Government Policy, Employment and Urbanization: Evidence from India's Special Economic Zones.
Bhojwani, Saloni H.
- Policy interventions designed to attract investment and accelerate employment growth are controversial in the literature on economic development. Both their effectiveness in attracting investment and their ability to impact the wider economy are debated. One such intervention designates an area of land, sometimes an entire city, as a Special Economic Zone (SEZ): an area to be provided with fiscal ... read moreincentives, less stringent regulation, lower levels of corruption, and improved infrastructure. The long-term goal of such interventions is to provide a jump-start to growth in the wider economy. In a number of Asian countries including China and Thailand, SEZs have been identified as successful tools for increasing export production and attracting foreign investment. In 2000, India adopted an explicit SEZ policy as a successor to and expansion of its earlier Export Processing Zone (EPZ) policy. This paper explores the case of the Indian SEZ's. The Indian SEZ policy has been surrounded by controversy, with claims that it has had little or no effect. To date no formal evaluation has been carried out. This paper aims to identify measurable evidence of the outcomes to date of that policy. It reviews the available qualitative data on their effects and explores evidence of their quantitative impact on output, exports and agglomeration (employment) in the SEZs and in the states and districts surrounding them. This thesis uses three models in an attempt to answer some key questions: What characterizes the locations chosen by the Indian government for the SEZs? Has the SEZ policy led to further economies of agglomeration? For example, what proportion, if any, of employment growth in the surrounding states and districts is attributable to the SEZs? Are firms choosing to locate in SEZs because of their special attributes or would they have located there anyway? Ultimately, in what way, if at all, has the SEZ policy been effective? I first evaluate the increase in employment associated with the SEZ. By comparing SEZ employment growth to that of their districts and states, this model assesses the proportion of city growth associated with the incentives found specifically in the SEZ. The second model explores interactions between the SEZs presence and exogenous factors likely to affect urbanization rates and foreign direct investment, including literacy, industrialization and financial infrastructure. The third model examines variables that may explain the selection of specific locations for SEZs. I find that the marginal effect of the SEZs on rates of urbanization and growth of employment in the surrounding areas is small at best. The qualitative surveys portray a failure to implement the policy effectively in India. My quantitative findings are consistent with that finding (Aggarwal, 2004).read less