India to Introduce Special Economic Zones

Highly structured labor markets with rigid rules ensure that workers aren't exploited, while open markets for labor allow businesses to grow and profit. Getting the balance right is difficult, but it is even harder in developing economies with a post-colonial mindset. China introduced Special Economic Zones that allowed the capitalists to exploit the workers in the communist state because central planning wasn't working. Now, India's 29 states may be allowed to do the same.

Kamal Nath, India's Minister for Trade and Commerce, has said "It will be for every state to decided" whether it wants to relax India's rather rigid economic rules. This is a stroke of genius, because if even one state makes a success of it, Mr. Nath gets the credit. And it if is a disaster, local politicians chose the path.

However, it is more likely to succeed. First of all, India is expected to grow economically by around 7% in the fiscal year that ends in a couple of weeks. It is always easier to introduce reforms when the pie is growing because the re-allocation of resources and rewards is usually a reduction in increase at worst rather than an absolute loss.

In addition, India has China's example from which to learn. For example, the main benefit to foreign investors of a Special Economic Zone is the significant tax concessions in the early days. India can, thus, focus on this rather than on those features that haven't proved their worth.

And why do it? With economic growth like India's it is not clear that any changes are needed, but that would be missing a very significant fact. While the economy has grown 7% this year, job creation over the last fives years hasn't hit 1% per annum, while the labor force is growing at 2% a year. Unless addressed quickly and successfully, lack of jobs is a time bomb for India. One hopes Mr. Nath's plan is a resounding success.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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