On the sidelines of last month’s ASEAN Summit in KL, Laos Minister of Industry and Commerce Khemmani Pholsena proposed an ASEAN-wide standard for Special Economic Zones (SEZs), stating, “We think that a framework for Special Economic Zones would be good to set up because we see that in each ASEAN member state, we develop different economic zones,” according to the Nikkei Asian Review. Although not likely to be adopted, it does raise the issue of market-distortive subsidies in the ASEAN Economic Community (AEC).
SEZs are zones specially designated for investment, usually considered outside the customs territory of the host country. Hence most SEZs have duty-free imports and exports, lighter regulations on labor and establishment, and perhaps income tax exemptions and deferments. All ASEAN countries have some form of SEZs, and use them to encourage foreign investment into their countries.
The motivating concept of the Laotian proposal is that this competition among ASEAN members disadvantages less competitive countries. Countries with poorer infrastructure or connectivity, like Laos, have to offer more investment incentives to encourage foreign investment. The downside is that those are the countries that can ill-afford the loss of tax revenue involved in such investment incentives. Thus, an ASEAN-wide standard for SEZ incentives would help end this “race to the bottom” to outdo each other with such incentives.
Unfortunately, ASEAN has shown very little willingness to address market-distortive subsidy and incentive policies, whether in SEZs and other programs aimed at attracting foreign investment, or in agriculture. This contrasts with the EU, where the European Commission aggressively targets state aid that supports national industries (although like most jurisdictions maintains its own agricultural subsidy programs). The Laotian proposal may be an idea whose time has not yet come, but if ASEAN is to achieve a true single market in the AEC, it will need to deal with government subsidy and incentive policies like the SEZs.