As recently as 2015, there were well over 4,000 free zones. One could be forgiven for thinking there might be a unique name for every individual zone: free zone, foreign trade zone, special economic zone … the list goes on. But the name isn’t what’s important: Results are. So Conway has created a Top Free Zones ranking for the first time, recognizing the top two zones per world region, as determined by survey results from industry experts and site selection consultants based on the following selection criteria:
Congratulations to all of the zones recognized on the following pages.
While there has been an explosion in the number of free zones operating worldwide in the past few decades, including the number of countries with a free zone increasing from less than 30 in 1975 to 130 in 2006, not every free zone is a guaranteed success. India has hundreds of zones that haven’t gotten off the ground, including more than 60 in Maharashtra state alone.
Vision, adaptability and good management are required to ensure a free zone succeeds. For example, Costa Rica and India have expanded their free zone production goals in recent years. Rather than focus solely on the textile and apparel production that has long dominated their free zone production, Costa Rica and India have sought to diversify their free zone production output. Costa Rica has emphasized electronics and pharmaceuticals production in the last few years, and India has increased its focus on food and electronics production. Both countries recognize the need to be adaptable if they wish to see their free zones succeed.
Vision, adaptability and good management are required to ensure a free zone succeeds.
There have been other free zone successes over the past few decades. Site Selection Managing Editor Adam Bruns noted “China’s first special economic zone — Shenzhen — is now one of its most developed and innovative cities.” The Economist has argued South Korean zones are amongst the world’s most successful due to their ability to foster links between companies operating in the zones and local suppliers. Honduras has also been successful at connecting local industries with companies operating within their zones and at ensuring at least 85 percent of the total wages are given to local workers.
US Foreign Trade Zone export production in 2015 ($84.6 billion) was the second highest export total ever for the US, dipping slightly from the previous year due to worsening petroleum market conditions. A total of 2,900 companies operate within US FTZs and 420,000 people are employed in the FTZs.
Honduras has also been successful at connecting local industries with companies operating within their zones and at ensuring at least 85 percent of the total wages are given to local workers.
Chinese free zones now employ more than 40 million people and account for a majority of China’s total exports. The International Labour Organization’s (ILO) “conservative” 2014 estimate for total worldwide employment in free zones was 66 million.
While these are impressive statistics, it is also worth emphasizing that many zones still have work to do. Too many free zones feature terrible working conditions, low pay and high turnover. The vast majority of free zone workers are women, many of whom are exploited with lower wages and longer working hours than their male counterparts.
The ILO notes women zone workers face numerous challenges, including a lack of job security, inadequate maternity protection and widespread sexual harassment and assault. Women zone workers also lack access to affordable good-quality food, causing many of them to be undernourished and prone to illness. Many zone workers are internal migrants, traveling from rural areas to urban areas to work in the zones, but typically do not have access to high quality public transportation. This lack of public transportation causes many zone workers to walk long distances just to reach work. Overtime working is also widespread in zones, contributing to zones’ high turnover rates.
Too many free zones feature terrible working conditions, low pay and high turnover.
These major issues call into question what a successful free zone looks like. In a 2010 report on the performance of special economic zones in Sub-Saharan Africa, Thomas Farole, a senior economist in the World Bank’s Africa Department, laid out three measures of success for special economic zones: static economic outcomes, dynamic economic outcomes and socio-economic outcomes.
Static economic outcomes are defined as the short-term gains made through use of free zones as instruments and investment policy. These outcomes include investment, employment and exports. Dynamic economic outcomes are the result of the integration of free zones with a domestic economy, ultimately leading to structural change of the domestic economy. Diversification, production improvements and increased openness are examples of dynamic economic outcomes. Socio-economic outcomes refer to the quality of employment created and the gender-differentiated impact of zones. Farole argues successful zones focus on each outcome type and not just one.
The message is clear: zone projects cannot just be financial incentive zones for international businesses. They must improve the wellbeing of the surrounding community.
Farole notes there is a strong correlation between infrastructure quality and investment, exports and employment in zones. Trade facilitation, such as South Korea’s fostering of strong and positive relationships between free zone companies and local suppliers, is also strongly correlated with program outcomes. Farole found that traditional indicators of competitiveness, including low wages, trade preferences and fiscal incentives, are not correlated with zone success. Despite those indicators not being linked with zone success, the ILO notes many zone employers prefer young women because they can pay them less than men and more experienced workers.
Many free zones are burdened by interconnected and easily remedied impediments to their success, including lack of community support stemming from a disregard for local community development. In its 2016 piece “Mexico’s Special Economic Zones: White Elephants?”, the Woodrow Wilson International Center for Scholars’ Mexico Institute advised the Mexican government to “define success as local development, not as foreign investment” and to “avoid industries that reinforce competitiveness via low-paid-jobs.” The Mexico Institute argues long-term free zone success, and even survival, depends on supporting and developing the local community. The Institute cites specific examples in India and Bangladesh of disenfranchised and poor communities rising up against zone projects that do not support the local community.
The message is clear: zone projects cannot just be financial incentive zones for international businesses. They must improve the well-being of the surrounding community.