Special Economic Zones of Islamabad

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INTRODUCTION:

Pakistan is the sixth most populous country in the world with a population of 207.78 million; given the current rate of population growth, it is estimated to reach 280 million by 2030. Currently, 63% of the population is below the age of 30. Enhancing essential skills in young individual for employment make economic rationale. Over the past decade, the youth (15-24 years) employment to population ratio in Pakistan has declined from 40.9% at the beginning of the period (2006-07) to a level of 36.9% at the end (2017-18) of the period but still considerably high. Pakistan has the 9th largest labour force in the world with nearly 4 million youth attaining working age every year. The country’s youth unemployment is higher than many others in South Asia. Pakistan also has the lowest female labor force participation rates (LFPR) in across all age groups within the region.

The government is enforcing a comprehensive set of administrative policy; and relief measures to address inflation and proactively help the vulnerable members of society. This approach is reflected in the recent decrease in inflation. From an administrative standpoint, the government has implemented structural reforms to stabilize the foreign exchange rate and ensure the availability of essential goods by targeting illegal activities such as foreign exchange malpractices, smuggling, and hoarding. Initiatives like “Sasta Bazaars” and Utility Stores are also being expanded to improve the availability of daily necessities. Regarding policy, government is working diligently to maintain the stability and availability of crucial goods, supported by programs like the “Kissan Package”, which provides subsidies and technological advancements to support agriculture.

SPECIAL ECONOMIC ZONES:

Special Economic Zones (SEZs) are predefined areas of economic activity. They stimulate industrial growth, international trade, and manufacturing jobs within a country. They serve as hubs of trade and business activity due to favorable rules and regulations, such as tax incentives, deregulated business activity and greater benefits for technology transfers and foreign investment. The first SEZs appeared in the late 1950s in industrial countries. They were designed to attract foreign investment from multinational corporations. The first was at Shannon Airport in Clare, Ireland. In the 1970s, SEZs were also established in Latin American and East Asian countries. The most successful SEZs to date have been in China.

The key experiences of China’s SEZs and industrial clusters can best be summarized as strong commitment and pragmatism from the top leadership; preferential policies and broad institutional autonomy; staunch support and proactive participation of governments, especially in the areas of public goods and externalities; public-private partnerships; foreign direct investment and investment from the Chinese Diaspora; clear goals and vigorous benchmarking, monitoring, and competition; business value chains and social networks; as well as continuous technology learning and upgrading. SEZs have contributed 22% of China’s GDP, 45% of total national foreign direct investment, and 60% of exports. SEZs are estimated to have created over 30 million jobs, increased the income of participating farmers by 30%, and accelerated industrialization, agricultural modernization, and urbanization.

Despite the great success of China’s special economic zones and industrial clusters, they also face many challenges to sustaining their success. These challenges include: moving up the global value chain; the sustainability of the export-led growth; environmental and resource constraints; institutional challenges; and lagging social development, among others. China has come a long way in a short time, and its rise is the most compelling economic story of the 21st century. Although it still faces many challenges and difficulties in sustaining its rapid growth, it has launched itself on an irreversible growth path and is poised to become a global economic powerhouse and a key economic and financial player

The recent report titled “Aligning Special Economic Zones Policies of Pakistan and China,” published by the Pakistan-China Institute and Power China, discusses how Pakistan can learn from the Chinese model of SEZs when establishing its own. The concept of SEZs dates back to mid-20^th century, with early examples like Shannon Free Zone in Ireland and China Shenzhen SEZ, which played pivotal role in transforming China into a global economic powerhouse. The successful examples of the Chinese SEZs are Shenzhen, Zhuhai, Shantou, and Xiamen. It has also played part in the social uplift of the society by creating 30 million jobs and increasing the income of traditional farmers by 30% through modern agricultural techniques and industrialization. The market-oriented reforms that China undertook in the 1980s were largely based on opening up of the economy for foreign competition while enhancing foreign trade, renewing domestic markets to make them more competitive, and providing greater leverage to the private sector. Most of the initiatives – lesser government regulation, greater public-private partnerships and use of more advanced technologies to boost the industrial sector – were seen to be taken within these SEZs. Customs and duties were relaxed. Tax benefits were provided. Basic infrastructure for efficient working of the market was built. Airports, roads, seaports and other modes of communication that are essential in transporting goods and products from industrial hubs to domestic and foreign markets were constructed. Access to technology and finance within these sectors was relatively convenient, thereby reducing the barriers to access in economic activity. Unsurprisingly, these zones not only boosted economic production and trade volumes, they created enormous employment opportunities, technological acumen among the workforce, and Chinese competitiveness in export markets.

“Global growth decelerates as advanced economies grapple with inflation and rising geopolitical tensions that contribute to economic uncertainty.”

There has been a policy debate within Pakistan about the utility of learning from China’s experience in fostering economic production and generating trade activity through CPEC. Pakistan and China have finalized nine SEZs to be developed in the first phase under the auspices of CPEC. Four SEZs, namely Dhabeji SEZ in Sindh, Bostan SEZ in Baluchistan, Rashakai SEZ in KP and Allama Iqbal Industrial City in Punjab, are at advanced stages of development. Moqpondass SEZ in Gilgit Baltistan, Mirpur SEZ in AJK, Mohmand Marble City in FATA, and two Federal SEZs namely Industrial Park on Pakistan Steel Mill land and ICT Model Industrial Zone are at the feasibility stage. Allama Iqbal Industrial City and Rashakai SEZs are leading in development works and allotments of industrial plots with many industrial units being under construction.

The recently launched Islamabad Model Special Economic Zone (IMSEZ), situated near T-Chowk in Rawat, Islamabad, is a significant addition to Pakistan’s industrial and economic landscape. This zone, developed under the China-Pakistan Economic Corridor (CPEC), was inaugurated on July 18, 2023 with the foundation stone laid by Prime Minister Shehbaz Sharif. It covers 1,000 acres of prime industrial land at the junction of the N-5 National Highway and Islamabad Expressway. It is designed to promote low-carbon industries and attract investments of $2.5 billion while creating approximately 1,000 jobs. It marks Islamabad’s first SEZ under the CPEC initiative and is expected to foster collaboration between Pakistan and China in industrial and economic reforms.

The IMSEZ aligns with Pakistan’s broader goals of industrial growth expected to attract $2.5 billion in investments and generate substantial employment opportunities, directly addressing economic stagnation. Location near T-Chowk in Rawat, at the intersection of the N-5 Highway and Islamabad Expressway, it ensures excellent connectivity for trade and logistics. Emphasis on low-carbon footprint industries supports Pakistan’s climate action goals while aligning with the capital’s eco-friendly planning. The IMSEZ aims to enhance industrial output and boost exports by leveraging cutting-edge technologies and sustainable practices. It marks Islamabad first SEZ under the CPEC initiative and is expected to foster collaboration between Pakistan and China in industrial and economic reforms.

Industrial activities, even with low-carbon targets, risk altering Islamabad’s ecological balance. Islamabad already benefits from nearby SEZs like Hattar and Rashakai.

However, there have been certain structural challenges that have rendered it difficult for Pakistan to actualize and reap benefits from Beijing’s successful experience with SEZs. Political instability results in policy instability, making investors uncertain and unwilling to undertake long-term projects. The political and economic instability also leads to high employment-based migration, with the skilled workforce leaving the country. There is also a distinct divide between federal and provincial governments, with the center often out of touch with the peripheries or conflicting policies between the two levels, adding to investor confusion about potential benefits. In this backdrop, Pakistan needs to work on granting autonomy to allow SEZ-relevant laws to be contextualized for each province, considering their population, capabilities, and economic environment. The federal government should take a centralized approach for laws that need to be consistent across all SEZs in the country. To further encourage investors and businesses to set up in Pakistan’s SEZs, the process should be streamlined. This platform would reduce bureaucratic red tape and accelerate processes by allowing organizations to handle all law-related matters, such as registrations, NOCs, and tax payments through one platform. Another problem currently facing Pakistan’s SEZs is the illegal reallocation of land to housing schemes and commercial plazas. Incorporating these lessons for SEZs will not only lead to successful realization of the goals envisioned, but could also lead to greater national integration. For instance, greater coordination among market and educational institutions could allow industries to communicate the nature of needed skills and workforce, while the universities could help develop these skills while fostering innovation. SEZs could also have specific training and vocational institutes focused on certain industries. In this vein, the eight incubation centers inaugurated in major cities of Pakistan are a prime example of successful public-private partnerships encouraging innovation and entrepreneurship.

As with China’s example, Pakistan needs to consider creating a separate legal system and courts for SEZs located within the zones themselves. The usual business and labor laws do not apply in SEZs, and the legal framework includes trade rules, general tax codes, FDI-related investment, real estate laws, labor, and environmental regulations. Separate courts would promote efficiency in dispute resolution and provide a secure legal framework, addressing concerns of international organizations that fear unjust arbitration due to corruption in the judiciary. Arbitrators and judges could be hired internationally to ensure unbiased services.

Strategic Policy Directions for SEZs:

A way ahead given their significance, development of SEZs should be made part of the overall growth strategy of Pakistan. Only in this way, Pakistan will be able to achieve the objectives of pro-inclusive and sustained growth. Following strategic policy directions may be adopted to maximize benefits from opportunities that are likely to come from SEZs:

1. Once a site for SEZ is selected in consultation with all stakeholders, it is important to remain committed to that decision.
2. Develop policies in close collaboration with Chinese and Pakistani enterprises. Learn from Chinese experience for effective policy implementation. To overcome governance problems, polarize decision making as much as is possible with involvement of the private sector. Since all the companies to be based in SEZs will be private therefore adopt an economically motivated strategy.
3. In consultation with potential industrial leaders from China and Pakistan, develop an agreeable set of rules of engagement for the operation of SEZs to ensure success.
4. Revise the SEZ Act 2012, which was legislated before the launch of CPEC project so that aspirations of Chinese investors are also taken into account.
5. SEZ strategists should organize promotional roadshows to attract potential investors from both China and Pakistan. Give full media coverage based on credible information to project a positive image of the Zones.
6. Establish modern vocational and technology institutions. Chinese vocational and technology institutions are modern and elaborate, utilize their expertise by inviting Master Trainers from those institutions. Host for a longer period by appointing their retired experts. Also introduce vocational training partnerships with the Chinese institutions. Prepare a plan and share with the Chinese government.
7. Establish incubators in SEZs with close coordination with Chinese companies so that Pakistani start-ups can closely watch and learn from their way of working, this will quickly enhance entrepreneurship.
8. Diaspora can spearhead SEZs activities and can be champions and drivers of SEZs, encourage them by giving full confidence that their investments and transfer of skills and knowledge will be absolutely secured and highly valued by the nation.
9. Train local Allied firms on how to efficiently conduct ancillary business with SEZ firms. Appoint qualified Chinese trainers for conducting short-term training courses and workshops.
10. With increase in the size of SEZs in the future, they will benefit more and more from external economies. From the beginning, government should keep an option open for expanding successful SEZs. There should be no limit on SEZ expansion.
11. Make public sector organizations efficient and productive by creating a mindset to assist and facilitate foreign private companies. Involve private sector experts for this purpose.
12. All ministries should work to ensure speedy implementation of SEZs projects to seize the upcoming opportunities. All provincial and federal governments should work together as ‘one team’ for the success of the SEZs.
13. Absolutely discourage rent-seeking activities, don’t allow investors to exploit policies or circumvent the very objective of establishing SEZS.
14. Through information dispersion and training, create a positive attitude in local firms to work with Chinese companies.
15. Be part of global supply chain and global value chain by adding the competitiveness of supplier enterprises with improved reliability and efficiency. For this to happen introduce business supporting policies. Also, contemporize trade facilitation system and infrastructure.
16. China has successfully deposited its SEZs to establish backward linkages with allied and supplier industries. Pakistan should act fast to learn from the Chinese experience. In this regard, create a synergy between Pakistani and Chinese SEZs for collective advantage and their connectivity.

CONCLUSION:

The establishment of special economic zones in Islamabad has significantly impacted economic development by creating opportunities that empower the youth. These zones have created a growth-oriented environment, attracting foreign investment and fostering enterprenurship. The SEZs in Islamabad serve as a model for sustainable development , guaranteeing that youth are active players in shaping a prosperous future for Pakistan. To conclude, the new 2024-25 budget presents considerable challenges for both salaried class and businesses, with impact on business confidence. Coupled with recent nation-wide internet outages, the investment climate in Pakistan appears further challenged. The government needs to reassess policies and present a coherent national approach that addresses the challenges outlined above. Without both macro- and micro-level changes, the business environment in Pakistan is likely to remain unfavorable. For SEZs in particular, the federal government must collaborate with provincial governments, incorporate their perceptions, remain flexible in policies to stay globally competitive, promote FDI through tax breaks (instead of increasing taxes), simplify administrative processes, and encourage free trade. These policy proposals could be adopted if Pakistan wants to benefit from China’s successful national policy of economic development and national rejuvenation.