According to the United Nations Conference of Trade and Development (Unctad), global sovereign debt — debt owed by countries to private, multilateral and bilateral creditors — reached a record $92tn at the end of 2022. As Unctad pointed out in its July 2023 ‘A World of Debt’ report, “countries are facing the impossible choice of servicing their debt or serving their people”, as 3.3 billion people live in countries that spend more on interest payments than education or health. 

These record levels of debt repayment leave very little fiscal space for investing in development projects such as special economic zones (SEZs). And this is the elephant in the room that will secretly shape SEZ development globally in the near-to-mid-term: SEZs cost money.

Be it in the policy and legal design, the on- and off-site infrastructure, the administration and the forgone revenues in the form of fiscal incentives, or investor attraction and aftercare, it all costs money.

SEZs are designated areas used to attract both foreign and local investment, typically thanks to different trade and fiscal laws from the rest of the country. They also have a proven track record of spurring economic growth.

But debt obligations limit choices. Countries — especially developing countries with record debt levels — may find themselves impaled on the following dilemma. The very time when they need to build SEZs most in order to earn their way out of their debt is when they can both least afford to and least afford not to.

As much as debt limits economic policy choices, SEZs can represent part of the solution. As noted by the authors of ‘Using Special Economic Zones to Facilitate Development: Policy implications’, Rajneesh Narula and James Zhan, SEZs represent a microcosm of the host country operating at its most efficient.

And as countries embark on the necessary reforms to stabilise and then grow their economies out of debt, SEZs have been a useful tool for developing countries unable to upgrade infrastructure, human capital and institutional frameworks across the entire economy and constrained by economic considerations and conflicting priorities. 

By upgrading these resources and capabilities within a confined area, policy-makers can overcome bottlenecks in resource availability and attenuate the cost of larger-scale upgrading across the entire country or subnational region, Ms Narula and Mr Zhan point out. 

But SEZs are by no means a panacea for the debt crisis or inducing economic growth, as an ill-conceived or poorly executed programme could exacerbate a country’s debt crisis and/or dampen growth. However, given their proven power to rapidly transform economies, well-executed SEZs are a must-have arrow in any policy-maker’s quiver, especially those in the throes of a debt crisis.

Ainsley Brown is SEZ expert and an adjunct lecturer in logistics and supply chain management at Mona School of Business and Management at the University of the West Indies, Jamaica. 

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This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence