Special Economic Zones – Special or not?

Ministers shouldn’t respond to the siren call of just ‘liberalising’ regulations or laws without a plan

In among the flurry of announcements being made by the government, some of them based on tweets, Minster Shane Jones discussed the possibility of delivering a ‘Special Economic Zone’ in New Zealand. Details were light, as papers have yet to be taken to Cabinet, but the Minister was keen to draw a link between the zones and energy security. That suggests that one of the first sites that could be established would be at Marsden Point, the site of our former oil refinery.

Given that the idea is still being shaped, can I take this opportunity to offer some thoughts on what might work and what might not? Firstly, I’m not against the idea of recognising that economic geography exists. Much of the advice that is provided to decision-makers assumes that any attempt to encourage economic development in a specific place will always end in failure – and so we should ignore geography as a factor.

But ideas like Special Economic Zones do need to be extremely carefully managed. Governments don’t have a great track record of changing track when things are going wrong. As the economist Dani Rodrik has succinctly put it “The standard rap against industrial policy – that governments cannot pick winners – is largely irrelevant: what determines success in industrial policy is the much less demanding capacity to let losers go”.

The biggest risk that exists in the delivery of any Special Economic Zone – and specifically in New Zealand – is that it has to be the actual answer to the problem you are trying to address. The Minister has rightly identified that energy security is a problem. We are witnessing the deindustrialisation of towns around much of provincial Aotearoa. Kinleith. Penrose. WPI’s Ruapehu sites. Energy prices hit meat processors in places like Smithfield. Energy prices also hit consumers in their pocket – with household energy costs running at more than twice the general rate of inflation.

Tackling that problem should be one of the central issues facing the government. We are a nation blessed with an abundance of natural and easily accessible renewable energy. Yet as a country we have failed to invest in new energy generation. Total electricity generation in New Zealand has remained the same for the past ten years. Renewable energy has increased, at roughly the same rate as non-renewables have exited.

Figure 1: Net Generation - GWh

Source: MBIE Data

Figure 2: Renewable Energy as a percentage of all Electricity Generation

Source: MBIE Data

During that period of time the population grew by almost 1 million people. The economy grew by more than a third in nominal terms. It’s hard to believe that if there was additional generation (and cheaper electricity) it wouldn’t be used. Indeed, it breaks one of the fundamental laws of capitalist economics.

It’s unclear how a ‘Special Economic Zone’ solves the issues of energy security and employment in New Zealand. It might make the building of some energy storage (LNG, refined fuels) slightly easier from a planning perspective, but the issue at hand is how we deliver more electricity generation (and make the cost of electricity cheaper). We also need to make sure that we are growing jobs in every region, not just in one place. Planning constraints at one port might be important, but they don’t tackle problems being found across the country.

The evidence tells us that to be successful, zones have to be implemented properly and carefully tailored into a country’s specific situation. As a report for the UK government shows they are not a suitable development instrument in every situation. They need to be located in a well-developed national industrial strategy. That is something that the government has moved away from by abolishing Industry Transformation Plans. They have also abolished the Future of Work Forum that was trying to do develop that work.

What would be a worry?

Overseas, special economic zones have been used to deliver ‘business friendly’ regulations. That tends to mean lighter environmental rules, or making it easier to appropriate land for business purposes. In the UK they have also been used to reduce the level of taxation that businesses need to pay.

Around the world they have also been used to undermine existing labour laws and labour regulations. In South Korea for example, this has led to restrictions on the rights of workers to collectively organise. An International Labour Organisation report in 2017 said “Reports of violations of freedom of association in EPZs (Export Promotion Zones – a type of Special Economic Area) are common”. Until October 2023, Trade Unions were banned in Bangladeshi Special Economic Zones.

There is no reason to support the relaxation of environmental, labour, or other regulations in any zone in New Zealand. Our labour laws and protections are already weak enough, and we are not even compliant with the most basic internationally recognised labour laws as set out by the UN.

Importantly, firms moving to these special zones to take advantage of these relaxed rules would be placing other firms in New Zealand at a competitive disadvantage. It would simply see the downward spiral in terms and conditions that we saw in other industries such as the Bus Industry.

What should the Minister do?

Minister Jones has started a good conversation – how do we build a better, long-term industrial policy in New Zealand? One that focuses on delivering great jobs in places that desperately need them. How do we make sure that we are using all of the tools of the state to make sure we get there?

Special Economic Zones might be part of that conversation, but we need to start at the beginning of the problem, rather than installing a solution and hoping it works. Our energy security issues are unlikely to be comprehensively addressed by a zone – unless there is a plan to address all the issues and not just fuel storage.

Ministers also shouldn’t respond to the siren call of just ‘liberalising’ regulations or laws without good reason. It doesn’t help existing firms in New Zealand, and it just means some companies get an opportunity to exploit workers or the environment. People and communities will pay for higher profits in the firms in those zones.

Getting a great industrial policy starts with answering the question “what does a good economy look like, and how is it different to the one we have now?”. Then getting buy-in to that from all sectors, and making long-term investment decisions about how to sustainably achieve our goals. On their own, Special Economic Zones aren’t the answer to that question.