create economic inefficiencies. These could, in principle, be removed economywide. But in practice this is infeasible, partly because of their fiscal cost (tax and customs regulation, infrastructure) and partly because of the political obstacles that would be encountered (for example in acquiring land and implementing regulatory reform).<sup>21</sup>

# **i)  Direct quantity effects:  Attracting investment**

As outlined in section 2.2 above, success in attracting investment requires that a wide range of conditions be met, covering geography, policy, and the business ecosystem. There is a weakest link problem, and many SEZs have failed because key elements of the package are absent.

First, SEZs need to be located in places consistent with their objectives and long-run economic viability. If they are export oriented (or import dependent) they need to have good access to port infrastructure. In countries where even well-located regions have difficulty attracting investment, SEZs in backwards or remote regions are unlikely to succeed. Economic scale of the SEZ itself (to reap scale and agglomeration economies) and of the area where it is located (to provide a local labor market and depth of local firms) are important factors. The importance of these factors is confirmed in Farole’s (2011) study of African SEZs. However, finding a ‘good location’ is necessary but not sufficient for success.

The success of an SEZ will also be determined by its comparative advantage, so unrealistic sectoral selection will lead to failure. Bangladesh initially sought to establish SEZs in high technology sectors and only after the decision was made to switch to labor-intensive garment manufacture did its SEZs take off. The fact that Bangladesh and other countries now occupy this product space has implications for the sort of sectors in which African countries could hope to be successful. In some sectors regional comparative advantage may be relevant rather than international comparative advantage.

There is considerable evidence that tax incentives alone are insufficient for success. Assessing the marginal impact of one policy is difficult given the complementarities between them and the country context (policies in place outside the SEZ). Nevertheless, Farole (2011) looks at data across 77 countries and finds that infrastructure and trade facilitation have a significant positive impact while tax and other financial incentives are much less important. This is consistent with recent Indian experience, where SEZs concentrated on tax and regulatory breaks while neglecting infrastructure provision. Khandelwal and Teachout (2016) compare firms inside and outside SEZs in India and Bangladesh. In Bangladesh, firms in SEZs experience much shorter delays in getting import licenses and clearance, construction permits, and connections to water and power. In India

> 21 This may come at a cost. As shown by Grant (2017), special economic zones in the United States are used to limit the opposition to protectionist policies that affect infra-marginal firms. In turn, this may allow policy distortions to be worse than they would otherwise be. In a development context, SEZs may allow strong unions to keep their lock on the labor market outside the SEZs, which might otherwise be challenged more seriously.

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