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.
