In response to the argument in favor of closing loopholes, Ludwig von Mises once noted that “capitalism breathes through those loopholes.”
In many ways, special economic zones (SEZs) are the ultimate loophole. But, like all loopholes, they benefit the politically connected few who know how to take advantage of them as opposed to the masses.
SEZs are geographically limited areas that governments have granted increased economic freedom to in order to attract foreign investment. They were most famously used in China, India, and the United Arab Emirates, but exist in more than seventy countries worldwide.
SEZs make it cheaper to do business in countries with centrally planned economies by removing the most onerous barriers to entry for businesses located in the zones. These include everything from tax breaks to special business visas.
The Port of Duqm, Oman’s largest SEZ, has many such incentives. The dozens of permits normally required to do business in the country have all been consolidated in a “one-stop shop,” which acts as an interface between the entrepreneur and the government. Foreign ownership of companies in Oman is illegal, unless they are registered in the zone. The zone also features numerous exceptionally generous tax breaks.
However, deregulation as a means to attract business can only go so far. Duqm is located in the middle of the deserts of southern Oman. It is very unlikely that in a free market any real estate developers would ever decide to develop a port there.
Duqm’s climate is hot, with temperatures reaching as high as 45ºC (113°F) in the summer. Water is expensive. And the nearest large cities are all located several hours away by flight. As a result, Duqm had to be developed using government financing.
Whether the inconvenience of the location is outweighed by the strength of the regulatory incentives remains to be seen. So far, Duqm has struggled to attract private sector tenants.
The role that SEZs can have in stimulating business through deregulation is limited. In his Theory of Money and Credit, Mises points out that production cannot occur in a vacuum, regardless of how good or bad laws might be. Mises writes: “The role played by man in production always consists solely in combining his personal forces with the forces of nature in such a way that the cooperation leads to some particular desired arrangement of material. No human act of production amounts to more than altering the position of things in space and leaving the rest to nature.”
Duqm is, on paper, a free market paradise. But in reality, it is a mostly empty city in the middle of the desert financed by the government of Oman.
Far too many SEZs are in a similar position. De jure they enjoy a remarkable degree of legal autonomy and economic freedom. De facto they are government-funded projects which could never exist in a free market.
Doing business in an SEZ can be difficult. Usually, only medium and large companies that can afford the lawyers and expensive land within the zones can take advantage of the benefits they offer. SEZs are the kind of deregulation that is most emblematic of “capitalism for the owners, socialism for the loaners,” which benefits big business at the cost of small business. In certain countries, SEZs create a sort of two-tiered society where the elites can enjoy capitalism while the disenfranchised must endure socialism.
In Socialism: An Economic and Sociological Analysis, Mises separates true liberalism from schemes designed to benefit the moneyed classes. He writes: “Liberalism champions private property in the means of production because it expects a higher standard of living from such an economic organization, not because it wishes to help the owners. In the liberal economic system more would be produced than in the socialistic. The surplus would not benefit only the owners.”
SEZs are loopholes, and capitalism breathes through loopholes. But like all loopholes, they tend to benefit those who can afford to hire the lawyers who can identify said loopholes.