Special economic zones: Beware of past failures

Lessons from Chu Lai

Developing special economic zones (SEZs) is not new in Vietnam. This idea emerged from the Doi Moi (1986) and was documented by the eighth National Congress (1997).

Vung Tau – Con Dao, established in 1979, was the first "special zone" to develop the oil and gas industry while Vietnam still ran a planned economy.

In the Doi Moi, "open economic zones” were densely developed in Vietnam’s central provinces, namely Dung Quat, Chu Lai, Nghi Son and Vung Ang. These zones aimed at making breakthroughs and contributing to national economic growth.

Especially, when the draft Law on Special Administrative-Economic Zones was submitted to the National Assembly for the first time in November 2017, Vietnam's determination to build “real” SEZs is even more strongly expressed.

According to many experts, framing open-door policies and creating institutional breakthroughs for SEZs are essential in the current socio-economic context. Successful SEZs will promote economic growth in Vietnam as many models in China and around the world have done.

However, building successful SEZs is not easy, as in the past, most of Vietnam's open economic zones were not competent enough to become a new growth motivation, not to mention that they all "failed" after a short time into operation.

For example, the first open economic zone of Vietnam was Chu Lai, established in 2003. After 15 years of operation, this economic zone showed a disappointing result.

Previously, to attract investors to Chu Lai, the Government adopted some incentive policies that were even far more open than ones being proposed for SEZs nowadays. Some policies included permitting foreigners and overseas Vietnamese to buy and sell properties in Chu Lai or paying for the total costs of compensation and land clearance for projects by the end of 2005.

But those incentives did not seem to live up to investors’ expectation. As per performance statistics, by Dec 20, 2016, Chu Lai open economic zone only had 118 licensed projects with the total investment of $2.159 billion. Among those, there were only 32 FDI projects with the total registered capital of over $1.069 billion. Currently, 74 projects have been put into operation with the disbursement of $923 million.

Besides, the largest investor in Chu Lai is not an international giant as expected but a domestic enterprise - Truong Hai Auto Corporation.

The situation repeated in Dung Quat, one of the five key economic zones in central Vietnam. Currently, Dung Quat has 12 abandoned works and projects from years ago with the total area of up to 270 hectares.

"Institution" is the key

Despite generous incentives, why did those open economic zones fail to achieve the results as expected?

Explaining the reason why Chu Lai could not attract large investors from abroad, previously, Dr. Vo Dai Luoc, former President of the Central Institute for Economic Management, said that Vietnamese policymakers had confused the concepts of “institution” and “mechanism”. "The nature of an open economic zone should be a free institution," he said.

According to Luoc, the purpose of establishing economic zones around the world was to create institutional breakthroughs, because to undertake institutional reform at the national level was difficult.

Modern and international institutions are the decisive factor for attracting investors. For example, Shenzhen (China) had adopted Hong Kong’s autonomy model, which was then applied to other coastal economic zones in China. As a result, 80% of foreign investment in China has been concentrated in the coastal zone," he argued.

Meanwhile in Vietnam, although the Ministry of Planning and Investment has planned 15 economic zones along the country, not even one zone has a self-governed and internationalised structure. "In fact, Chu Lai is still an industrial park with unremarkable incentives," Luoc emphasised.

According to economist Pham Chi Lan, there had already been numerous incentives in Vietnam’s open economic zones, but they were not successful because the implementation process was not effective.

Lan said that SEZs should be "institutional laboratories" which took the lead in undertaking administrative reforms and created a friendly environment for investment.

SEZs should have the most streamlined and effective management structure to process the problems, especially ones of investors, the economist emphasised.

According to Dr. Can Van Luc, Chief Economist of the Bank for Investment and Development of Vietnam (BIDV), the latest draft for SEZs replaced the Chief Executive mechanism by the council-committee structure. Such administrative arrangement was clearly not modern and streamlined yet, but a clear division of responsibilities among the boards might help a little, he said.