The Developmental Effects of Special Economic Zones:

Evidence from India’s States∗

Meir Alkon
Princeton University†

Abstract
Can state policymakers use export-oriented economic policies to promote development in
local areas? Arguments and research drawing on the case of China’s Special Economic Zones
suggest that subnational political entities can target specific policies in order to jumpstart local
and regional socioeconomic development. Since 2006, Indian states have pushed similar zones
in the face of major protests, arguing that they will be engines for development. In this paper,
I provide the first systematic analysis of the developmental effects of these zones, leveraging
an original dataset on the location of India’s SEZs, matched with 2001 and 2011 census data
containing a host of social and economic developmental variables. The findings do not suggest
that Indian SEZs have generally had significant effects on local socioeconomic development. In
addition, I present an explanation for the failures of SEZ policy in India, in contrast to China, ar-
guing that different political incentives have led to diverging development outcomes. I outline a
mechanism by which Indian state politicians can use state-owned development corporations for
rent capture, undermining the potential effectiveness of SEZs. Moreover, I rule out a prominent
alternative explanation, that co-partisan political alignment would explain the developmental
underperformance of SEZs. The combination of available means for extracting rents and the ab-
sence of incentives to constrain such rent extraction explains the otherwise puzzling divergence
in the regional developmental effects of SEZs in India and China.

Keywords: international political economy, political economy of development, India, export

policy, place-based economic policies, covariate balancing propensity score, special economic zones
∗
I thank Nhung Bui, Atul Kohli, Helen Milner, Audrye Wong and seminar participants at Princeton for helpful com-
ments and suggestions.
†
Department of Politics and Woodrow Wilson School of Public and International Affairs, malkon@princeton.edu.

1
Introduction

To what extent can subnational actors use export-oriented policies to promote local development?

Export-oriented zones are often an important component of a country’s foreign economic policy,

but are also an important manifestation of place-based policies1 that create local economic hubs,

helping to generate growth, employment, and industrial development in the surrounding areas.

For example, the special economic zones (SEZs) in Guangdong and other parts of coastal south-

ern China have become global manufacturing and export centers that have also served as engines

of rapid regional development. However, SEZs in India have had uncertain results. Anecdotal

evidence criticizes government policy on these zones from any number of angles, and SEZs have

also sparked substantial local protests and contention. This presents an important question: have

place-based economic policies, specifically SEZs, promoted local development in India? And if

not, what accounts for the puzzling divergence between the impact of SEZ policies in China and

India? These research questions have theoretical implications for the study of place-based export

policies within IPE, and practical implications for India’s domestic debates on land acquisition,

investment policies, and local development.

In this paper, I provide the first systematic analysis of the developmental effects of India’s spe-

cial economic zones. I use an original dataset on the location of all of India’s rural SEZs, matched

with 2001 and 2011 census data containing a host of social and economic developmental variables.

The findings do not suggest that Indian SEZs have generally had significant effects on local socioe-

conomic development. In addition, I present an explanation for the failures of SEZ policy in India,

in contrast to China, arguing that different political incentives have led to diverging development

outcomes and benefits. Local leaders in China are incentivized to promote local economic growth

and development in order to secure political promotions, whereas local politicians in India lack

similar incentives and have several alternative political strategies to win elections and stay in of-

fice. Moreover, I rule out a prominent alternative explanation, that co-partisan political alignment

would explain the developmental underperformance of SEZs.

1
Kline and Moretti (2014b) define place-based policies as those that “...explicitly target geographic areas for some
form of special treatment, be it tax subsidies, public investments, or special rules and regulations.” [630]

2
 This structure of the paper is as follows. First, I consider my theoretical arguments in light

of existing research on the socioeconomic effects of SEZs, including the China case, as well as

the role of subnational politics in Indian economic policy. I then discuss the specific, contentious

context of India’s SEZ policies, and their political justification, including the spillover effects for

surrounding communities. I describe my empirical strategy to identify these treatment effects and

the dataset I have assembled to test these hypotheses. My results show that despite claims to the

contrary, India’s special economic zones have not generated positive developmental spillovers in

surrounding communities. Next, I present my theoretical explanation of local political incentives,

supplemented by evidence from field interviews and Indian newspapers, and describe how state-

government owned industrial development corporations may facilitate corruption in the siting

of these zones, undermining their potential developmental effects. Additionally, I rule out one

prominent explanation for how place-based developmental initiatives can be inefficiently allocated.

Finally, I discuss the results and conclude.

The India Case: State Politics and SEZs

Indian states are key drivers of economic development (Sinha, 2005b,a). Divergent foundations of

political economy have led to different attitudes towards business among Indian states, with very

different levels of engagement with the global economy as well as tremendous regional diversity

in patterns of development and inequality (Kohli, 2012). These divergences have their roots in a

long history of subnational variation in policymaking and complex local-central relations (Jenkins,

2004). The increased emerging role of states in India’s political economy has led to a new, spatially

mediated pattern of economic restructuring (Kennedy, 2014). This paper argues that this type of

rescaling has profound implications for the political economy of development. Subnational poli-

cies can potentially be a driver of inequality (both within and across regions). As will be discussed

below, SEZ policies in India have provoked considerable debate and contention.

The model of economic development driven by local leaders is not unique to India. In the Chi-

nese case, arguments made by Xu (2011) point to the importance of decentralization for growth,

driven by the idea of a “market-preserving federalism” (Montinola, Qian and Weingast, 1995). This

decentralization and localization of economic policy, of which SEZs are a key component, plays im-

3
portant roles in accounts of China’s political reform and its ability to attract capital (Shirk, 1993;

Naughton, 1996). However, the effects of subnationally-led economic development policy is con-

tested, both cross-nationally (Cai and Treisman, 2005, 2009) and in the specific case of China (Cai

and Treisman, 2006a). In the case of foreign direct investment, FDI may empower local politicians

to pursue their own interests vis-a-vis the center (Malesky, 2008). In developing countries, FDI

may also increase corruption by increasing market concentration and the rents that public officials

can extract (Pinto and Zhu, 2016). Strong centralized leadership can constrain rent extraction as

well as demands for autonomy by local politicians, an argument advanced in the case of China by

Sheng (2010).

India’s Export Policies

“MAKE IN INDIA”: on the eponymous government website,2 this slogan jumps out in bold letters

against a lion charging forward, its outline is filled with the imagery of cogs turning efficiently. The

website defines the program’s mission: “A major new national program. Designed to facilitate in-

vestment. Foster innovation. Enhance skill development. Protect intellectual property. And build

best-in-class manufacturing infrastructure. There’s never been a better time to make in India.” This

symbolizes a new push in India for export-oriented and investment policies in order to promote

economic growth. As the site explains, the Make in India program “represents an attitudinal shift

in how India relates to investors: not as a permit-issuing authority, but as a true business partner.”

This attitudinal shift is part of a larger transformation in Indian economic policymaking, which

has increasingly moved to a “pro-business” orientation over the past twenty years (Kohli, 2012).

In doing so, it has largely eschewed the government-led developmental policies prevalent from

independence through the 1980’s (Kohli, 2004). However, it has only selectively and partially aban-

doned the associated government-led developmental rhetoric, particularly stated commitments to

developmental equity and indigenous production. Maintaining these commitments while satis-

fying pro-business supporters has become a challenging catch-22 faced by Indian politicians and

parties. The devolution of politically costly pro-business strategies at the state level provides one

solution to this problem, satisfying both the center, because it can avoid the electoral penalty asso-
2
See http://www.makeinindia.com/

4
ciated with being pro-business, and to the states, which can use policy implementation to strate-

gically distribute resources and satisfy within-state political interests and coalitions.

The significance of the shift towards pro-market or pro-business policies is larger than in the

Indian case alone. India is one of many developing countries, especially in Asia, for which the

maintenance of pro-business policies has been intimately associated with the production of state

legitimacy through the delivery of economic growth. GDP is the key metric of performance. For

India, the Chinese model of development is the archetype. Indeed, “Make in India" intentionally

suggests a future-oriented counterpoint to “Made in China.”

Indian scholars’ increasing emphasis on state politics reflects a sense that the drama of politics

in India has largely, if not entirely, moved to the state level (Kumar, 2012: 3-5). This is particularly

the case in the area of economic reforms. Specifically, between-state competition for FDI is an arena

where states have been at the forefront of implementing policies and making decisions, as well as

competing globally in the market for foreign capital (Kennedy, 2014: 29-33). In international per-

spective, the phenomenon of subnational political economies, though discussed since the “retreat

of the state” (Strange, 1996), remain poorly understood.

Protest and Politics: Contention Around India’s 2005 SEZ Act

The passage of the Special Economic Zone (SEZ) Act of 2005, which facilitates Indian states’ ap-

propriation of land for export-oriented projects, epitomizes the devolution of the implementation

of economic reform and foreign economic policy-making to the states. The national-level hurdles

are cleared through administrative streamlining, a single bureaucratic “window” for central min-

isterial approvals, and devolution of many of the layers of legal and procedural responsibility and

initiative to the states.

SEZ policy has been extremely contentious, sparking numerous protests against a policy that

is widely viewed as being against the interests of the poorest members of society. Some, such as

Aggarwal (2012: 63), argue that the problem with SEZs is not that they are providing economic

giveaways at the expense of poor farmers, but that the policies of accommodation of capital are

insufficiently liberal: “When viewed from the international perspective, the package offered by

the policy is not sufficiently attractive to divert international investments to these SEZs. The SEZ

5
environment needs to be benchmarked against their success in the long run.”

The process of SEZ approval and development is described in Figure 1. The process of SEZ

approval and notification is a direct product of the SEZ Act of 2005, which was designed to sim-

plify the required procedures in order to spur more investment and development (Aggarwal, 2012).

There are three key stages of the process to focus on. First, a proposed SEZ needs to receive formal

approval. Among other requirements, formal approval can only be received after (i) the state gov-

ernment has signed off on the project; (ii) after the SEZ can provide proof that it is in full possession

of the land; and (iii) in putting forward the application for approval, the state government should

have provided exemption from a number of taxes, worked to ensure adequate infrastructure (elec-

tricity, water, etc), and worked to ensure clearance from the appropriate state regulatory bodies.

The minutes of the board meetings show that projects are deferred or rejected if they have not met

either of these criteria. Formal approval by the board is therefore a comprehensive measure of the

projects that have received state government support. After approval, the board must provide no-

tification, with further documentation and requirements, and then must provide authorization for

the developer to begin operations. One large body of criticisms of SEZs has focused on the large

number of projects that have passed formal approval, but that ultimately never become notified

or operational (Aggarwal, 2012; Jenkins et al., 2015). At this point, the land for these projects has

been acquired (often with the help of special state-owned corporations, as discussed below) under

a simplified rubric for land acquisition that relaxes traditional rights to compensation for landown-

ers. After approval, the next step for the SEZ is formal notification, at which point investment and

construction can begin. The dataset used in this research focuses on the effects of notified SEZs,

since these are the ones that will potentially have spillover effects on surrounding areas.

The role of the state government bureaucracies in making a SEZ viable is therefore several fold.

First and foremost, it is legally and financially very challenging for private developers to acquire

adequate land (Seshadri, 2011). Second of all, the state government is generally responsible for

much of the provision of electricity, including regularity and quality of supply (Kale, 2014); the

regular provision of electricity has been shown to have significant impacts on firm productivity

in India (Allcott, Collard-Wexler and O’Connell, 2014). Additionally, state governments play key

6
roles in adjudicating conflicts between farmers and industries, particularly exporting industries,

which are large consumers of scarce water in India and cross-nationally (Rudra, 2011). The state

governments are therefore both potential veto players and critical facilitators for special economic

zones.

Application Application
In-Principle Formal
Notification
Authorized
SEZ Approval Application
In-Principle Formal
Notification
Authorized
Approval Approval Operations Approval Approval Operations

Continued from Previous Page

Identify the Area and make a Rule 5 (2) - Requirements for Minimum (contiguous) Area
Proposal for setting up a and other terms and conditions for an SEZ
Special Economic Zone. BoA decides on the Proposal Multi product - 1000 hectares or more (<5000 HA)&
(Form-A) minimum 50% for processing area.
State Govt. shall endeavor the following subject to the requirements
prescribed by the Central Multi Product Exclusive Services – 100 hectares or more
prior to recommendation Specific sector or in a port or airort - 100 hectares or
Exemption from electricity duty or taxes Govt.
more and minimum 50% for processing area.
Allow generation, transmission and distribution of Electronics and hardware and software including
power within a SEZ ITES and non-conventional energy-10 hectares or more
Exemption from State and local taxes, levies and duties Free Trade and Warehousing - 40 hectares or more
Providing water, electricity and such other services & a built area of not less than one lakh sq. mtrs.
Proposal directly State Govt. to forward Delegation of power to the Development Proposal Approved Proposal Approved with
Proposal Rejected
to the BoA the proposal to the Commissioner inclusive of power with respect to Modifications
requires prior BoA, with workmen employed by the developer.
recommendation recommendations, Declaration of the SEZ as a Public Utility Service
within 45 days (Rule 4) Providing single point clearance system to the
of the State Govt.
Developer and Unit under the State Acts and Rules. Modifications Modifications not
acceptable to acceptable to Developer
State Govt. to ensure that requirements under Rule 5 The BoA shall record reasons for the rejection and intimate
Developer
have been complied with and copies of relevant the Central Govt., who informs the concerned person.
notifications issued by it are attached with the proposal.

PROPOSAL
PROPOSAL The Central Govt. shall grant the LoA within thirty days of
APPROVED
REJECTED receipt of communication to the concerned person or the
concerned State Govt.
State Govts. required to indicate whether LoA valid for o n e years but can be extended for a further
Continued on Next Page proposed area falls under reserved or ecologically period of two years in Form – B
fragile area as specified by concerned authority Central Govt. grants The Developer shall obtain approval from Concerned
Letter of Approval Departments of the Central and State Govts. or Government
Agencies, as may be required.

Notification Application
In-Principle Formal
Notification
Authorized
Notification Application
In-Principle Formal
Notification
Authorized
Approval Approval Operations Approval Approval Operations

Continued from Previous Page

Continued from Previous Page
The Central Govt. shall notify the identified area as a SEZ subject
subject to the following:
Submission of details mentioned above and other details, if any.
any.
Acceptance of conditions specified in the Letter of Approval
Letter of Approval Notification for Area proposed is not less than the minimum area requirement.
received by Declaration of an area
Developer in Form - as SEZ
B The Developer is required to furnish following details: The Central Govt. shall be guided by the following as per sec. 5:
5:
Proof of legal possession and irrevocable right with regard to Generation of additional economic activity
the identified area.
Promotion of exports of goods and services
Promotion of investment from domestic and foreign sources
Developer to submit Certificate from the State Govt. or its
authorized agency stating that Creation of employment opportunities
Application to the Central Development of infrastructure facilities
- Developer has legal possession & irrevocable rights to Continued on next
Govt. for Declaration of Maintenance of sovereignty and integrity of India; the security of the State and
develop said SEZ slide
identified area as SEZ
- The said area is free from all encumbrances friendly relations with foreign States.

In case the identified area is a leasehold property, the lease

shall be for period not less than twenty years.
Exemptions, drawbacks and concessions shall be available for the authorized
Identified area shall be contiguous and vacant and it should
have no public thoroughfare. operations after the SEZ has been notified by the Central Govt.

** BOA can relax the condition of contiguity on case to

Continued on Next Page The Central Govt., if it considers appropriate, notify subsequently
subsequently any additional area
case basis, on merits, for reasons to be recorded in
to be included as a part of the existing SEZ. No minimum area requirement
requirement for
writing
additional area notification.

Figure 1: A diagram of the SEZ process (source: ILFS and DC)

Operations Application
In-Principle Formal
Notification
Authorized
Operations Application
In-Principle Formal
Notification
Authorized
Approval Approval Operations Approval Approval Operations

Continued from Previous Page ! Authorized Operation

means operation which may be authorized by central government and such operations shall be
mentioned in Letter of Approval. Sec 4 (2) And Sec 15 (9)
The Developer shall submit to the BoA the details of operations
Grant of Approval
for Authorized
Operations
proposed to be undertaken at the SEZ.
! Example : List of approved activities by BOA for certain SEZs

The BoA may authorize the Developer to undertake in the SEZ,

7 1. Land & Site Development
such operations which the Central Govt. may authorize. 2. Utilities
3. Security Systems
Development Commissioner (DC) of the SEZ shall be the
Processing and
Non-processing authority for demarcating the areas falling under the SEZ as: 4. Telecomm/Infocomm/Communication facilities
Area Sec. 6 Processing Area or
Exclusively area for trading or warehousing or 5. Facilities & Infrastructure
Area other than (a) & (b)
6. Waterside Infrastructure
Issues pertaining to the processing area, FTWZ: 7. Trading Hub
Separate entry & exit points and be fully secured by taking
such measures as approved by BOA
8. Common facilities & Services
Only authorized persons allowed to enter 9. Social Infrastructure
The Spillover Developmental Effects of SEZs

The spillover effects of SEZs have been one of the major selling points used by advocates of the pol-

icy, who have pointed to the gains from infrastructure investments as one of the key advantages

of SEZs, and a way in which the very public costs of SEZs (tax concessions, preferential water and

electricity access, displacement, etc.) are ostensibly balanced by public goods (roads, electrifica-

tion, etc.). Evidence does suggest that the spillover effect has occurred for Chinese SEZs (Wang,

2013). However, there has been no systematic analysis of the economic and social effects of SEZs

in India.

Determining the spillover effects of SEZs is important for several reasons. First, while SEZs

are widely and increasingly used as tools of economic policymaking, their touted benefits largely

hinge on their spillover effects (Wall, 1993; Aggarwal, 2012; Wang, 2013), making it important to

assess their true impact. While the SEZ model has been widely adopted in many countries, there

have been a number of cases of poor performance and mixed success (Bräutigam and Tang, 2011,

2014), suggesting that a more fine-grained assessment of this policy is needed. Second, the debate

on the effects of SEZs, as discussed above, has formed an important axis of political debate. This

debate has so far been uninformed by systematic, causal analysis of the effects of SEZs on develop-

ment. Third, India’s liberalization includes significant subnational policy experimentation, as the

checkered pattern of Export Oriented Units (EOUs) and SEZs (Cheesman, 2012) suggests. Eval-

uating which subnational policies, particularly on SEZs, have been effective will have important

implications for India’s continued economic development amidst challenges of globalization and

rising inequality.

Assessments of the positive effects of SEZs in driving growth arise largely from the Chinese

case, where empirical evidence suggests that SEZs specifically and place-based policies more gen-

erally have been successful in delivering positive benefits to the geographic areas in which the SEZs

are sited. Research has identified Chinese SEZs as key engines for policy experimentation as well

as important employment generators (Zeng, 2011). For example, Lu, Wang and Zhu (2015) find

that the SEZ program has a positive and significant effect on employment, output, capital, and the

overall number of firms, while Wang (2013) shows that SEZs create agglomeration economies, in-

8
crease wages, and attract more FDI. As (Zeng, 2011) further argues, the impacts of such SEZs were

facilitated by widespread infrastructure spending in the area surrounding the SEZs - including

basic infrastructure like roads, water, electricity, and telephone connections. The causes for these

differences are of course larger than the specifics of SEZ policy. India has attracted very different

types of FDI when compared to China, caused (for example) by much higher relative levels of labor

mobility in China than in India and much more difficulty in acquiring land in India (Zheng, 2015).

This research also contributes to bridging literature on place-based development and IPE. The

central government has long been the focus of research for scholars of the political economy of

development and IPE. It is the locus of policymaking, a source for economic growth, and the de-

terminant of the distributive outcomes. However, state governments have become increasingly ac-

tive in these areas. The practical and theoretical implications of this shift are extremely significant.

From a practical perspective, contestation over economic policy-making has moved to the state,

where the array of interests may be very different from the national level; this may lead to greater

divergence in policy, and corresponding greater inter-regional inequality. In some states character-

ized by strong coalitions of business and elite interests, it may also lead to increased within-region

inequality. From a theoretical perspective, state-level involvement in the global economy suggests

both a new locus of policymaking and a potentially greater heterogeneity in aggregate national

policy outputs, along with greater uncertainty in macroeconomic policymaking, as a country’s

constituent mini-developmental states take economic policymaking in diverse directions. The key

question then arises of whether such subnational governments can effectively target development

and whether their economic policies do indeed bring about the social and economic benefits these

local politicians promise to their constituents.

A robust literature in economics discusses the situations under which government policies

and programs designed to increase development in specific regions can be successful (Kline and

Moretti, 2014a). Increasingly, sub-national regions use competitive policy to draw investment from

both international, and increasingly, domestic capital. The active role of the state in India’s SEZ

policy, and claims of the importance of SEZs for sparking development and employment growth,

make the SEZ policy an example of internationally-oriented (because of the focus on export max-

9
imization) place-based policies. Evidence suggests that place-based policies which include large

infrastructure programs, generally initiated by national governments, can lead to lasting differ-

ences in regional development (Kline and Moretti, 2014b). Previous, limited research on EOUs in

India, which are like mini-SEZs, and which have been largely under-emphasized in the last decade

of export-oriented international economic policy) suggests that these smaller-scale export zones

have been successful. This research has, however, been largely descriptive (Cheesman, 2012) and

confined to using data at the regional level (Leong, 2013). Given the evidence that China’s SEZs

have been key engines of local growth and development (Wang, 2013), a key question is whether

India’ SEZs have been successful examples of place-based policy making, and if they have not,

what explains the divergence in outcomes.

In India, much of the debate on the merits of SEZs has hinged on the question of spillover

effects. In the face of protests from farmers whose land has been displaced, the potential for the

positive effects of SEZs constitutes an important aspect of evaluating their effects (Aggarwal, 2007).

A range of descriptive and qualitative studies have attempted to adjudicate these questions, with

inconclusive answers. Can subnational political entities encourage localized development through

place-based international economic policies? Does the evidence suggesting China’s success in this

regard mean that the policy will work in other countries and contexts?

This paper provides new evidence to answer these questions. As Aggarwal (2012) writes in

her review of the effects of SEZs, “In the Indian context, however, the available data are highly

aggregated and pertain to some selected indicators of EPZ/SEZ performance such as employ-

ment, investment, and exports. Assessing the social and economic impact of SEZs using quan-

titative methods, therefore, presents considerable statistical challenges.” (7) I leverage an original

dataset that matches SEZs to the nearest Indian census village(s), nested within 5,842 subdistricts,

allowing for disaggregated analysis of the effects of SEZs at a micro-level. I use advances in the

pre-processing of observational data for the identification of causal effects, specifically Covariate

Balancing Propensity Score Estimation, to account for pre-treatment differences in the levels of eco-

nomic development across subdistricts. This allows me to provide evidence that SEZs do not have

effects on infrastructure and a range of other development indicators, and mixed effects on unem-

10
ployment in the subdistricts where they are sited. This suggests general reason to be cautious in

evaluating the power of subnational development policies to specifically target place -based devel-

opment, and more specific reason to be cautious in extrapolating political economic development

and export-growth models.

I hypothesize that after accounting for the level of development and infrastructure in a sub-

district in the 2001 census (pre-treatment), operational SEZs will have no significant effects on

local socioeconomic development, with outcomes measured from the 2011 census of India (post-

treatment). I discuss this research design in greater detail below.

Empirical Strategy

I test my theoretical expectations about the spillover effects of SEZ policy using India’s 2001 and

2011 census data, which contain information about a host of key variables. The spillover effects of

SEZ policy has not yet been tested in India. The high degree of state-level variation in SEZ policy

means that any meaningful analysis of SEZ effects needs to be done at the sub-district level, well

below the aggregated level of the Indian state. However, any attempt to causally analyze the effects

of place-based policies must overcome serious empirical challenges in the form of non-random

assignment to receive these policies, and difficulty in determining the appropriate control group

(Neumark and Simpson, 2014).

In this analysis, I focus on the effect of rural SEZs, for both practical and theoretical reasons.

Practically, these SEZs can be matched more specifically to delimited geographical areas, where

it is reasonable to compare their effects. Theoretically, rural SEZs are the most important because

they have been the most contentious in displacing farmers and because they have been touted by

state governments as bringing much needed development to these areas.

Data Overview

The data for this research is assembled from several sources; an overview of these sources is pro-

vided in Table 1. Its core is an original dataset containing the universe of SEZs formally approved

by the Board of Approvals, taken from the boards’ meeting minutes over 69 meetings spanning the

11
period of time from the board’s first meeting on March 17, 2006 and going until February 23, 2016.3 .

This information contains the date of approval, the developer’s name, the area and sector of the

SEZ and its location. Creating a dataset from these meeting minutes has several advantages over

existing records of SEZ activity, making it uniquely suited for examining the state-level politics of

SEZs.

The dataset created from the minutes is merged with existing lists of notified and operational

SEZs, maintained by the Ministry of Commerce.4 Data on SEZs is then merged with Indian Census

Data from 2001 and 2011, using village and sub-district identifiers. The 2001 and 2011 census con-

tain rich data at the village level, which can be aggregated into sub-district level data. The Indian

census contains a rich range of socioeconomic measures, including data on available infrastruc-

ture. Finally, census village codes are used to match SEZs to state legislative constituencies; these

constituencies are used for voting in the Vidhan Sabha (state assembly) elections, which are held

every five years. Since every census village is part of one constituency, SEZs can be matched to a

Vidhan Sabha constituency, or constituencies, using the method of bottom-up aggregation (Alam,

2010).

An important caveat concerns the coverage of this matching. Many formally approved SEZs’

specific locations are not listed on the minutes (i.e. a nearby city or the relevant district are named)

and require cross-validation using news sources, the SEZ developer’s website, or the state devel-

opment corporation’s website. However, in many cases, it is not possible to directly match a SEZ to

its constituency. The data-generating bias exhibits bias in that it tends to under-match urban SEZs

relative to peri-urban SEZs, since precise, ward-level (within city) data is needed to match the lo-

cation of urban SEZs to electoral constituencies. The data is therefore a better representation of the

distribution of SEZs outside of urban centers. At the same time, since peri-urban and rural SEZs

tend to be larger, and because they are built on farmland, they are more likely to be contentious.

Existing research suggests that SEZs tend to be sited in areas which are already more developed

more than average (Jenkins et al., 2015), and differences in means that I calculate verify that this
3
Minutes of meetings of the board are available for download from: http://www.sezindia.nic.in/boa-minutes.
asp
4
These lists are available for public download: http://www.sezindia.nic.in/writereaddata/pdf/notified.pdf
and http://www.sezindia.nic.in/writereaddata/pdf/ListofoperationalSEZs.pdf

12
 Data
(1) Formally Approved/Notified SEZs
(2) Notified, Operational SEZs
(3) Indian National Census
(4) State Legislative Election Data
(5) National Election Data
Description
Original dataset of all SEZs, 2006-2016
Ministry data on all notified and operational SEZs
Indicators for 600k villages 2001,2011
Constituency level election data
Parliamentary level election data

Table 1: Overview of data sources.

is the case. Table 2 shows the differences in means and t-tests of the significance in difference

between these two populations along a number of covariates measured in the 2001 Indian census.

Since all variables are measured in 2001, before the beginning of the SEZ program, these variables

are measured pre-treatment. All post-treatment variables come from the 2011 census, after the

largest, first wave of SEZs has been established. As Table 3 shows, these systematic differences in

development persist in the 2011 census. It is important to note that direct difference-in-differences

is not appropriate because the 2011 census data contains many new (and more detailed) variables

that are different from those in the 2001 census. However, geographic matching between the two

censuses allows for comparison of these two different but related set of indicators across this time

period. The key question then is whether the SEZs have any effect on development after accounting

for imbalance in treatment and control groups.

Covariates Means Not Treated Means, Treated Difference P-val

1 Total area,mean 17623.07 19043.02 1419.95 0
2 Total HHs, mean 371.82 663.24 291.41 0
3 Total Pop., mean 1897.5 3163.37 1265.87 0
4 Scheduled Caste Pop 309.72 443.48 133.76 0
5 Scheduled Tribe Pop., mean 198.22 92.36 -105.85 0
6 Paved Road Approach, N/Y mean 0.74 0.93 0.19 0
7 Number of Post Offices 0.37 0.59 0.21 0
8 Power for All Use Types, N/Y mean 0.78 0.91 0.13 0
9 Area na for Cultivation, mean 95.63 156.14 60.51 0
10 Total Workers, mean 830.07 1289.05 458.99 0
11 Marginal Workers, mean 188.69 258.29 69.6 0.02
12 Non-Workers, mean 1067.43 1874.32 806.89 0.01

Table 2: Pre-treatment differences in means between subdistricts where any SEZs are sited and
those without.

To overcome non-random assignment of which sub-districts receive SEZs, I weight observa-

tions based on 2001 (pre-treatment) census data, and evaluate the effects of established SEZs using

13
 Covariates Means Not Treated Means, Treated Difference P-val
1 Non-workers, mean 1164.83 2099.83 935 0
2 Marginal workers, mean 225.52 268.87 43.35 0.23
3 Marginal HHs, mean 10.13 11.29 1.16 0.58
4 Total workers, mean 900.49 1472.92 572.43 0
5 Power Supply for All Users, N/Y mean 0.59 0.88 0.3 0
6 Dom Power supply, N/Y mean 0.88 0.96 0.08 0
7 Dom Power Supply, Summer Hours mean 13.24 13.2 -0.04 0.93
8 Dom Power Supply, Winter Hours mean 13.7 13.43 -0.27 0.55
9 Agri. Power supply, N/Y mean 0.64 0.93 0.29 0
10 Agri. Power Supply, Summer Hours mean 13.22 18.06 4.83 0
11 Agri. Power Supply, Winter Hours mean 13.87 18.65 4.78 0
12 Comm. Power supply, N/Y mean 0.55 0.83 0.28 0
13 Comm. Power Supply, Summer Hours mean 9.06 11.91 2.85 0
14 Comm. Power Supply, Winter Hours mean 9.67 12.63 2.96 0
15 Mobile Phone Coverage, N/Y mean 0.81 0.96 0.15 0
16 Public Bus Service, N/Y mean 0.42 0.78 0.36 0
17 Private Bus Services, N/Y mean 0.29 0.38 0.09 0
18 Railway Station, N/Y mean 0.03 0.04 0.02 0.02
19 Natl. Highway, N/Y mean 0.07 0.12 0.06 0
20 Black-Topped Roads, N/Y mean 0.69 0.9 0.22 0
21 Gravel Roads, N/Y mean 0.87 0.89 0.03 0.06
22 All weather roads, N/Y mean 0.75 0.93 0.18 0
23 Post Office, mean 0.14 0.17 0.03 0.19
24 Treated Tap Water, N/Y mean 0.35 0.65 0.3 0
25 Govt. Nursery School, N/Y mean 1.8 1.69 -0.12 0
26 Govt. Primary School, N/Y mean 0.88 0.92 0.04 0
27 Private Primary School, N/Y mean 0.26 0.48 0.22 0
28 Govt. Snr. Secondary School, N/Y mean 1.93 1.91 -0.02 0.03
29 Total HHs w/ Banking Services 51.63 56.89 5.26 0

Table 3: Post-treatment differences in means between subdistricts where any SEZs are sited and
those without.

14
2011 (post-treatment) census data. This design has the potential to both inform theoretical under-

standings of the implementation of state-level industrialization and export policies, and also to

inform the practical debate on the costs and benefits of SEZs, which has so far proceeded without

any rigorous, quantitative assessment of what these benefits are.

Covariate Balancing Propensity Scores

Propensity scores have long been used as a technique for estimating treatment effects in the absence

of randomized assignment to treatment (Rosenbaum and Rubin, 1983), allowing observational re-

searchers to construct control groups (Rosenbaum and Rubin, 1985). Although using propensity

scores for matching is not without its problems (e.g., King and Nielsen (2016)), propensity scores

have a number of advantages when matching can take place on a number of covariates and when

the control population is much larger than the treatment population (Stuart, 2010), as long as the

number of matched covariates is not extremely large, especially relative to the number of observed

units (Roberts, Stewart and Nielsen, 2016). Other methods have drawbacks which makes them less

suited for this application, particularly since most methods are designed for binary treatments.

However, in this analysis, a subdistrict may have multiple SEZs, the number of years that the SEZs

are located in the subdistrict may be different, and the size of the SEZs may vary. All of this requires

treating SEZs as a non-binary treatment.

The Covariate Balancing Propensity Score (CBPS) can be used for continuous valued treatments

and also has several other applications. It capitalizes on the propensity score’s dual advantages,

by both achieving balance on observed covariates and by modeling the conditional likelihood of

assignment to treatment (Imai and Ratkovic, 2014). The method and its extensions (Fong, Imai

and Ratkovic, 2015) have several advantages when used for pre-processing data for estimation of

causal effects (Ho et al., 2007). The CBPS can be used to generate a set of weighted values that

allows researchers to make unbiased estimates of causal effects from models estimating the effect

of treatment on outcomes of interest. In this research context, the CBPS uses 2001 census variables

to model the likelihood a given Indian subdistrict contains a SEZ (or many), weighting treatment

effect by the number of years before the 2011 census that this SEZ is notified, and then analyzing the

treatment effect of these SEZs on measures of socioeconomic development from the 2011 census.

15
Assessing the Effect of SEZs

Because SEZs are believed to deliver localized spillover benefits, this analysis uses the Indian sub-

district. Also known as tehsils, talukas, or mandals, these are administrative units one level below

a district, which is in turn one level below a state. In the 2001 census, there were 5,842 subdis-

tricts. For each subdistrict, the censuses of 2001 and 2011 contains village-level data which can be

aggregated up to return the mean levels. While first-differencing between censuses is not possible

because of differences in questions, the continuity of the administrative unit allows comparisons

across subdistricts at both time periods on a range of development indicators. Because of the em-

phasis of SEZ proponents on infrastructure growth and employment benefits, and the emphasis of

SEZ detractors on agricultural productivity and government services, these are the (2001) variables

selected for determining CBPS weights and the twenty-nine (2011) variables used to measure the

treatment effect of SEZs, respectively. Summary statistics of pre-treatment covariates (2001) and

relevant 2011 post-treatment outcome variables are contained in Tables A5 and A6.

Results

In this section, I present CBPS-weighted estimates of the effects of operational SEZs in rural areas

of India on 29 different development indicators from the 2011 census. Figure 2 evaluates these ef-

fects using the area of SEZs in a subdistrict as the main independent variable. Additionally, Figure

3 evaluates these effects using the total number of SEZs as the main independent variables. Evi-

dence suggests that SEZs in India have not generally had significant effects on these development

indicators. This provides suggestive evidence that the spillover argument does not apply in In-

dia, and of some limitations to subnational governments ability to target development using these

kinds of place based policies. However, one important concern is that the developmental effects

may vary based on the length of time that SEZs have been established. To evaluate this possibility,

I construct weighted measures of the effects of notified SEZs, for which date of notification is clear

and available, for both total area and total number. I then estimate these effects weighted by the

number of years between SEZ notification and the 2011 census. These estimates are summarized

in Appendix Figures A6 and A7, for area and number respectively.

16
 Area of Operational SEZs
HHs with Banking Avail., Vill. Mean. ●
Govt. Secondary School, Vill. Mean ●
Private Primary School, Vill. Means ●
Govt. Primary School, Vill. Means. ●
Govt. Nursery, Vill. Means ●
Treated Tap Water, Vill. Means ●
Post Office(s), Vill. Means ●
All Weather Roads, Vill. Means. ●
Gravel Roads, Vill. Means ●
Black−Topped Roads, Vill. Means ●
National Highway, Vill. Means ●
Railway Station, Vill. Means. ●
Treatment Effects

Private Bus Avail, Vill. Means ●

Public Bus Available, Vill. Means ●
Cell Coverage, Vill. Means ●
Hrs. Comm. Supply (Winter) Vill. Means. ●
Hrs. Comm. Supply (Summer) Vill. Means ●
Comm. Power Supply, Vill. Means ●
Hrs. Agri Supply (Winter) Vill. Means ●
Hrs. Agri. Supply (Summer) Vill. Means ●
Agri. Power Supply, Vill. Means ●
Hrs. Domestic Supply (Winter) Vill. Means ●
Hrs. Domestic Supply (Summer) Vill. Means ●
Domestic Power Supply, Vill. Means ●
Power Supply Avail for All Users, Vill. Means ●
Total Workers, Vill. Means. ●
Marginal Households, Vill. Means ●
Marginal Workers, Vill. Means ●
Number of Non−Workers, Vill. Means ●
−0.05 0.00 0.05
Treatment Effect (Pr) on Dimensions

Figure 2: CBPS weighted effects of area of operational SEZs on subdistrict development.

17
 Number of Operational SEZs
HHs with Banking Avail., Vill. Mean. ●
Govt. Secondary School, Vill. Mean ●
Private Primary School, Vill. Means ●

Govt. Primary School, Vill. Means. ●

Govt. Nursery, Vill. Means ●
Treated Tap Water, Vill. Means ●

Post Office(s), Vill. Means ●

All Weather Roads, Vill. Means. ●
Gravel Roads, Vill. Means ●

Black−Topped Roads, Vill. Means ●

National Highway, Vill. Means ●
Railway Station, Vill. Means. ●
Treatment Effects

Private Bus Avail, Vill. Means ●

Public Bus Available, Vill. Means ●
Cell Coverage, Vill. Means ●
Hrs. Comm. Supply (Winter) Vill. Means. ●
Hrs. Comm. Supply (Summer) Vill. Means ●
Comm. Power Supply, Vill. Means ●
Hrs. Agri Supply (Winter) Vill. Means ●
Hrs. Agri. Supply (Summer) Vill. Means ●
Agri. Power Supply, Vill. Means ●
Hrs. Domestic Supply (Winter) Vill. Means ●
Hrs. Domestic Supply (Summer) Vill. Means ●
Domestic Power Supply, Vill. Means ●
Power Supply Avail for All Users, Vill. Means ●
Total Workers, Vill. Means. ●
Marginal Households, Vill. Means ●
Marginal Workers, Vill. Means ●
Number of Non−Workers, Vill. Means ●
−0.10 −0.05 0.00 0.05 0.10 0.15
Treatment Effect (Pr) on Dimensions

Figure 3: CBPS weighted effects of number of operational SEZs on subdistrict development.

18
Mechanisms of Ineffectiveness: State-Owned Development Corporations and Local Po-
litical Corruption

What is the mechanism underlying the developmental failures of India’s SEZs? In this section, I

describe the important role of state-owned (as in India’s subnational government) development

corporations in facilitating corrupt land deals.

One of the key drivers of SEZ location and approval is the presence of state-government owned

industrial development firms. State development investment corporations continue the Nehru-era

policies of government-led industrial development that was propagated with ideals of inclusive

growth. These firms exist explicitly to facilitate development, industrialization, and growth, and

they are the developer or co-developer for many SEZs.

Additionally, in states where they exist, these entities have played key roles in land acquisition

for private developers, allowing private developers to avoid problems associated with land acqui-

sition: protests, hold-outs for higher prices, clearance from other regulatory bodies (i.e. environ-

mental clearance), and so on (Jenkins, Kennedy and Mukhopadhyay, 2014). These corporations are

the state-level descendants of the national-level developmental policies, and they not only provide

explicit legal, procedural, and bureaucratic facilitation for land acquisition, but also give these ac-

quisitions a sheen of public purpose (Levien, 2013). Table 4 shows states (among those with formal

approvals) that have these corporations. These states account for 560 of the 678 formally approved

SEZs, over 80% of the total.

State Developer Name(s) Formal Approvals

Andhra Pradesh Andhra Pradesh Industrial Infrastructure Corporation 125
Gujarat Gujarat Industrial Development Corporation 52
Karnataka Karnataka Industrial Area Development Board 72
Kerala Kerala State Information Technology Infrastructure Limited; 33
Kerala Industrial Infrastructure Development Corporation
Maharashtra Maharashtra Industrial Development Corporation Limited 124
Madhya Pradesh M.P. Audyogik Kendra Vikas 21
Orissa Odisha Industrial Infrastructure Development Corporation 12
Tamil Nadu Electronics Corporation of Tamil Nadu; 82
State Industries Promotion Corporation of Tamil Nadu
Uttar Pradesh Uttar Pradesh State Industrial Development Corporation 39

Table 4: States with (state-owned) development corporations, and the number of formally ap-
proved SEZs by state.

19
 The states that see the most SEZs also tend to be correlated with incidence of corruption and dif-

ficulty in acquiring land, based on recent survey of States’ Investment Potential, from the National

Council of Applied Economic Research.5 For example, the two most corrupt states are Andhra

Pradesh and Tamil Nadu, which are also among the top three state in terms of formal approvals.

Moreover, state owned development corporations are frequently entangled in a number of corrup-

tion inquiries and have often been found by the courts to be in violation of national and state laws.6

Corruption cases have also been brought against large SEZ developers.7 Chief Ministers (heads of

state governments) have also been implicated in corrupt land deals for SEZs.8

In India, the dynamic of land politics has often played out in stark distributional terms. “Land

speculation amplifies class and caste inequalities in novel ways, marginalizes women and creates

an involuntary dynamic of agrarian change that is ultimately impoverishing for the rural poor.

Given the minimal benefits for rural India in this model of development, farmer resistance to land

dispossession is likely to continue and pose the most serious obstacle to capitalist growth [emphasis

mine] in India.” (Levien, 2012: 933). At the same time, many of the distributional conflicts between

farmers and SEZ developers has not been for land that has actually been turned into a productive

SEZ, but rather for land that has been acquired and which then sits idle.9 Additionally, much of

the land that has been acquired and continues to be acquired where there is not that much demand

from businesses.10

Land is a key input for production, and the displacement of landowners for development has

long been a key normative and practical challenge for development in India (Parasuraman, 1999).

For example, Sud (2014) argues that economic restructuring and transformation in Gujarat have

largely been dictated by the pace and nature of the liberalization of land policies. The websites of
5
For the full NCAER report, see: http://www.ncaer.org/uploads/photo-gallery/files/
1459754012NAER-SIPI-Report%202016.pdf. Note that this report is commissioned after the majority of SEZs
are approved and/or notified, so to the extent that state rankings changed in the intervening years, so caution should
be exercised in direct comparison.
6
For example, the Karnataka Industrial Areas Development Board see: http://timesofindia.indiatimes.com/
city/bengaluru/KIADB-is-turning-land-into-gold/articleshow/7119970.cms
7
For example, http://www.newindianexpress.com/nation/2015/aug/05/CBI-Files-Two-Cases-against-\
Corruption-King-Yadav-Singh-794943.html
8
For example, in Andhra Pradesh, the state with the largest number of SEZs, see http://indiatoday.intoday.in/
story/ap-ysr-reddy-helped-built-the-kingdom-on-jaganmohan-reddy/1/150496.html
9
Author Interview, Delhi, May 27 2015 (a)
10
Author Interview, Delhi, June 1 2015 (a)

20
state-led corporations advertise themselves to the private sector as acquirers of land. The follow-

ing quote, from the homepage of the Odisha Industrial Infrastructure Development Corporation,

aimed towards private sector partners embodies this role: “Land Acquisition: Major industrial

projects require large stretches of land at specific locations based upon project requirements. IDCO

provides assistance in Identification of Project Site, Alienation / acquisition of land on behalf of

the project, R & R and Forest Clearance.”11 Thus, the presence of state-owned development cor-

porations provides an important mechanism by which state-level politicians can acquire land for

business purposes and SEZ development. It can facilitate the observed patterns of anticipating

civil society resistance, in which these local politicians target areas where they expect there to be

less resistance.12

Indeed, there is empirical evidence that Indian states with state development investment cor-

porations disproportionately drive SEZ development. Figures 4 and 5 show the distribution of

SEZs by area and by acreage, across India’s states. Two key patterns are evident. First, there is sub-

stantial imbalance in the number of SEZs and their extent, with several states, mostly Gujarat and

the Southern Indian states, accounting for most SEZs and most land alloted to SEZs. Second, there

is a high correlation between those states listed in table 4 and those states with higher numbers

of SEZs. This is an indication of the importance of state-level politicians’ initiative in determining

the existence and location of SEZs. Despite the fact that SEZs are a national initiative, the struc-

ture of the program means that state politicians technically have a tremendous ability to target the

location of these export zones and therefore, potentially, targeting development in certain areas.

This shows that subnational initiatives to promote export-led growth do not necessarily produce

localized spillover effects, especially when there are opportunities for local rent capture.

Testing an Alternative Explanation: Political Alignment in India?

In this section, I consider a prominent alternative explanation for the general developmental in-

efficacy of SEZs in India, specifically that co-partisan political alignment causes SEZs to be sited
11
See http://www.idco.in/2009/.
12
Author Interview, Ahmedabad Gujarat, May 22.

21
Number of SEZs by State

Number of SEZs
20
40
60
80
100
120

Figure 4: The distribution of SEZs by number in state

22
Area of SEZs by State

Area of SEZs (acres)

5000

10000

15000

Figure 5: Area approved for SEZs by state

23
in aligned constituencies for electoral reasons. Co-partisan political alignment occurs when politi-

cians at one level of government belong to the same party as politicians at another level. Specifically,

I test whether SEZs are sited so as to satisfy the political interests of the party in power, using a

regression discontinuity design described in more detail in appendix section A2.2.

Testing for political alignment as the alternative explanation is the most important in the Indian

context for two reasons. Partisan alignment has been shown to be an important part of the electoral

strategy of political parties in India, which use a geographical targeting of place-based programs

and social service spending, in order to support co-partisan elected officials. This effect has been

demonstrated in programs including rural employment programs (Gulzar and Pasquale, 2016),

rural electrification (Alkon, Kennedy and Urpelainen, 2016), and road construction (Lehne, Shapiro

and Vanden Eynde, 2016). As Jensenius (2015) and Asher and Novosad (2015) argue, in the Indian

context political alignment is particularly important because local politicians play the role of an

intermediary or a ‘fixer.’ This argument builds on a large body of research documenting the role

of alignment in provision of public services and in the allocation of budgets. Political alignment

plays an important role in public service delivery because of pork barrel politics, as studies from

the United States (Berry, Burden and Howell, 2010; Larcinese, Rizzo and Testa, 2006), Spain (Solé-

Ollé and Sorribas-Navarro, 2008), the United Kingdom (Fouirnaies and Mutlu-Eren, 2015), and

Brazil have shown (Brollo and Nannicini, 2012).

When central and state governments allocate resources for public service delivery, political

alignment with a politician in a constituency both helps government leaders maintain their leg-

islative coalition and increases the likelihood of policy implementation because of aligned polit-

ical incentives. In India, candidates for state elections often compete via promises of provision

of development, and the state government often takes credit for this provision (Chhibber, 2001).

The overall conditions of dependency and policy-making give the state government tremendous

power over local affairs. As Chhibber (2001: 25) points out, “[l]ocal governments are dependent

on the state government both politically and economically and function more as agencies of the

state government than as independent levels of government.” Additionally, the implementation of

other programs in India has been strongly influenced by the chief minister, which heads the state

24
(Maiorano, 2014).

To test for the effect of alignment on SEZ location, I first evaluate whether copartisan align-

ment between members of the state legislature (Vidhan Sabha) and the Chief Minister increases the

likelihood that a SEZ will be located in that legislative member’s district - that alignment leads

to more SEZs and to a greater area for both formally approved and notified SEZ activity in that

constituency.

While the de facto policy decentralization around SEZ development gives good reason to focus

on the effect of alignment at the local level, it is also important to assess a variant of this alterna-

tive explanation, focusing on national parliamentarians’ alignment with the prime minister. This

explanation would focus on the de jure importance of the centralized board of approvals, and as-

sume that it is alignment with the Prime Minister in the national legislature which determines the

location of SEZs. To test this alternative policy, I use data on national parliamentary elections, re-

stricted to elections with less than 5% margin of victory, testing whether alignment with the prime

minister (INC throughout) increases the likelihood that SEZs are sited in the parliamentarians’ dis-

trict, or increases the area of SEZs within the district. Both RDDs show that co-partisan alignment

does not increase the probability of SEZ siting. This rules out co-partisan alignment as an explana-

tion for the location of SEZs, and, while not completely invalidating the possibility of other kinds

of politically-motivated targeting in site selection, suggests that India’s SEZ-policy specific design

has been sufficiently inattentive to conditions promoting positive spillovers. Finally, because of

the importance of party coalitions in India, and the fact that the ruling UPA (United Progressive

Alliance, the coalition ruling India from 2004-2014) required the support of many non-INC parties

to rule, I also evaluate the national alignment alternative using data on alignment which includes

the changing coalition memberships. Again, no evidence is found that alignment is driving SEZ

location.

Discussion: Explaining the Puzzling Divergence of SEZs in China and India

Given that SEZs have been engines of place-based development in China and elsewhere, what

explains the developmental inefficiencies in the case of India’s SEZs? I argue that the incentive

structure of local politicians accounts for this difference. In China, local leaders’ primary goals

25
are to be promoted, and a major component of earning promotions comes from overseeing high-

GDP growth in their jurisdictions (Montinola, Qian and Weingast, 1995; Xu, 2011).13 While local

leaders in China are also corrupt, their broader incentives are focused on ensuring that this cor-

ruption does not interfere with economic growth and other party-mandated development targets,

in order to secure promotion. Promotion is valuable in and of itself and also facilitates extracting

more rents. Such incentives to promote growth and development are generally lacking in India,

or are overshadowed by a number of alternative strategies for political success. Politicians can

use targeted distribution of state services to secure electoral support (Saez and Sinha, 2010), and

can make appeals based on caste and ethnicity (Chandra, 2007). They can be corrupt and crimi-

nal in other ways,14 not only without facing electoral censure, but often to their electoral benefit

(Vaishnav, 2012). The availability of alternative strategies for political success, combined with the

opportunities to extract rents via state-owned development corporations, can explain the poor de-

velopmental benefits generated by SEZs; the terms for many of India’s SEZs are so generous that

they do not make economic sense from the perspective of government concerns about tax revenue

or infrastructure costs.15

In China, the incentive to compete across jursidictions to gain promotion leads to an emphasis

on maximizing overall development, growth, as well as fiscal extraction (Lü and Landry, 2014).

In the case of SEZs, this centralization of political authority in making promotion decisions facil-

itates the kind of policy experimentation and innovation that was instrumental in China’s rapid

development, and which explains the changes and experimentation in the SEZ model (Naughton,

1996; Heilmann, 2008). Conversely, the nature of political decentralization in India, in which lo-

cal politicians compete for elected office based on any number of criteria, suggests very different

incentives. This line of argument is very different from the descriptive account put forward by

(Moberg, 2015), who argues that India’s SEZ policy was in fact too centralized, and did not allow
13
Though the importance of local GDP growth for Chinese officials’ promotion is widely held, it is not uncontested,
as some research questions whether decentralized decision-making actually facilitated China’s economic growth (Cai
and Treisman, 2006b), as well as whether GDP is actually so highly valued in local-promotions (Shih, Adolph and Liu,
2012)
14
India’s most recent (2014) Lok Sabha is the richest and most criminal so far. See Rukmini S., “16th Lok Sabha will be
richest, have most MPs with criminal charges,” The Hindu, May 18, 2014 http://www.thehindu.com/news/national/
16th-lok-sabha-will-be-richest-have-most-mps-with-criminal-charges/article6022513.ece
15
Author interview, Ahmedabad, Gujarat, May 22.

26
sufficient autonomy for local politicians.16 This approach conflates the de jure power that the cen-

tralized board of approvals has for de facto power in determining the location of SEZs. In fact, a

close reading of the minutes of the boards of approval suggests repeatedly that the most important

criteria for determining whether an SEZ is granted formal approval is if the developer is already

in possession of the land. This means that developers who have already received land allocations

from state-owned development corporations are well-positioned in the approval process. Con-

versely, developers who are still struggling to complete land acquisition (usually because of legal

challenges or popular protest) are often denied formal approval. In the broader context of land

acquisition, many states have long diverged from national level laws governing land acquisition.17

This de jure power at the state level in the SEZ process suggests that far from being too centralized,

India’s SEZ policy devolves substantial power to state politicians, who generally face incentives to

extract rents that are very different from the growth and development focused incentives of local

politicians in China.

Conclusion

Subnational political entities as well as place-based policies have increasingly played important

roles in the international political economy. As has often happened in political pursuit of eco-

nomic development, Indian politicians have actively borrowed a model for encouraging export-led

growth that was successful elsewhere (Evans, 2004). Proponents have pointed to China’s growth

and suggested that SEZs are important for regional development, while opponents have argued

that SEZs entail high costs in terms of human displacement and foregone tax revenues. I have

provided evidence that one of the main claims of the proponents does not have empirical back-

ing: SEZs do not have significant spillover developmental effects on surrounding areas. I have

argued that this developmental inefficacy is abetted by rent extraction via state-owned develop-

ment corporations. I have also been able to rule out a prominent alternative explanation – partisan
16
Moberg (2015) defines success as national economic growth in the long run - which is both empirically very difficult
to measure, and substantively differs from the place-based rationales for development that many SEZ-proponents prof-
fer when justifying up-front costs of human displacement, preferential infrastructure and resource access, and multi-
year tax holidays.
17
See http://timesofindia.indiatimes.com/india/In-their-land-states-have-their-own-rules/
articleshow/48106506.cms

27
alignment – for politically-motivated siting of SEZs. This combination of available means for ex-

tracting rents and the absence of incentives to constrain such rent extraction explains the otherwise

puzzling divergence in the regional developmental effects of SEZs in India and China.

28
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33
The Developmental Effects of SEZs:

Evidence from Indian States

Appendix

Meir Alkon
Contents

A1 Census Variables Summary Statistics APP-2

A2 Age-Weighted Effects of SEZs APP-5

A2.1 Effects of Area of SEZs, Weighted by Age . . . . . . . . . . . . . . . . . . . . . . . . . APP-5
A2.2 Effects of Number of SEZs, Weighted by Age . . . . . . . . . . . . . . . . . . . . . . . APP-7

APP-1
A1 Census Variables Summary Statistics

Summary statistics for pre-treatment covariates in 2001 and for development indicators indicators

in 2011 are summarized in A5 and A6.

APP-2
 Num. Obvs. Means SDs Min. Max.
Total area, mean 5840 17654.68 5473.47 1 40605
Total HHs, mean 5842 378.31 496.36 4 6410
Total Pop., mean 5572 1926.35 2282.00 17 30926
Scheduled Caste Pop 5842 312.69 380.36 0 5416
Scheduled Tribe Pop., mean 5842 195.86 373.47 0 5932
Paved Road Approach, N/Y mean 5790 0.75 0.30 0 1
Number of Post Offices 5842 0.38 0.40 0 6
Power for All Use Types, N/Y mean 5188 0.79 0.37 0 1
Area na cultivation, mean 5840 96.98 130.29 0 2750
Total Workers, mean 5572 840.53 870.98 4 11118
Marginal Workers, mean 5572 190.28 194.67 0 3423
Non-Workers, mean 5572 1085.82 1479.31 8 21644

Table A5: Summary statistics for 2001 census (pre-treatment) variables. All variables are the
subdistrict-level mean of all villages within the subdistrict.

APP-3
 Num. Obvs. Means SDs Min. Max.
Non-workers, mean 5842 1185.64 1526.21 16 24703
Marginal workers, mean 5842 226.49 233.64 0 3835
Marginal HHs, mean 5842 10.16 21.97 0 719
Total workers, mean 5842 913.23 952.36 15 15804
Power Supply for All Users, N/Y mean 5842 0.59 0.40 0 1
Dom Power supply, N/Y mean 5693 0.88 0.24 0 1
Dom Power Supply, Summer Hours mean 5641 13.24 5.56 2 30
Dom Power Supply, Winter Hours mean 5642 13.70 5.02 2 31
Agri. Power supply, N/Y mean 5693 0.64 0.41 0 1
Agri. Power Supply, Summer Hours mean 5603 13.33 8.47 2 26
Agri. Power Supply, Winter Hours mean 5604 13.98 9.12 2 28
Comm. Power supply, N/Y mean 5693 0.56 0.39 0 1
Comm. Power Supply, Summer Hours mean 5651 9.12 6.28 2 28
Comm. Power Supply, Winter Hours mean 5651 9.73 6.26 2 30
Mobile Phone Coverage, N/Y mean 5842 0.82 0.24 0 1
Public Bus Service, N/Y mean 5842 0.43 0.36 0 1
Private Bus Services, N/Y mean 5842 0.29 0.25 0 1
Railway Station, N/Y mean 5842 0.03 0.05 0 1
Natl. Highway, N/Y mean 5842 0.07 0.11 0 1
Black-Topped Roads, N/Y mean 5842 0.69 0.30 0 1
Gravel Roads, N/Y mean 5839 0.87 0.21 0 1
All weather roads, N/Y mean 5842 0.75 0.28 0 1
Post Office, mean 5842 0.14 0.18 0 1
Treated Tap Water, N/Y mean 5842 0.35 0.39 0 1
Govt. Nursery School, N/Y mean 5842 1.80 0.36 1 2
Govt. Primary School, N/Y mean 5842 0.88 0.16 0 1
Private Primary School, N/Y mean 5842 0.27 0.45 0 13
Govt. Snr. Secondary School, N/Y mean 5842 1.93 0.10 1 2
Total HHs w/ Banking Services 5841 51.75 19.37 0 100

Table A6: Summary statistics for 2011 census – post-treatment outcome variables. All variables
are the subdistrict-level means of all villages within the subdistrict.

APP-4
A2 Age-Weighted Effects of SEZs

This section verifies results presented in the main paper by analyzing the treatment effect of SEZs

on 2011 covariates based on the number of years before 2011 that the SEZ is notified. This analysis

is built on the assumption that spillover effects may take more time. Section A2.2 analyzes the

effects of the number of SEZs weighted by their age, and in section A2.1 evaluates the effect of the

area of SEZs, weighted by their age. The general absence of effects (with some exceptions, as dis-

cussed in the main text) suggest no reason to believe that SEZs have spillover effects on neighboring

subdistrics, providing further verification of the main results.

APP-5
A2.1 Effects of Area of SEZs, Weighted by Age

In this section, the effect of the area of SEZs in a subdistrict is adjusted, with each SEZ’s area

weighted by the number of years prior to 2011 that it was notified. This total SEZ area-years is

then summed for each subdistrict, and used as the independent variable in these models. The 29

outcome variables from the 2011 census are presented in Figure A6 The absence of effects provides

further evidence that SEZs have not had developmental spillovers.

APP-6
 Time−Weighted Area of SEZs
HHs with Banking Avail., Vill. Mean. ●
Govt. Secondary School, Vill. Mean ●
Private Primary School, Vill. Means ●
Govt. Primary School, Vill. Means. ●
Govt. Nursery, Vill. Means ●
Treated Tap Water, Vill. Means ●
Post Office(s), Vill. Means ●
All Weather Roads, Vill. Means. ●
Gravel Roads, Vill. Means ●
Black−Topped Roads, Vill. Means ●
National Highway, Vill. Means ●
Railway Station, Vill. Means. ●
Treatment Effects

Private Bus Avail, Vill. Means ●

Public Bus Available, Vill. Means ●
Cell Coverage, Vill. Means ●
Hrs. Comm. Supply (Winter) Vill. Means. ●
Hrs. Comm. Supply (Summer) Vill. Means ●
Comm. Power Supply, Vill. Means ●
Hrs. Agri Supply (Winter) Vill. Means ●
Hrs. Agri. Supply (Summer) Vill. Means ●
Agri. Power Supply, Vill. Means ●
Hrs. Domestic Supply (Winter) Vill. Means ●
Hrs. Domestic Supply (Summer) Vill. Means ●
Domestic Power Supply, Vill. Means ●
Power Supply Avail for All Users, Vill. Means ●
Total Workers, Vill. Means. ●
Marginal Households, Vill. Means ●
Marginal Workers, Vill. Means ●
Number of Non−Workers, Vill. Means ●
−0.1 0.0 0.1 0.2
Treatment Effect (Pr) on Dimensions

Figure A6: CBPS weighted effects of area of operational SEZs on subdistrict development, with
area weighted by years before 2011.

APP-7
A2.2 Effects of Number of SEZs, Weighted by Age

In this section, the effect of the number of SEZs in a subdistrict is adjusted, with each SEZ weighted

by the number of years prior to 2011 that it was notified. This total number of SEZ-years is then

summed for each subdistrict, and used as the independent variable in these models. The 29 out-

come variables from the 2011 census are presented in Figure A7 The absence of effects provides

further evidence that SEZs have not had developmental spillovers.

APP-8
 Time−Weighted Number of SEZs
HHs with Banking Avail., Vill. Mean. ●
Govt. Secondary School, Vill. Mean ●
Private Primary School, Vill. Means ●
Govt. Primary School, Vill. Means. ●
Govt. Nursery, Vill. Means ●
Treated Tap Water, Vill. Means ●
Post Office(s), Vill. Means ●
All Weather Roads, Vill. Means. ●
Gravel Roads, Vill. Means ●
Black−Topped Roads, Vill. Means ●
National Highway, Vill. Means ●
Railway Station, Vill. Means. ●
Treatment Effects

Private Bus Avail, Vill. Means ●

Public Bus Available, Vill. Means ●
Cell Coverage, Vill. Means ●
Hrs. Comm. Supply (Winter) Vill. Means. ●
Hrs. Comm. Supply (Summer) Vill. Means ●
Comm. Power Supply, Vill. Means ●
Hrs. Agri Supply (Winter) Vill. Means ●
Hrs. Agri. Supply (Summer) Vill. Means ●
Agri. Power Supply, Vill. Means ●
Hrs. Domestic Supply (Winter) Vill. Means ●
Hrs. Domestic Supply (Summer) Vill. Means ●
Domestic Power Supply, Vill. Means ●
Power Supply Avail for All Users, Vill. Means ●
Total Workers, Vill. Means. ●
Marginal Households, Vill. Means ●
Marginal Workers, Vill. Means ●
Number of Non−Workers, Vill. Means ●
−0.08 −0.04 0.00 0.04 0.08
Treatment Effect (Pr) on Dimensions

Figure A7: CBPS weighted effects of number of notified SEZs on subdistrict development, with
number weighted by years before 2011.

APP-9
Why SEZs Don’t Have Effects: Partisan Alignment RDD

The research design examining the political siting of SEZs tested the hypothesis that alignment

between state constituency members and the chief minister would increase the probability of SEZs

in that constituency, or increase the number of acres of SEZ land formally approved. To test this

hypothesis, I used a regression discontinuity design (RDD), creating a dataset of close elections

and evaluating the impact of alignment between the party of the local constituency member and

the party in power at the center.

In this design, the treatment effect of alignment is measured against the control population of

non-aligned constituencies, with the control population restricted to those constituency-election-

year periods in which the state has at least one formally approved SEZ. Table A7 summarizes

these populations. RDD analysis suggest a null or at least inconsistent effect for alignment (5%

bandwidth; results not reported).

A second design used the universe of parliamentary elections (in 2004 and 2009) to create a

dataset of close parliamentary seats, and evaluate the competing explanation that national-level

alignment (with the INC prime minister) affected the siting of SEZs. This effect is also absent, for

both SEZ number and area, ruling out copartisan bias as the cause of SEZ siting and again sug-

gesting that policy-specific conditions are the mechanisms underlying the lack of spillover effects,

rather than political capture.

APP-10
 State Election Year(s)
Andhra Pradesh 2004,2009
Chhattisgarh 2008
Guj 2002,2007,2012
Haryana 2005, 2009
Karnataka 2008
Kerala 2006,2011
Maharashtra 2004,2009
Madhya Pradesh 2003,2008
Orissa 2004
Punjab 2007
Rajasthan 2003,2008
Tamil Nadu 2006,2011
Uttar Pradesh 2007,2012
West Bengal 2006

Table A7: Universe of state-election years, for constituency-matched samples

APP-11