Special Economic Zones and the Need for Proper Governance: Empirical Evidence from Indonesia.

• Author: Hidayat, Syarif
• Position: Report

Over the past few decades, Special Economic Zones (SEZs) have been commonly used as an industrial or development policy tool. Since 2009, Indonesia has also established SEZs in several parts of the country with a view to promoting Foreign Direct Investment (FDI), exports, jobs and fostering equitable economic development. Towards this end, the government offers various tax and fiscal incentives, as well as other facilities which are not widely available in other parts of the country. The location of SEZs is determined by the central government based on proposals from business entities and regional governments.

Despite their popularity, many SEZs around the world fail to achieve their intended goals. According to the World Bank, there is no single model to define a successful SEZ. (1) However, as SEZs are costly economic initiatives, countries seeking to implement this model must consider the governance set-up of SEZs as it is a key factor determining their success.

This article examines the concepts and practices of governance in relation to the management and development of Indonesian SEZs. Specifically, it analyses whether Indonesian SEZ governance takes into account local contexts. Our empirical findings were collected during field trips conducted in 2018 and 2019 in three Indonesian SEZs: Mandalika in West Nusa Tenggara Province; Tanjung Kelayang in Bangka Belitung Province; and Galang Batang in the Riau Islands Province. The profiles of the three SEZs are summarized in Table 1.

Data collection methods employed were interviews and Focus Group Discussions (FGDs) with fifty-four participants across the three locations. The participants include, among others: 1) senior bureaucrats in provincial and district/city governments; 2) officials in subdistrict governments; 3) personnel in the SEZs' organizational structure, such as the Regional Council, the SEZ Administrator and the Business Development and Management Agency; 4) representatives from businesses involved in the implementation of the SEZs; 5] academics, especially university lecturers; 6) traditional and religious leaders in the three research sites; and 7) representatives from non-government organizations (NGOs), activists and journalists.

Our study finds that the success of SEZ development projects requires not only traditional "good governance", but also "proper governance" designs and policies which take into consideration the local conditions to maximize stakeholders' participation. However, this is often difficult to implement. In fact, not many Indonesian SEZs have been able to make use of the "proper governance" model, which has to some extent constrained their overall success.

The article proceeds in four sections. The first discusses the conceptual framework of SEZ and governance. The second examines the policy setting of governance for SEZs in Indonesia. The third discusses the actual practices of SEZ governance and the shortcomings that we found from the three case studies. Finally, the article concludes by offering some theoretical reflections on the concept of "proper governance" regarding the development of SEZs in Indonesia.

Good Governance versus Proper Governance

The term Special Economic Zone (SEZ) is used in the academic literature to refer to a broad range of commercial zones, such as the Maquiladora in Mexico, freeports in Dubai, the United Arab Emirates and Shenzhen, China; the Free Trade Zone (FTZ) in Batam, Indonesia; Export Processing Zones (EPZ) in Chittagong, Bangladesh; as well as certain industrial parks in many countries. An SEZ is generally characterized as a geographically bounded separate customs area managed by a regulatory body, in which companies receive special benefits from the government. (2)

Countries develop SEZs mainly to boost economic growth through exports and FDI promotion. SEZs are also meant to increase job opportunities and promote technological spillover for local workforce and industries. While providing economic benefits, many SEZs have also been criticized for having high social and economic costs. To attract investors, the government usually has to provide various financial subsidies and regulatory incentives for entities that choose to be located within SEZs. (3) SEZs have also been criticized for exploiting female workers, creating poor working environments with low wages and undermining labour and environmental standards. (4) Such issues are common in regions that are dependent on labour-intensive industries, such as the garment industry. (5)

Another criticism is that many SEZs--despite the popular perception that they are a development tool--are not effective in promoting knowledge or technological spillover effects. In particular, they are perceived ineffective in promoting backward linkages to promote local supporting industries. Moreover, they tend to make the host country dependent on imported intermediate inputs. However, it is difficult to evaluate SEZs in terms of industrial upgrading and technological transfer due to data limitations. (6) While some regions have succeeded in creating backward linkages with other industries in the country, others have failed to do so. Even if they are successful in this regard, backward linkages are more likely to occur in countries that have strong industrial ecosystems, i.e. where there are no big technological gaps between regions. (7)

Over the past two decades, China has succeeded in developing growth zones by utilizing the SEZ model. (8) Interestingly, a large number of successful Chinese SEZs are owned, developed and operated by private actors. (9) However, it has been found that public-private cooperation is critical for the success of SEZs as the government plays an essential role in providing infrastructure and incentives for the private sector to develop SEZ projects.

It is a common assumption that SEZs can only be successful if they offer competitive advantages greater than those offered elsewhere, e.g. cheap labour and/or cheap raw materials. However, what ultimately determines the success or failure of an SEZ development project is its relevance to the specific local contexts in which they are located, and how effectively the projects are designed, implemented and sustainably managed. (10) This article seeks to broaden the literature on SEZs by emphasizing the importance of governance and local contexts in the successful development of SEZs. However, it is important to note that findings from the case studies presented in this article may not be applicable to other SEZs in different political-economic settings.

Governance itself is a complex concept, and its definitions are therefore relatively varied, depending on the perspectives and disciplines. Generally, governance can be defined as "the rules of collective decision-making in settings where there are a plurality of actors or organisations and where no formal control system can dictate the terms of the relationship between these actors and organisations." (11) This indicates that there are at least three main elements of governance, i.e. rules, collectivity and decision making. These three elements of governance are shaped by the needs of the people, which, in turn, requires not only the adaptation but also the actualization of the governance framework, depending on specific local contexts.

At the national level, the adaptation and actualization of the designs and practices of governance are essential in order to deal with the complexity of social problems, rising demands from interest groups and the widening impact of globalization. (12) Likewise, at the company level, businesses also need to adjust their corporate governance practices to accommodate new demands from consumers, regulatory complexity, corporate social responsibility and global competition. (13)

Among the complexities of governance concepts, a challenge is how to define "good governance". This concept refers to a development school of thought introduced by the World Bank in the early 1990s. (14) Broadly speaking, the concept of good governance emphasizes the importance of upholding the principles of accountability, transparency and clarity of legal frameworks in everyday decision making and policy implementation. (15) Adherence to these three principles is supposed to lead to effective governance and, eventually, the promotion of positive development outcomes. Elsewhere, scholars have argued that the essence of good governance depends on two major factors: the changing role of government in society, and the changing capacity of society to pursue collective interest under severe external and internal constraints. (16) This means the essence of good governance is the creation of dynamic interactions between state and society in both decision making and policy implementation. Others have also argued that good governance comprises six main components, namely: participation; decency; fairness; accountability; transparency; and efficiency. (17)

While the concept of good governance has inspired action in many developing countries, there has also been growing criticism of its weaknesses. For instance, the concept tends to apply "one size fits all" parameters. (18) As a result, at the implementation stage, these parameters become relatively ineffective. They normally fail to explain, among other things: first, what is essential and what is not; second, what should come first and what should follow; third, what can be achieved in the short term and what can only be achieved over the longer term; and fourth, what is feasible and what is not. Good governance per se is thus not sufficient for optimum development outcomes. It also needs democratic support, ownership, commitment, and must take into account the country's cultural and historical contexts. (19)

Criticism has also been directed at the concept of good governance's failure to facilitate the implementation of decentralization policies. (20) A study of African...