Special Economic Zones in the Indonesia Malaysia Assignment

Assignment Task

Background

The Indonesia–Malaysia–Thailand Growth Triangle (IMT-GT) and the Brunei Darussalam–Indonesia–Malaysia–Philippines East ASEAN Growth Area subregional cooperation programs supported by the Asian Development Bank (ADB) highly prioritize developing regional and cross-border production networks using special economic zones (SEZs) and special border economic zones (SBEZs) as the key tools. These programs are potentially effective mechanisms to deepen subregional cooperation; strengthen linkages to the wider Association of Southeast Asian Nations (ASEAN) Economic Community; and stimulate economic activities, employment, exports, and foreign direct investment (FDI). However, very little is known about whether and how economic corridors are leveraged to set up SEZs and other production hubs and how successful the participating countries have been in coordinating their SEZ strategies to generate network externalities in the subregion through regional cooperation. Against this background, the present study is conducted by ADB—a regional development partner to IMT-GT since 2006—on a collaborative approach to SEZ development and cooperation in IMT-GT under the technical assistance project titled Enhancing Effectiveness of Subregional Programs to Advance Regional Cooperation and Integration in Southeast Asia at the request of the member states. To my knowledge, no earlier study has assessed the implementation of the subregional agenda from the perspective of economic zones.

Objectives. The study sets out the following specific objectives

• mapping the economic zones in the IMT-GT countries
• mapping the economic zones on IMT-GT economic corridor routes;
• assessing the national and subnational policies, regulations, institutions, and governance relating to IMT-GT economic zones;
• assessing the alignment between the national development agenda on the one hand and the IMT-GT economic corridor and zone development approaches on the other;
• reviewing the subregional economic performance to gauge the success of economic zones; and
• Identifying the challenges facing the subregional economic zones and offering  recommendations for actions to deepen economic zone development and cross-border cooperation in the IMT-GT subregion

Data

The analysis is based on both primary and secondary data. The primary data were gathered through field trips to selected economic zones, and consultations and interviews with a cross section of federal governments as well the state or provincial governments’ officials, the Centre for IMT-GT Subregional Cooperation management team, economic zones’ management authorities, and private entrepreneurs. The primary data were combined with the secondary data, which encompassed an enormous range of sources including nationally and internationally published studies; development plan documents of the three countries since the 1960s; texts of the relevant acts, decrees, and regulations; government reports and press releases; academic and news articles; blogs and books; and the websites of various government agencies.

Methodology

The data were assessed using descriptive, exploratory, and explanatory approaches. The descriptive element includes mapping the economic zones in Indonesia, Malaysia, and Thailand and their policy frameworks. The exploratory part delves into the linkages between the zones and national development strategies, and reviews the zones’ economic impacts. Finally, the explanatory part explains the subregional program’s relevance using both theoretical arguments and empirical evidence.

Typological framework of economic zones

A two-layered classification is proposed to map the economic zones. At the top (level 1) is the typology based on the legal perspective, from which there are mainly three types of economic zones: general, special, and hybrid. The distinction between the general economic zones (GEZs) and SEZs centers mostly around the type of regulatory regime that governs them. The SEZ is a distinct economic zone with a specialized legal regime to overcome the institutional deficit in developing countries. Hybrid zones consist of both GEZs and SEZs. Each type of economic zone further branches out according to its functional characteristics in layer 2. In this typological framework, subregions are classified as cross-border hybrid zones covering contiguous subnational units from two or more nation-states that can drive growth by reinforcing local competencies through regional integration.

Mapping of the economic zones in IMT-GT countries

The governments of Indonesia, Malaysia, and Thailand adopted the economic zones program at different times; followed different policies regarding the designs, types, and names of the zones; and implemented them with different rigor. However, the turning point came in the mid-2000s when all three countries gave a major thrust to their economic zones programs to steer their respective economies to a higher growth trajectory with structural shifts to higher value-added activities. Since then, there has been proliferation not only in the number but also in the variety of zones. The typology presented in the study is employed to map all 2,092 cluster-based economic zones in these countries (excluding the hybrid zones), for which specific information is available. It is found that 497 (24%) of them are general zones; the rest are cluster-based SEZs (1,595) of different varieties. Indonesia has the largest number of SEZs (1,482), followed by Thailand (68) and Malaysia (45). Malaysia leads in GEZs (309), followed by Indonesia (149), and Thailand (39). Overall, Indonesia has the most diverse types and the largest number of economic zones, followed by Malaysia and Thailand. More importantly, however, 91% of Indonesia’s zones are SEZs, followed by Thailand (72%), and Malaysia (13%). The analysis also shows that all three countries have been launching ever more ambitious zones initiatives since the mid-2000s. Economic zones have evolved toward larger spatial dimensions, complex structures, more comprehensive high-tech orientation, multisectors, and flexible locations. This evolution reflects a strong commitment, pragmatic approach, and dynamic learning toward economic zones adopted by all three countries, which are critical compoents of an economic zone policy.

Legal and institutional frameworks of special economic zones and general economic zones

It is shown that the economic zones are evolving not only in terms of their structural features but also in legal and institutional frameworks. Along with the provisions of fiscal incentives, the range of facilities, services, and amenities available within zones has been extended in new ambitious zone programs, particularly in Indonesia and Thailand. The preferential regulatory contents have also been enriched and enlarged over time. The SEZs, which have been the centerpiece of industrial policy of the three IMT-GT countries since the 1970s, have grown in importance with an aggressive drive launched by these countries to build a new variety of zones in recent years to achieve a variety of goals by unleashing their full potential.

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