can be addressed…through more stringent evaluation of feasibility of project proposals and online application and approval systems. Also, project evaluations should be independent of the government.”

However, he says that SEZs have a place in developing countries, provided they are run correctly: “This is a good policy to promote manufacturing and export and to link India into the global production network. If the policy is implemented properly and India initiates some general reforms focusing on ease of doing business the scheme will be beneficial. It has positive impacts on exports, employment and investment. The SEZ should continue to play a key role in India’s development but there is a need to address the current problems.

A more coherent strategy needs to be developed by the government so that it is easier to do business in the country, says Mukherjee: “The government needs to consolidate different schemes under the Foreign Trade Policy and design subsidies that are WTO non-actionable and will benefit manufacturing.  In India there are too many alternative models, but none of them provide [an] holistic end-to end solution.”

Aqaba
Another country that has experimented with SEZs is Jordan. The nation’s southern beach town of Aqaba was designated an SEZ in 2001 by the government to help develop the region as a centre for trade, tourism and culture. The Aqaba Special Economic Zone Authority (ASEZA) was established with the purpose of directing the strategy for the area, with a particular focus on improving the areas architecture, ports, coral reef, industrial zones and airport. However, the rush of investment in the area might have been overly enthusiastic, with the city littered with half-built housing facilities that have remained untouched in a number of years.

Urban regeneration is a key goal of many country’s attempts to develop themselves into modern, thriving economies. While the concept of a special economic or enterprise zone is sound, the examples in India and Jordan show that they must be implemented properly, with clear guidelines, if they are to be successful. The UK government has enthusiastically announced plans to create many of these zones, but in order to ensure that it sees more examples like the London Docklands – and less like Louisville – depends on the level of support and demand the government is willing to commit.