Editing Special economic zone (section)

== Economic impacts ==

SEZs have a significant impact on the economies where they are established, offering several key benefits that contribute to [[economic growth]] and development. One of the most important effects is the attraction of [[Foreign direct investment|Foreign Direct Investment]] (FDI). By offering [[tax break]]s, streamlined regulations, and enhanced infrastructure, SEZs provide a favorable environment for foreign companies looking to invest. This influx of capital can generate substantial economic activity, including job creation within the zones and in related sectors such as logistics, transportation, and services.

SEZ’s can lead to growth in [[Gross regional domestic product|Gross Regional Product]] (GRP) per capita, reflecting an increase in the economic output of the region. Similarly, they can contribute to higher [[personal income]] levels and attract more FDI projects, which bring in both capital and expertise. These economic improvements can contribute to higher [[living standards]] for the local population.

In addition to attracting investment, SEZs are crucial for generating [[employment]]. The businesses that establish themselves in these zones require workers, leading to an increase in jobs for the local population. This can, in turn, result in higher income levels and better living standards for people in the surrounding areas. However, it is important to note that the positive economic effects of SEZs do not always translate into positive social impacts. For instance, despite the economic growth they bring, SEZs may not always lead to a significant reduction in [[unemployment]] rates, as some regions may experience a mismatch between job creation and local labor market needs.

SEZs also play a vital role in boosting exports. Many companies operating in these zones focus on manufacturing goods for international markets, helping to increase a country’s exports, which can improve the trade balance and generate foreign exchange earnings.<ref>{{cite journal |last1=Sinenko |first1=Olga |last2=Mayburov |first2=Igor |title=Comparative analysis of the effectiveness of special economic zones and their influence on the development of territories |journal=International Journal of Economics and Financial Issues |date=2017 |volume=7 |issue=1 |page=115 |url=https://dergipark.org.tr/en/download/article-file/364150}}</ref>

Furthermore, SEZs contribute to local economic development by stimulating demand for local goods and services. As businesses in the zones require input from local suppliers, this creates additional economic activity and encourages further investments in the region.  
Infrastructure development is another major benefit. The establishment of SEZs often leads to improvements in transportation networks, utilities, and communication systems, which can have positive effects beyond the zone itself, benefiting the wider economy.  
Additionally, SEZs can serve as hubs for technology transfer and [[innovation]]. Foreign companies often bring advanced technologies and expertise, which can help local firms improve their own operations and boost their competitiveness. This knowledge transfer is essential for skill development within the local workforce, enhancing their capabilities and preparing them for future economic challenges.<ref>{{cite journal |last1=Rajneesh |first1=Narula |last2=James |first2=Zhan |title=Using Special Economic Zones to Facilitate Development: Policy Implications |journal=Transnational Corporations |date=2 September 2019 |volume=26 |issue=2 |pages=1–25 |doi=10.18356/72e19b3c-en |ssrn=3623037 |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623037 |language=en}}</ref>

However, SEZs also have some drawbacks, such as a possible increase in inequalities between regions or the potential for inefficient resource diversification.  Indeed, the economic benefits of SEZs are unevenly distributed. Critics argue that these zones often benefit large multinational corporations disproportionately while providing limited gains for local businesses and communities. In [[Poland]], for example, SEZs have concentrated economic activity in select regions, creating significant disparities in development. Moreover, the focus on foreign investors can result in dependency on external capital, which may not always align with the host country’s long-term economic priorities.<ref name="The Pervasive Problem of Special Ec">{{cite journal |last1=Chaisse |first1=Julien |last2=Ji |first2=Xueliang |title=The Pervasive Problem of Special Economic Zones for International Economic Law: Tax, Investment, and Trade Issues |journal=World Trade Review |date=October 2020 |volume=19 |issue=4 |pages=567–588 |doi=10.1017/S1474745620000129}}</ref> This is directly linked to the theory of a [[balanced economy]], which claims that an economy can only grow if all sectors are financed simultaneously. In contrast, the unbalanced development theory argues that investing in certain sectors—or, in this context, specific regions—can lead to the development of other sectors.<ref name="Balanced or Unbalanced Development">{{cite journal |last1=Litwack |first1=John M. |last2=Qian |first2=Yingyi |title=Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition |journal=Journal of Comparative Economics |date=1 March 1998 |volume=26 |issue=1 |pages=117–141 |doi=10.1006/jcec.1997.1502|doi-access=free }}</ref>

Another drawback is the fact that tax incentives can disrupt the equilibrium between the state and companies. When companies make sufficient profits, they pay higher taxes, which allows the government to invest without raising taxes. However, if this is not the case, the government may need to increase taxes. In a tax incentive system, to maintain equilibrium, the revenue generated by the system must be high enough to prevent the state from having to raise taxes.<ref name="Balanced or Unbalanced Development"/>

Another issue is the so-called "[[race to the bottom]]" among EU member states. The lack of harmonized tax policies enables countries to compete aggressively by offering increasingly generous incentives to attract investors. While this may benefit individual SEZs in the short term, it undermines collective EU goals of [[Regional policy of the European Union|equitable economic development and cohesion]]. Furthermore, these tax breaks often fail to deliver proportional benefits, as many foreign firms bring their own [[labor force]], limiting local job creation and exacerbating inequalities.<ref name="Liberal and illiberal industrial po">{{cite journal |last1=Győrffy |first1=Dóra |title=Liberal and illiberal industrial policy in the EU: the political economy of building the EV battery value chain in Sweden and Hungary |journal=Comparative European Politics |date=1 October 2024 |volume=22 |issue=5 |pages=574–593 |doi=10.1057/s41295-023-00374-0}}</ref>

Finally, while SEZs are heralded for their ability to attract Foreign Direct Investment (FDI), their broader economic implications often reveal significant shortcomings. One major concern is their role in facilitating [[tax evasion]]. By offering highly competitive tax rates and other financial incentives, SEZs sometimes create conditions where corporations exploit loopholes to minimize their tax liabilities. This practice undermines state revenues, limiting the ability of governments to invest in [[public service]]s and infrastructure. For instance, Ireland's Shannon SEZ, while successful in drawing foreign investment, has been criticized for perpetuating "[[tax haven]]" dynamics that weaken EU fiscal cohesion.<ref name="The Pervasive Problem of Special Ec"/>