Do Special Economic Zones Induce Developmental Spillovers? Evidence from India's States

Abstract

Do special economic zones induce local development? Research drawing on the case of China's special economic zones suggests that subnational polities can target the location of export zones in order to catalyze local and regional socioeconomic development. Since 2006, a number of Indian states have pushed forward similar zones in the face of accusations of land grabbing, arguing that the zones will be engines for improvement in exports, employment, and infrastructure. I argue that local development spillovers are an important, albeit previously understudied, dimension by which to evaluate the effects of special economic zones. I then present the first systematic analysis of the developmental effects of India's SEZs, leveraging an original dataset on their locations, together with 2001 and 2011 census data containing a host of social and economic developmental variables. The findings show these SEZs have failed to bring about local socioeconomic development. To explain this absence of developmental spillovers, I provide a theoretical framework based on the crucial role of political economy incentive structures facing local politicians. I outline the mechanism through which Indian state politicians use state-owned development corporations for rent capture, undermining the potential effectiveness of SEZs and leading to their developmental failures. The combination of available means for extracting rents and the limited political constraints on such rent extraction leads to a lack of developmental spillovers. This framework can also help to explain the difference in the effects of SEZs in India and in China. These findings have theoretical importance for understanding the conditions under which subnational polities can use export zones and other export policies to catalyze development, and practical implications for understanding the mixed pattern of SEZ success across the world.