Role of Sez

This report aims at examining the impact of Special Economic Zones (SEZs) on human development and poverty reduction in India. It identifies three channels through which SEZs address these issues: employment generation, skill formation (human capital development), and technology and knowledge up gradation. It examines how the impact of SEZs is passed through each of these channels.It found that labor intensive, skill intensive and technology intensive firms co exist in India’s zones. The data was generated through across the three largest SEZs (in terms of their contribution to exports and employment) : SEEPZ, Madras and Noida.

The analysis reveals that ‘employment generation’ has been the most important channel through which SEZs lend themselves to human development concerns, in India. Employment generated by zones is remunerative. Wage rates are not lower than those prevailing outside the zones.Besides, working conditions, non monetary benefits (such as transport, health and food facilities), incentive packages and social security systems are better than those prevailing outside the zones, in particular, in the small/informal sector. The role of SEZs in human capital formation and technology up gradation is found to be rather limited. Introduction In this era of globalization, most developing countries are witnessing a shift away from an import substitution based development strategy to one based on export promotion policy.

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As part of their policy instruments to promote exports, many of these countries are vigorously promoting export processing zones (EPZs). EPZs are seen as a key instrument not only for promoting exports and earning foreign exchange but also for stimulating economic growth through additional investment, technology transfers, and employment generation. A majority of new zones have taken root in developing countries.

One of the most controversial aspects of EPZs is their impact on labor standards, labor relations and human development. A significant body of literature now exists addressing the concerns about human development ffects of these zones. However, empirical evidence is ambiguous. Review of existing studies however suggests that a comprehensive analysis of EPZs’ labor related effects is scarce. There are several limitations of the existing literature: First, in the absence of a comprehensive framework within which different aspects of human development effects are woven together, some effects are over emphasized while others are neglected. Second, the analysis is often supported by patchy evidence Third, very few studies evaluate the labor effects of EPZs in comparison with domestic industries (Kusago and Tzannatos 1998).Fourth, zones are not a static phenomenon. The economic conditions in which they operate change over time and affect their characteristics (or competitive attributes).

This, in turn, impinges on the benefits that they yield. Gains from EPZs would thus depend on the stage of their evolution and would vary across countries as also within countries across zones and time. The present report integrates various aspects of human development effects into a single framework and examines the Indian experience within that framework.The research question is whether EPZs have contributed to employment, human development, and poverty reduction in India.

A variety of terms such as industrial free zones and free trade zones are used interchangeably through most of the EPZ literature. In India, they are called ‘special economic zones’ (SEZs). The SEZ scheme introduced by the government of India in April 2000 has its genesis in the Export Processing Zone (EPZ) scheme, which was introduced way back in 1965 when the first zone was set up in Kandla. By the late 1990s, seven more zones had come into existence.Under the new scheme, however, all the existing EPZs were converted into SEZs. In the rest of the paper therefore we shall use the term ‘special economic zones’ or SEZs. The framework encompasses not only labor relations and labor standards issues but also knowledge generation and technology management in the zones and their linkages with poverty reduction.

Human Development and Poverty Reduction Effects of Zones: An Analytical Framework Following the existing SEZ literature, we identify three channels through which SEZs may affect human capabilities • Employment effects Human capital formation effects • Technology upgrading effects Employment Effects The employment effect of SEZs operates through three channels : one, SEZs generate direct employment for skilled and unskilled labor ; two, they also generate indirect employment; and three, they generate employment for women workers. It is believed that employment creation generates incomes, creates non pecuniary benefits, improves the quality of life of labor and enhances their productivity. These, in turn, have poverty reduction effect.

Direct employment generationIn so far as SEZs comprise labor-intensive activities, enterprises in SEZs constitute a significant source of new employment. Due to the availability of labor at low wages, developing countries generally attract investment into simple processing labor intensive industries. This increases the demand for unskilled labor within the zone. Shift towards higher value added activities as SEZs grow, might increase demand for skilled labor also. SEZs also generate employment for unskilled labor by creating demand for physical infrastructure within the zone.

This stimulates the local construction industry giving employment to unskilled labor. Demand for utilities such as water, electricity, communication, and administration also rises. Finally, there has been increasing demand for various support services such as, hotels and restaurants, and transport, which is expected to have a substantial impact on employment generation. Indirect employment generation The indirect effect is manifested as ancillary employment opportunities generated in sectors of the economy affected by the operations of the SEZ.These include, transport, communication, automobile, civil aviation, shipping, tourism, hospitality, packaging, banking, and insurance.

Employment opportunities are, thus generated for both unskilled and skilled labor. In addition to the above, there are three other channels through which SEZs generate a favourable impact on employment generation. One, SEZs provide foreign exchange earnings that slacken the foreign exchange constraints of the rest of the economy regarding the import needs of the rest of the economy and accelerate investment activities.SEZs thus generate development funds, which facilitate generation of economic activities and employment. Two, they also generate economic activity outside the zone due to the transformation of investment funds into fixed assets and purchase of inputs and services from the rest of the economy. Three, once additional incomes are generated, there is an increase in demand for various goods and services such as housing, education, health and transport. This in turn has multiplier effects on income and employment. Employment for WomenWomen’s share to total employment in SEZs is substantially high than both the economy as a whole as well as the manufacturing sector in the SEZs.

Women workers are considered more disciplined and hard working. It is found that employers prefer female workers to male workers in the belief that manual dexterity, greater discipline and patience make women more suitable for the unskilled and semi-skilled activities carried out in the zones. Besides, they are less likely to exert pressure for high wages and better working conditions.Majority of women are young, single and come from rural and poor backgrounds. But for SEZs they might not have been absorbed into formal employment at all and hence SEZ employment can be said to afford them an independent source of income that would otherwise have been denied.

SEZs are thus expected to contribute substantially to the empowerment of women. The above theoretical propositions suggest that zones contribute to human development by increasing employment opportunities.The implicit assumption is that job creation alleviates unemployment, generates income, improves standard of living, and results in human development and poverty reduction. However, it cannot be assumed, a priori that employment in SEZs enhances human development, which depends crucially on wages and working conditions. It is generally claimed that in order to attract investment, in particular FDI, governments eliminate labor standards, consequently promoting labor exploitation and depletion of human capital.There are restrictions on the right to join a trade union, bans on collective bargaining and the right to strike. Employers often pay scant regard to labor laws, employment regulations, and health and safety norms at work.

These issues are critical in determining employment effects of zones on living standards, poverty reduction, and human development and need to be analyzed in detail before drawing any conclusion regarding the impact of zones on human development and poverty reduction. Skill Formation (Human Capital Formation) EffectsThere are various modes by which SEZs can positively contribute to human capital formation. One is the firm level activity whereby the host country labor force acquires skills from within the firm through training and learning by doing on the job. Zone units can thus directly affect the skill formation as workers are provided additional training on- and off the job. Local employees of multinational corporations (MNCs) in some cases are sent to their headquarters abroad or elsewhere for middle and, more often, higher management training, and advanced technician training.Training may spread broader than enterprise programmes.

The second method involves upgrading of the education system to cater to the needs of the zone units. Some cooperative training programmes between schools/colleges and the enterprises in the SEZs are being developed. These programmes aim at providing technical education at the factory rather than at the institution. Zone units may also be setting up training institutes to impart training to the labor to create the relevant pool of skilled labor. Skill formation for the poor unskilled workers also occurs through assimilation of industrial discipline.

This might increase the welfare of poor unskilled workers by increasing the range of job opportunities available to them. Improved skills and productivity increase workers’ income earning capacity. Given the high labor turnover rate in the SEZs, domestic firms can benefit from this training by hiring workers previously employed in the zone firms.

In the long-term, the creation of a macro environment in which returns to education and skill development are high, is an important component of the skill formation effect of SEZs.Zone units raise the demand for and wages of skilled workers through technology transfer and capital investment, which in turn provides positive incentives for educational attainment and skill formation. Finally, SEZs offer a highly conducive investment climate to attract FDI by making up for infrastructural deficiencies and procedural complexities that characterize developing countries. Typically, FDI brings with it technology transfer, managerial, and other skills (such as marketing and distribution), access to markets and training for staff.Foreign entrepreneurs may set an important example for potential domestic entrepreneurs by demonstrating that the right combination managerial, technical and marketing know-how can allow organizations to profitably enter world.

The export knowledge of foreign firms operating in SEZs is expected to spill-over to domestic firms in SEZs and then to those in the domestic economy. Through such linkages SEZs may enable firms in the rest of the economy to master production, distribution and marketing skills important for enhancing international competitiveness.SEZs can thus play a crucial role in upgrading domestic entrepreneurial skills. Technology Upgrading Effects SEZs attract export-oriented FDI and promote other forms of collaboration between local firms and MNCs. For instance, SEZs facilitate the insertion of domestic SMEs (small and medium enterprises) into global value chains by offering them an enabling investment. Global standards, low-cost competition, and advances in technology raise challenges for the SEZ units competing in global value chains.This stimulates learning and innovation which are crucial aspects of human development. Two distinct types of value chains are identified: those that are producer-driven and others that are buyer-driven.

The former type characterizes those value chains in which multinational enterprises (MNEs) outsource the production of components and play the central role in controlling the system. They provide technology to the networked producers. This arrangement is common in capital- and technology-intensive industries such as automobiles, computers and electronics.In contrast, the latter type refers to primarily low-tech labor intensive industries in which large retailers, branded marketers, and trading companies play the pivotal role in setting up decentralized production networks in a variety of exporting companies, typically located in the ‘Third World’. In this case MNEs are marketers of products only; networked producers need to arrange for raw materials and technology themselves. Participation in these chains allows producers to upgrade themselves technologically on continuous basis.

For instance, many local firms become responsible for original equipment manufacturing (OEM) wherein they source raw materials locally and manufacture products to the specifications of foreign buyers. But having established a range of technological skills through learning, these firms transfer into ‘original brand name manufacturing’ (OBM). Learning and knowledge created in SEZs is eventually transmitted to domestic firms supplying to the SEZ firms through backward linkages when the companies within the SEZ buy inputs from the host country.Direct transaction of technology and indirect spill-overs through various channels such as copying, reverse engineering, and movement of workers and managers between foreign and domestic companies also facilitate transmission of knowledge to the rest of the economy. Further, trade bodies, manufacturers’ associations and export marketing bodies which provide a useful platform to interact and to foster closer rapport among members act as valuable forums for information sharing and spillovers. Thus, SEZs are not enclaves/foreign territories that are functioning in isolation, as many believe. Linkages between SEZs and human developmentANALYSIS ON INDIA SEZ’S RESPECT TO THE REPORT Three major conclusions emerge from the analysis. These are as under.

(1) Employment generation, both direct and indirect, has thus far been the most important channel, through which SEZs have impacted on human development and poverty reduction in India. India’s SEZs are not dominated by assembly type operations. ‘Value addition’ component and hence employment generation potential of zones is rather large. Even though their contribution to national employment has been rather limited, they have contributed significantly to employment generation at the regional level.Due to stagnation, their ability to absorb surplus labor has been declining. This is manifested in the declining employment elasticity of exports.

It can only be reversed if fresh investment is attracted to SEZs. With the SEZ Act in place, there has been a surge in the establishment of new zones, which is likely to generate huge employment potential in the economy. Much of this will be a net addition to employment as investment relocation/diversion in export oriented production is likely to be limited. Zones have proven to be particularly beneficial to female employment.

SEZs have opened up opportunities for wage employment for women in the formal sector, thereby increasing their employability as well as improving their position in the household. This is an important contribution of zones because female employment is crucial for equitable growth. Most critics suggest that employment is feminized in the zones and that these women are young and can easily be exploited.

However, the analysis of socio economic status and working conditions of female workers undertaken in the study finds little evidence to support these hypotheses. There is a wide consensus on the entral role of employment in poverty reduction. One is therefore tempted to conclude that zones can be used as an effective policy instrument in alleviating poverty. However, the relationship between poverty and employment lies in the extent to which income generated from employment permits workers and their dependants to obtain goods and services necessary to meet minimum needs. Poverty reduction thus calls for the creation of remunerative, regular and good-quality jobs in the labor market. Our analysis suggests that wages in the zones are not lower than those prevailing outside the zones, in particular in the small/informal sector.Working conditions in the zones in terms of social security benefits, transport facilities, health facilities, food facilities, working environment and working space, are also better than those in the same types of jobs in the rest of the economy.

This has had a direct effect on the standard of living of workers. SEZs, if promoted vigorously can therefore act as an initiator in the process of human development and poverty alleviation in India. (2) The role of SEZs in human capital formation appears to be relatively limited. Most SEZ units impart on-the-job training to their workers.

But training is focused, employer-driven and lasts for short durations. Most workers feel that this training does not upgrade their skills substantially. Nevertheless, they feel that they are exposed to learning by working under strict time schedules, high quality standards and sophisticated machinery.

This learning helps in upgrading their capability of learning further. Skill begets skill through a skill multiplier process and ensures higher returns. Workers also feel that their job prospects outside the zone have improved due to their working in SEZs.When workers move out of the zones to domestic economy, skill spill-over’s take place in the rest of the economy as well.

New zones that are attracting second and third generation firms are expected to enhance the role of SEZs in human capital formation by creating demand for new set of skills and by imparting substantial training to workers for handling highly skill intensive operations. (3) Zones’ contribution as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation has however been quite limited till now.Zones are dominated by medium tech activities and most firms are involved in contract manufacturing, which leaves little scope for R&D activities. It is found that the technology-related activities of the SEZ units are not different from those of the export oriented domestic units outside SEZs. The zones thus could not fulfill the role of promoting innovation systems in the economy. This is despite the fact that the knowledge spill-over potential of zones is rather high in the economy.

Most entrepreneurs are educated and run their businesses professionally.Besides, many of them have units outside the zones as well. It is also observed that most zones have formed manufacturers’ associations. They are also members of other manufacturers’ associations. SEZs are thus not working in isolation and are well connected with the domestic economy. Perhaps a micro/sector based study could indicate some success stories.References 1) KumarR, kumar R,”Sez: Capturing rne Foreign Market”, Southern Economist, Sept. 2006, Vol 45 2) Roychaudhury A.

A. ,”SEZ: to be or not to be” Yojna, June 2007. 3) Aggarwal, Aradhna,”Sezs and growth”, Yojna, Oct2005, ) 87th report of the parliamentary standing committee on commerce on Action taken by Government on the recommendations/observations of the committee contained in its 83rd report http://164. 100. 47. 5:8080/newcommittee/reports/EnglishCommittees/Committee%20on%20Commerce/87th%20report. htm 5) Seminar, February 2008, Special Economic Zones Cul-de-sac http://www.

indiaseminar. com/ 6) SEZs: A catalogue of questions, Aseem Srivastava, http://infochangeindia. org/200702036051/Trade-Development/Analysis/SEZs Acatalogue-of-questions. html 7) “Some Straigth Talk on Sezs”, Economic Times,4 oct, 2006.

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