Why did Jamaica implement its Special Economic Zones Regime?
Why did Jamaica implement its Special Economic Zone Regime? Especially when it already had a Free Zone Regime which dated as far back as the late 1970’s. This is a very valid question?
Significance
Why does knowing any of this important? That is too is a very valid question.
This article offers a great foundation and expanded understanding of Jamaica’s SEZ Regime and serves, in part, as a documentation of institution knowledge that sadly often does not get put down on paper and is lost to the ages. Additionally, in having an expanded view of the background and rationale for Jamaica’s SEZ Regime it will aid those who are contemplating investing hopefully come to a quicker decision to make it Jamaica; for those that have already invested in the Regime to better navigate the existing and any future changes to the Regime; and for those involved in administration, which I must make full disclosure includes myself, to aid both potential and current investors through the regime and to aid policymakers adjust and improve the Regime.
Jamaica’s SEZ Regime
Special Economic Zones (SEZ) exist in Jamaica, that clearly goes without saying. But have you ever wondered why Jamaica decided to implement a SEZ Regime. We already had a Free Zone Regime, so why change the name? This is a very valid question especially when you considered that Free Zones and SEZ are defined in the same way, according to the World Bank a zone is:
If this is true, and it is, why the need for the change from Free Zone to SEZ? Still a very valid question.
It should be noted that SEZs come in a variety of forms, names and functions – Free Trade Zones, Free Zones, Export Processing Zones, Enterprise Zones, etc. These names are reflective of a government’s priorities and positioning of its economy. However, what unifies all these names is that they are development tools used by governments to attract, and facilitate investments that act as catalysts to diversify whole or targeted segments of their economies.
Free Zone to SEZ: a new policy direction
The name change from Free Zone to SEZ is not a simple matter of form over substance. The SEZ concept is a deliberate policy break away from past policy and is intended to send a clear signal to the investor community (domestic and international); the multilateral lending agencies; and the World Trade Organization (WTO) that Jamaica is moving in a new policy direction. The Free Zones of the past were largely export processing zones enclaves reliant on non-World Trade Organization (WTO) compliant export performance fiscal incentives, the SEZ on the other hand move beyond export processing and is fully WTO compliant.
Three reasons for the change
There are principally three reasons why Jamaica changed its Zone Regime from Free Zone to SEZ and these are:
- WTO compliance.
- Jamaica’s International Monetary Fund (IMF) Agreement.
- Improving Jamaica’s global competitiveness
Please note that this video is being shared for information purposes only and is not a JSEZA or GOJ endorsed or developed video. Therefore the views expressed in the video are my own and do not necessarily reflect those of the GOJ or JSEZA.
WTO compliance.
The WTO prohibits subsidies in particular export performance and local content subsidies – The Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) (“SCM Agreement.” Under its WTO obligations arising from the SCM Agreement Jamaica phased out its offending subsidies and repealed Jamaica Export Frees Zone Act replacing it with the Special Economic Zone Act, 2016. Jamaica and several other developing countries were given a deadline of the end of December 2015 by the WTO, after receiving serval extensions, to implement these reforms.
| Date | Event | Comment |
| July 2015 | SEZ Policy | It guided the legislation development |
| December 2015 | SEZ Bill Tabled in Parliament | To meet WTO and IMF obligations |
| February 2016 | SEZ Act becomes law | |
| August 2016 | SEZ Law comes into effect | The law came into effect at a later date than it was passed into law to facilitate the create of certain instructional arrangement, like the creation and staffing of the SEZ Authority. |
IMF Agreement.
Jamaica’s public debt by 2013 had reached a historic high of about 147% of GDP, this made Jamaica one of the most indebted countries in the world. On May 1, 2013 Jamaica entered a USD $932 million Extended Fund Facility (EFF) loan agreement with the International Monetary Fund which imposed as benchmark conditionalities various austere economic reforms meant to both reform the Jamaican economy and impose fiscal discipline. These benchmark conditionalities were designed as triggers that only if met would entitle Jamaica to draw down on the funds of the EFF.
For more on Jamaica’s lending arrangements with the IMF please click on the button below.
One such reform was the streamlining of tax incentives and bring the granting of tax incentives under the purview of the Ministry with responsibility for Finance. This was done under what is commonly referred to as the Omnibus Tax Act or more formally: The Fiscal Incentives (Miscellaneous Provisions) Act, 2013. The Act abolished and streamline almost all tax incentives granted by the government of Jamaica under one system, however, interestingly enough it did not repeal the Jamaica Exports Free Zone Act. Why? That is a very valid question. The reason for this was that the creation of a new zone regime arising from Jamaica’s WTO obligations was adopted by the IMF as a benchmark conditionality, therefore Jamaica’s Free Zone Regime had a ‘sunset’ based the country’s WTO and now IMF obligations.
The IMF influence of fiscal discipline runs deep within Jamaica’s SEZ Regime, namely it the structure of the fiscal incentives.
The SEZ Regime is the only fiscal incentive regime in Jamaica that is not directly administered by the Ministry with responsibility for Finance. However, the Ministry of Finance has some very important roles to play within the Regime, for example any reforms pertaining to administration or value of the SEZ fiscal incentives is its responsibility. Another IMF influence was the inclusion of performance based mechanism within the SEZ fiscal incentives such as the employment tax credits which further rewards SEZ Occupants for their performance in job creation with the ability, up to a limit, to further reduce their corporate income tax rate of 12.5%.
Improving Jamaica’s global competitiveness
The SEZ regime is not simply a response to external pressures imposed by important institutions in the global economic governance structure. It is also about how Jamaica can improve itself and be more globally competitive. The world had changed a lot since 1982 when the Jamaica Export Free Zones Act was made law and Jamaica also needed to change if we are going to be globally competitive. One area we needed to as a country to address is the rise and proliferation of global supply and value chains and with it the fragmentation of global production. How do we as a country tap into and deepen our involvement in global value chains which according to the InterAmerican Development Bank (IDB) account for more than 50% of global trade. This is a very valid question?
For small island developing countries like Jamaica we have long had a ‘export or die’ mindset. However, in today’s globalized world, with its complex of supply and global value chains, its not simply about exporting any more. It is about trade. It cannot be over stated the importance of trade especially for small island developing states. And the SEZs have their role to play. The SEZs are a major policy tool being used to connect Jamaica to the world. A nation’s development and prosperity are increasingly joined to its connectedness to the rest of the world. In today’s world of globalization it is not sufficient to simply have market access, the ability to turn that access into market presence is a necessity.
Supply chains both literally and figuratively are on the move. In a recent Gartner survey 33% of supply chain leaders plan to move at least part of their manufacturing due in large measure to Covid-19 induced disruptions. In fact, in a paper published by McKinsey in 2020 – Risk, Reliance, Rebalancing in Global Value Chains – they estimate that between 2020 and 2025:
“16 to 26% of exports, worth $2.9 trillion to $4.6 trillion in 2018, could be in play—whether that involves reverting to domestic production, nearshoring, or new rounds of offshoring to new locations.”
More recently the InterAmerican Development Bank (IDB) identified that as part of the USD $78 billion in nearshoring opportunities that exist in Latin America and Caribbean (LAC) region, Jamaica has a $USD 138 million opportunity in increasing goods exports alone. Jamaica’s SEZ Regime is a well-positioned policy mechanism aimed at facilitating Jamaica attracting some of this value to our shores.
What could this mean for the Jamaican economy?
Returning to the Mckinsey study for a minute and if we looked at three industries, Food & Beverage (Agro-processing), Furniture and Pharmaceuticals, and let us crunch the numbers. It should be noted that Food & Beverage (Agro-processing) and Pharmaceuticals are priority industries while is Furniture permitted industry for the Jamaica Special Economic Zone Authority (JSEZA). JSEZA is the regulator of zones in Jamaica with the mandate implementing the SEZ regime by acting as an economic development agency. In carrying out its functions as an economic development agency, JSEZA has decided to focus its attention on eight (8) industries that it believes can make a real socio-economic impact on Jamaica in the short to medium term.
While Jamaica’s SEZ regime was designed not to regulate any specific industry there are a handful of industries that are not permitted such as banking, retail, tourism, etc., with all others being permissible. This move to what is called a ‘negative list’ is another change away from what pertained under Jamaica’s Free Zone Regime, where there was a ‘positive list’ approach which listed the activities permitted in the zones.
However back to the Mckinsey study for the numbers. If Jamaica focused on capturing just paltry one one-hundredth or 0.01% of the possible potential export relocation for all three of industries that would translate to USD$ 240,000,000 – $390,690,000 being added to our exports. Using a conversion rate of 155 to 1 that would translate to J$37,200,000,000 – $61,519,500,000. By any measure that would be a sizable dent in the Manufacturing Strategy target of J$81 billion.
| Sector | Total global exports 2018 (USD) | Possible potential export relocation (USD) | National level: theoretical Jamaican export value capture of 0.01% |
| Food & beverage | $1,149,000,000,000 | $63 – $125,000,000,000 | $6,300,000 – $12,500,000 |
| Furniture | $164,000,000,000 | $37 – $74,000,000,000 | $ 3,700,000 – $7,400,000 |
| Pharmaceuticals | $626,000,000,000 | $236 – $377,000,000, 000 | $236,000,000 – $377,000,000 |
However, being globally competitive also involves a very special feature of modern SEZ regimes that move away from being walled off enclaves to being integrated nodes of economic activity. And for this forward and backward linkages between the SEZs and the domestic economy is essential. In yet another departure from the old Free Zone Regime which was designed as an enclave Jamaica’s not only encourages these linkages but directly incentivize them.
Developers and Occupants may claim zero rating for Jamaica’s value added tax (VAT) or General Consumption Tax (GCT) on sales to them. In an instance this induces local sales to the zones by 15%, incentivizing the Developers in the build out and maintenance of their zones and Occupants in the day to day operations of their commercial activities in zones to ‘buy local’ Jamaican. Based on data received from the Tax Administration Jamaica (TAJ) for 2020 and up to June 2021 for every $1 of GCT forgone or zero rated the SEZ stimulated 15 cents in the Jamaican economy:
- Or for every $10 = $1.5 for the Jamaican economy
- Or for every $100 = $15 for the Jamaican economy
This translates to some serious money for local Jamaican suppliers and the local economy to the tune of:
- 2019: over J$817 billion
- 2020: over J$74 billion (this drop off was caused by the Covid-19 pandemic however there was a massive rebound in 2021)
- 2021 (up to June): over J$332 billion
As such, SEZs should be viewed as export platforms for local businesses that facilitate the reduction of the associated logistics, transport and administrative costs of trading across borders. The SEZs while physically located in Jamaica are an ‘international space’ and are a captive export market for local producers to engage global value chains without leaving the geographic boundaries of Jamaica. In re-design of its Zone programme (Free Zone to SEZ) the Government of Jamaica has taken the deliberate policy decision not create enclaves characteristic of traditional free zones, but to have SEZs act as catalysts for growth and development of the overall economy through programmes that create backward and forward linkages with the rest of the economy.
Conclusion
Why did Jamaica implement its Special Economic Zone Regime? Is not only a valid question, it is a significant one.
SEZs are purposed built and fully serviced sites aimed at improving the competitiveness of manufacturing and services. They are founded on the principles of improving efficiency, clustering of complementary value added services, and seamless integration into the global value chains, low corporate taxation and a business friendly environment. These principles, however, are not self-applying. They have to be implemented systematic and this is where the JSEZA comes into play.
