Squeezing the zones to the max

This article originally appeared in the Municipal Journal.

If nothing else, special economic zones (SEZs) are resilient. Spatial zoning – offering tax incentives, simplified regulations and other benefits to attract inward investment and deliver growth – have been a mainstay in central government policy in the UK since the 1980s and have survived the turbulent transitions from Boris Johnson’s Levelling Up agenda all the way through to today.

“a potential lifeline”

SEZs can be diverse in actual policy form – although most readers will recognise their current incarnations: freeports, greenports, investment zones and enterprise zones – but they all have a shared aim to stimulate local economies, thus offering a potential lifeline to many local authorities who struggle to find ways to do so.

However, critics argue SEZs struggle to deliver the growth they promise, and – more broadly – the logic of trickle-down economics that underpins successive governments’ laser-like focus on delivering growth initiatives often fails to deliver tangible benefits to local communities. This was demonstrated by analysis of the Greater Manchester economy which found that, while GVA in the region has doubled since 1998, this growth hasn’t been as inclusive as it could have been, and suggests the wealth created may have been extracted as profits to distant shareholders.

“subsidies and tax breaks which often benefit large corporations”

Over the last few years, the Centre for Local Economic Strategies (CLES) has been investigating how SEZs operate and it seems they, too, may be following a similar path of “exclusive growth”, rather than creating long-term benefits for local economies. What is more, this is happening at a cost to the public purse, in subsidies and tax breaks which often benefit large corporations that prioritise shareholder returns over community and worker benefit. Such trends risk deepening inequalities and undermining the current Government’s missions that commit to deliver economic growth that is “strong, secure and fair”.

Observations from operational freeports and investment zones underscore these concerns, and even though our investigations suggest that, in some cases, manufacturers within SEZs are local operations, complex ownership structures mean they may still be channelling profits to overseas tax havens.

“potential for driving inclusive economic development”

All of that said, our investigations over the last few years have shown ways to deliver SEZs for greater local benefit. Despite the risks, they hold potential for driving inclusive economic development when designed and delivered alongside policies that favour the needs of communities.

Local authorities can, for example, leverage their powers, the flexibilities of SEZs and other wraparound policies to set conditions on tax benefits, mandating higher wages, worker protections and equitable profit-sharing for businesses benefiting from tax incentives.

Similarly, they can support targeted skills development by collaborating with educational institutions to ensure job opportunities created in SEZs don’t just go to skilled graduates but target the communities that need them most.

Requiring transparency in financial reporting and aligning SEZ governance with inclusive economic objectives, too, can encourage local business participation, supporting indigenous enterprises to grow.

“work to be done”

There is work to be done, though, if Labour want to deliver their mission of ‘strong, secure and fair’ growth through SEZs. Strengthening local authorities to ensure SEZs are aligned with regional and national industrial strategies, for example, would ensure that investment within SEZs can drive longer term objectives around local skills development or social business, rather than pitting industrial strategy against inclusive economy objectives.

Labour should also consider mandating social value in exchange for the subsidies found in SEZs. Drawing inspiration from the Welsh Social Partnership Act, which prioritises fair work and social value in public contracts, SEZ subsidies could become contingent on local jobs, high environmental standards, tax compliance, real living wages, collective bargaining or any number of other outcomes calibrated to the needs of the place they will be operating. This approach would also ensure SEZs were working in synergy with Labour’s Make Work Pay agenda.

“deliberate and purposeful use of public funds”

These measures would require deliberate and purposeful use of public funds to ensure SEZs contribute to reducing inequalities rather than exacerbating them. To that end, CLES will be hosting a roundtable in the spring, inviting policymakers and local authority officers to consider critical questions to maximise the impact of SEZs.

We want to know how employment opportunities in SEZs can be designed to benefit disadvantaged communities, and to be high quality and sustainable. We’re interested, too, in how governance structures can prevent SEZs from becoming conduits for wealth extraction and the role that local authorities can play in ensuring that SEZs align with broader goals of fairness and sustainability.

“We can’t miss this opportunity”

The answers to these questions will determine if SEZs can transition from being mere economic incentives that follow traditional approaches to trickle-down economics, to becoming engines of equitable and inclusive growth. We can’t miss this opportunity to break a mould which has been set, despite its flaws, for more than 30 years.