Jonathan Roberts, Research Fellow
What are they?
Why are they important?
How do they contribute to the Cambodian economy?
How do they affect the future outlook of the Cambodian economy?
I have discussed broadly the impact that increased trade and investment has had on Cambodia’s development. One of the most concrete policy examples of this being the case is in Cambodia’s Special Economic Zones (SEZ). At its simplest definition, a Special Economic Zone is an area within a country in which business laws and trade regulations differ from other areas. Such industrial areas combine incentives for investors with administrative support from the government so as to facilitate trade. To give an idea of how an SEZ might better incentivize investment, here is a list of incentives provided by Cambodia’s Sihanoukville Special Economic Zone:[1]
- Long-term lease permits
- Import duty exemption on materials
- Exemption on export duty
- Exemption of tax on profit for up to 9 years (“tax holidays”)
- Permanent visa for families and investors
In addition, SEZs also have significantly higher levels of infrastructure development, and are often placed strategically in locations that expedite the import-export process. As of 2015, Cambodia has at least 36 SEZs, with the majority of investors coming from Cambodia, Japan, Thailand and Taiwan.
Have Special Economic Zones been successful in promoting investment and development in Cambodia? Evidence suggests that they have. A study by scholars from Australian National University and the Asian Development Bank finds that Cambodian SEZs have incentivized investment that would otherwise not be present.[2] There are two important components to this success. The first is that, through SEZs, Cambodia has successfully attracted new investment to the region, and thereby new employment—around 68,000 jobs with better prospects than alternative opportunities, to be exact. The second component to SEZ success is especially supportive of a liberal, pro-free market development agenda: the government has left establishment and management of SEZs to private sector developers. In doing so, Cambodia avoids associated public sector set-up costs, and increases sustainability through greater market discipline.
At the same time, there are multiple issues that must be addressed in order for SEZs to have a lasting positive impact on the Cambodian economy. In order for an SEZ to be sustainable, it must make linkages with the rest of the economy in order to boost competitiveness. The Asian Development Bank finds that linkages between SEZ firms and the economy are minimal, and comparatively less than similar firms working outside the zones. As the light manufacturing sector within SEZs grow, Cambodia find a way to create such linkages. Another substantial issue is the higher cost of operating within an SEZ. Higher electricity prices, for example, drive up production costs, and unexpected fees may drive investors into dishonest practices, according to Open Development Cambodia.[3]
A final interesting point to consider is the way that SEZ might influence relations between Cambodia and other countries. For example, in the Sihanoukville Special Economic Zone (SSEZ), the largest SEZ in the nation, Chinese investors have created steel mills that will work with imported Chinese raw materials.[4] Indeed, of SSEZ’s 109 hosted companies, 94 are Chinese.[5] In addition to China’s One Belt One Road Initiative, Cambodia’s SEZs serve as a place for them to extend their international economic policy. It will be interesting to see how Chinese involvement in the Cambodian economy through SEZs may lead to further bilateral influence—which is currently only speculation.
All in all, Cambodia’s Special Economic Zones have been helped create jobs jobs, increase wage levels, and improved investor sentiment in Cambodia. And, as a classical liberal think tank, we at GMRC are especially pleased with how Cambodian SEZs have experienced success under private-sector management; this underlines the fact that liberal, pro-free market policies can help realize an effective development agenda.
1. Sihanoukville Port Special Economic Zone (SPSEZ), accessed on 18 August 2017
2. Peter Warr, Jayant Menon, Cambodia's Special Economic Zones, Asian Development Bank (ADB), October 2015, accessed on 18 August 2017
3. Special Economic Zones, Open Development Blog, 4 August 2015, accessed on 18 August 2017
4. Hor Kimsay, Steel firm mulls factory in SSEZ, Phnom Penh Post, 21 November 2016, accessed on 18 August 2017
5. Cam McGrath, Sihanoukville zone prospers on China links, Phnom Penh Post, 12 June 2017, accessed on 18 August 2017