Role of Sez

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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. 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 effects 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...
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