When Governments Suspend Their Own Rules: Special economic zones can be anything from tools of crony capitalism to seeds of a freer world order.

• Author: Bell, Tom W.
• Position: BOOKS - Lotta Moberg's "The Political Economy of Special Economic Zones" - Critical essay

ALL OVER THE world, in carefully delimited areas, governments have carved out exceptions to their own rules. These special economic zones, better known as SEZs, come in many sizes and types, ranging from simple duty-free warehouses to jurisdictions the size and complexity of entire cities. Host governments typically roll back taxes, customs, and similar barriers to trade in their zones, but sometimes offer special labor, environmental, or financial regulations, too.

You probably live within a short drive of an SEZ: The United States has more than 400 of them, in the form of Foreign Trade Zones. Today most countries--about 75 percent--host SEZs of some sort. Worldwide, they number well over 4,000, and if you count micro-zones, some of them no bigger than parts of buildings, over 10,000.

Though the core idea runs back to ancient times (including the colonial proto-SEZs that gave rise to the United States), modern special economic zones started to emerge in 1948, when Operation Bootstrap made Puerto Rico a special trade and processing zone. A more popular model emerged in 1959, when the international airport in Shannon, Ireland, opened a special zone to accommodate transshipping and value-added processing. More recently, as with the zones that already fill China and that are planned in Saudi Arabia and Honduras, SEZs have grown to cover whole cities and areas of law.

The Political Economy of Special Economic Zones casts a coolly objective eye on this latest institutional mutation to issue from the roiling competition of global trade. Its author, Lotta Moberg, a recent graduate of George Mason University's economics doctoral program and now an analyst at the investment bank William Blair & Co., finds both opportunities and challenges in their rise.

As Moberg explains, politicians often have self-interested reasons to promote special economic zones. Sometimes they're merely seeking a new venue for graft. More honorably, they often hope the zones will attract investment, create jobs, and increase exports--and that voters will reward them for it.

Can SEZs work such wonders? Moberg voices doubt. Her book lays out the reasons, deeply informed by public choice reasoning, why SEZs too often distort economies rather than help them grow. Politicians lack the information and incentives required to plan and run the zones well. Many become burdens to their hosts, and they can distract policy makers from broader and more essential reforms.

Yet Moberg also...