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Economic potential of free zones

Pakistan missed what today from a distance of about 40 years appears to be a dream-boat of a lifetime when Ghulam Ishaq Khan, the then finance minister of the military dictator General Ziaul Haq, ruled that the laws governing the Karachi Export Processing Zone (KEPZ) would not be much different from those that govern Pakistan. That is why neither the one (KEPZ) launched by Prime Minister Zulfikhar Ali Bhutto in 1976, which he had wanted to be genuinely free economic zone with laxer laws governing it and nor the EPZs launched in 1980 by General Zia’s regime could take off.

And ironically, when the so-called ‘free marketers’ of Pakistan were restricting the rules governing KEPZ in 1979, the same year communist China was opening up its port city Shenzhen to the so-called free world as its first export-free zone. Since then China has travelled a very long road paved with prosperity reaching by the turn of century the top most position in world economic ranking, lifting in the process a million people out of poverty while during the same period we have journeyed in the reverse.

Only a visionary like ZAB could have launched the nuclear programme that he did as soon as he took over the reins of the country following its dismemberment in late 1971. Likewise, it was a visionary ZAB who, looking at the vast economic potential in the offing in the immediate neighborhood-the oil and gas rich UAE which at the time was, however, very weak in physical infrastructure like ports and shipping – had launched KEPZ along with a Casino building in Karachi along the sea-side with an eye on the thriving commercial hub of the region in the making and the tourism potential it had held. Notwithstanding the 1971 debacle, Pakistan in those days had relatively more developed infrastructure needed to exploit the riches of the UAE and its commercial potential for mutual benefit. Had he had his way without the military intervention disrupting his plans perhaps he would have long ago turned Karachi into what Dubai is today. But as fate would have it, Karachi degenerated into a 40-year long lawlessness and violence, instead while Dubai blossomed into a city of nearly everlasting boom.

But that is a past already lost to history. Let us now look at the future challenges and potential in the same rich neighborhood and prepare ourselves to make the most of the economic potential in the offing in and around the UAE and other Gulf Cooperation Council (GCC) countries.

According to Robert Mogielnicki (How ‘Free Zones’ Became the Middle Eastern Diplomacy Tool of Choice, published on October 1, 2020 in Foreign Policy magazine), the involvement of free zones in geopolitical reconfigurations is not restricted to the Persian Gulf states. Plans by Iran and China to formalize a 25-year strategic partnership include Chinese commitments to develop Iranian free zones in Maku, Abadan, and Qeshm Island. In 2019, a state-owned Chinese oil-trading company imported Iranian oil into what is known as bonded storage — a component of free zones — in China so that the oil would not pass through customs or appear on national import records. The Trump administration nevertheless imposed economic sanctions on the associated Chinese oil-trading company.

The author says that the free zones and other megaprojects with free zone characteristics are also crucial channels for foreign direct investment flows into the Middle East. Chinese firms have invested or pledged billions of dollars for projects in Abu Dhabi’s Khalifa Port Free Trade Zone and the special economic zone in Duqm, Oman. The Russian ambassador to Egypt set high expectations that a Russian industrial zone in the Suez Canal Economic Zone would attract $7 billion in new investments.

In the opinion of the author several factors explain why free zones have moved to the forefront of geopolitical relations in the broader Middle East.

First, there is a widely held perception that free zones reduce risks associated with entering new markets. Marketing strategies depict free zones as politically neutral commercial gateways with seamless and cost-effective services. Host governments may create free zones and other forms of special economic zones to gauge the effects of potential economic reforms — such as easing local ownership requirements — or to develop new industries. In this respect, governments and policymakers may treat free zones as commercial litmus tests.

Second, free zones attract a wide array of local, regional, and international economic actors. This diversity of players can shield individual governments from criticism relating to new international relationships, for example between Gulf states and Israel. Global business actors operating in Gulf free zones also enjoy preferential business incentives, which include greater ownership rights, lax labor regulations, and exemptions from customs duties and taxes.

Third, free zones are already prominent structural components of the Middle East’s political economy, especially that of the Gulf region. In Dubai, for example, investors can choose between dozens of operating free zones, and the emirate’s 50-year charter sets out its vision of a virtual commercial city that can host 100,000 firms. Saudi Arabia’s Neom—a megaproject-cum-free zone in northwest of the country—stretches the bounds of national sovereignty by aspiring to incorporate nearby Egyptian and Jordanian territories. Saudi policymakers have also proposed free zones along Saudi Arabia’s borders with Yemen and Iraq, presumably to advance its objectives in those countries. The Qatar Free Zones Authority aims to offer “state of the art infrastructure” next to Hamad Port and Hamad International Airport, while Omani free zones ostensibly seek to promote growth in underdeveloped parts of the country.

Further, according to the author, while free zones do play a role in broader efforts to encourage friendlier political ties between countries, it is difficult to identify a clear causal link between this economic mechanism and positive foreign relations outcomes. The considerations underlining business interests often diverge from key foreign affairs objectives. Moreover, employing free zones within the domain of foreign relations has the potential to enrich small, isolated segments of given populations without engaging larger swaths of respective societies.

In geopolitics, free zones and other types of special economic zones used to facilitate global trade and investment usually fly under the radar. However, these commercial entities, in which the rules of business are laxer than those in the national territory, are fast becoming prominent features of controversial strategic partnerships emerging across the Middle East. In turn, beyond serving as commercial incubators for select industries, free zones have now started to act as bellwethers for the geopolitical and economic reconfigurations underway across the broader Middle East.

“That’s particularly true when it comes to relations between Israel and the United Arab Emirates. Following the announcement of a normalization agreement between the two in August, Israeli Prime Minister Benjamin Netanyahu mentioned that his country would import from the UAE free zones, saying that “we know that we will get good prices,” and hinting that further engagement would follow.

“Israel may be turning over a new leaf with the UAE, but its ties to free zones aren’t anything new. Israel has long engaged with similar Qualifying Industrial Zones in Egypt and Jordan—the result of a program authorized by the U.S. Congress in 1996 to strengthen ties between Israel and its neighboring Arab states. These free zone-related entities permit Egyptian and Jordanian firms to export to the United States duty-free, provided that the exported products contain inputs from Israel. The latest cooperation over free zones follows an older trend in which economic partnerships prefigure better relations.

“The emirate of Dubai, widely considered the Gulf’s de facto free zone hub, is using its flagship commercial entities to cement ties with Israeli counterparts. In September, DP World—the Dubai-based multinational logistics company—and other government-related entities signed multiple agreements with Israel-based DoverTower Group, a shareholder of the Israel Shipyards port in Haifa and a partner in Eilat Port. DP World plans to assess port and free zone development opportunities in Israel as well as establish a direct shipping route between Eilat and the UAE port of Jebel Ali. Moreover, the Israel Diamond Exchange and the Dubai Diamond Exchange, which is part of the government-owned Dubai Multi Commodities Centre free zone, inked an agreement to enhance cooperation in the diamond trade. The Jebel Ali Free Zone and Dubai Airport Free Zone Authority both signed memorandums of understanding with the Federation of Israeli Chambers of Commerce in late September to support Israeli companies intending to establish businesses in Dubai.”

M Ziauddin, "Economic potential of free zones," Business Recorder. 2020-10-07.
Keywords: Economics , Economic potential , Karachi Export , Economic zone , Foreign policy , Economic mechanism Benjamin Netanyahu , UAE

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