In countries facing infrastructure shortcomings and challenging business environments, Special Economic Zones SEZs may be used to overcome barriers to firm entry, attract FDI, and encourage industrial clusters. SEZs enable the allocation of scarce resources on a limited scale in order to create quick wins. These small economic enclaves can prove experimental industrial policies and incentives. Industrial estates allow the government to make desirable improvements in infrastructure and business environment, which will reduce transaction cost and encourage industrial clustering.
SEZs take a step further: government can create islands of policy flexibility without changing a broader sea of national policy. The success of Thimphu TechPark, launched in , suggests that ICT has a strong potential in the context of economic zones. Most Bhutanese are taught English from an early age, and the country scores particularly well on the human assets index that is part of the official LDC category.
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Bhutan is following a path well-trodden by successful tech exporters: start small and cheap, discover markets through trial and error, and move into more sophisticated activities later on. In the spirit of the GIFF, these are the pioneer firms which have invested and achieved quick wins, their success demonstrating to other companies the potential benefits from investment in Bhutan.
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A total of workers are employed at the park, which is an important source of employment for young people in the capital, and more than half the number of people who work at three of the five hydropower plants although a small proportion of the , economically-active national workforce. E-commerce and e-government have a low environmental impact because they localize service access and delivery and are more efficient than old, carbon-heavy industries.
Once the potential has been demonstrated, demand increases as more firms follow. SEZs allow policy flexibility, infrastructure and targeted incentives for attracting these pioneer firms. Although industrial estates provide infrastructure, the effects can be amplified with supplementary policy support. The first mover problem is an obstacle based on a lack of information.
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Initial investors have no previous firms to demonstrate the profitability of foreign firms in the region. Further, after a firm has entered Bhutan, this firm produces information which successive firms can use whether the firm succeeds or not. Pioneer firm incentives compensate for this additional risk. A large proportion of the fiscal incentives targeted firms new to Bhutan. Further, except for some general incentives, specific sectors were the focus of most of the document.
The tourism sector, for instance, is among the sectors that received the most fiscal incentives. As Bhutan receives industrial transfer, it must be more integrated into the global market.
To win competitiveness in the international arena, an efficient custom system must be developed to facilitate export and import. However, Bhutan ranks the lowest efficiency of customs clearance process among South Asia countries, and worse, it takes the longest time to clear exports, according to the Enterprise Survey.
Customs clearance is relevant not just to goods exporters but to the ICT services exporters which can be found in EPZs. The GIFF study, whilst not providing an exhaustive list of future industries into which Bhutan should transfer, argues that the government should play an active role in structural transformation, particularly to help the economy overcome first-mover and externality problems.
In a nutshell, the government should facilitate attracting FDI, removing binding constraints and promote SEZs with targeted policies — particularly in services and more specifically ICT. This is by no means to discount the importance of major existing industries such as tourism and hydropower, but diversification is an urgent and pressing task. As industries transfer, Bhutan will become more integrated into the global market and other investors may follow.
The least developed countries report, 2006: Developing productive capacities
In addition the learning-by-doing effect may lead to the emergence of local entrepreneur-led firms. Building productive capacity is critical to successful LDC graduation in that it provides a long-term platform for sustainable social and economic development beyond reliance on international support measures such as trade preferences and aid. Although LDC graduation is an important milestone, it is only a stage in the process and should not be seen as the end-point.
Nonetheless there are links between the LDC criteria and productive capacity. GNH has contributed to the relatively effective use of hydropower resources and to the preservation of the natural environment, as well as to ensuring that the benefits of development have been reasonably and equitably shared. Whilst some success has been achieved in diversification, a continued expansionary and stable macroeconomic environment is essential to underpin continued success.
Preliminary research conducted for this report indicates that Bhutan could utilize the current global industrial transfer window to develop new sectors and to build on the success of Thimphu TechPark and others. Toggle navigation. International Centre for Trade and Sustainable Development. Overview News archive Issue archive About. The US is also seeking more open access for its automotive exports and insurance companies. ICTSD reporting. This article is published under. Previous article Events. If you would like to submit an event, please email us. Upcoming : 27 July By Robert Howse and Petrus van Bork.
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