Did the metamorphosis from Export Processing Zones to Special Economic Zones improve the efficiency of trade enclaves in India?

Abstract

In this paper, the efficiency of seven conventional Special Economic Zones in India is analyzed, by adopting a stochastic production frontier technique, for the period between 1986–1987 and 2007–2008.Results indicate that although the efficiency scores of these enclaves have improved over the years, specifically with the introduction of the SEZ policy (2000–2001), it is far below the threshold level as identified in the literature. Besides, one can also observe a discrepancy emerging between better export earning zones and efficient zones. On the determinants side, policy intervention and large geographical area, accompanied by clustering of units, are found to have impacted the efficiency scores of these enclaves positively.

Keywords:

• trade policy
• Special Economic Zones (SEZs)/Export Processing Zones (EPZs)
• trade performance
• efficiency

JEL Classification:

• F13
• F14
• F01
• D60

Notes

1. Irrespective of the difference in the time of implementation, the explicitly stated objectives behind the promotion of these enclaves were always export promotion with an emphasis on encouraging nontraditional exports of the country (Armas and Sadni-Lallab 2002). These enclaves revealed an impressive performance trend in a few countries, such as Mauritius, Cost Rica, Dominican Republic, Bangladesh (Engman et al. 2007). However, zones in some countries failed to create their own economic niche mainly due to lacunae in the policy and structural problems in the economy, as in the case of a few countries in Africa (Tekere 2000) and Cuba (Willymore 2000). The Indian experience with respect to EPZs is quite dismal not only in terms of its contribution to the country’s total volume of trade but also in its failure to diversify the export basket (Kundra, 2000; Aggarwal 2004, 2005; Tantri 2011, 2012).

2. See the second section for a brief overview on Indian SEZs policy.

3. See for instance Goldar (1985), Bhavani (1991), Ray (2002), Parameshwaran (2002), Goldar et al. (2003), Kambhampati (2003), Trivedi (2004), Balakrishnan et al. (2006); Bhandari and Maiti (2007), Mukherjee (2008), Babu (2008); Pradeep and Jong-Rong (forthcoming) and others.

4. In the Asian context, India was the first country to experiment with FTZs/EPZs within an inward-looking trade strategy.

5. The SEZs Act and SEZs rules in India were subsequently amended several times over the last seven years in accordance with the changes required to promote SEZs as effective instruments of trade.

6. www.sezindia.nic.in

7. Government of India (2012).

8. For details, see Bhaduri (2007), Gill (2007), Sharma (2007), Kasturi (2008), Mukhopadhyay (2009).

9. With this criterion, the selected seven SEZs represent the entire population, because there were only seven SEZs that were fully functional in the country before the introduction of the SEZ policy.

10. Operational SEZs in the country can be categorized into two major categories (Tantri 2012), namely conventional SEZs and modern SEZs. Conventional SEZs are those that have their origins in the EPZ structure and were operational before the introduction of the SEZ policy. Modern SEZs, on the other hand, are those that were approved and became operational after the implementation of the SEZ policy.

11. There is no published data source available in the public domain regarding various issues pertaining to SEZs expansion in the country. Thus, we had to restrict our analysis for 2007–2008 based on data collected as a part of author’s fieldwork in these seven zones.

12. For instance, earlier studies estimating the efficiency of the Indian manufacturing sector have considered the manufacturing sector as a production unit and did not consider variations within a manufacturing sector at the subsector level.

13. Moreover, this is the first study to address issues related to the efficiency of these enclaves in India. Given this, it would be better if we start with the scenario in aggregate and then attempt unit-specific efficiency estimation.

14. An alternative tool for efficiency estimation is the non-parametric programming approach. However, there are number of limitations associated with this technique. For instance: (a) it is an extreme point technique; noise such as measurement error can cause significant problems; (b) although this technique can show how well an economic unit is doing compared with others, the results obtained cannot be compared with a theoretical maximum; and (c) since it is a nonparametric technique, statistical hypothesis tests are difficult to carry out. Thus, given these limitations, the present analysis is restricted to the stochastic frontier production function approach and, more specifically, the Cobb-Douglas production function for its simplicity and logarithmic nature of analysis.

15. Also see Appendix Table A1.

16. This, however, is not addressed in the present analysis.

17. Beta convergence gained importance with the pioneering work of Barro and Sala-i-Martin (1991). The equation runs as follows. Income Growth = α+β (initial income) +ϵ _i . In this, convergence is explained based upon the value and significance of beta.