Special economic zones (SEZ) in Germany: reasons, design and benefits

_ Yuri Kofner, economist, MIWI Institute. Munich, 14 September 2021.

Reasons for SZW in Germany

30 years after the fall of the Berlin Wall, the regional development gap between East and West continues to be a major economic and social problem in Germany. According to Eurostat, the average per capita GDP in the new federal states (31.4 thousand euros) in 2020 was still more than a quarter (26 percent) lower than in western Germany (42.5 thousand euros). The difference between the two territorial states Mecklenburg-Western Pomerania and Bavaria was almost 40 percent. [1]

The exit from reliable nuclear and coal energy as part of the so-called “energy turnaround” will lead to considerable losses for economic performance, tax revenues and the labour market in many German regions. The remaining nuclear power plants directly employ approx. 6 thousand people, indirectly approx. 5.5 thousand employees, and induce a further 8.2 thousand employees. [2]

The direct, indirect and induced employment of the lignite sector is 55,000 people across Germany, of which almost 20,000 are directly employed, 30,000 indirectly and 5,000 induced. As a result of the coal phase-out, over 13,000 people would lose their jobs in the Lusatian mining area alone and the affected communities would have to forego around 4.6 percent of their revenue from income tax and 4.3 percent from trade tax. Nationwide, the hard coal sector is associated with 23,000 employed and a tax payment of 15.5 million euros in income tax and 23.4 million euros in trade tax yearly. [3]

Due to state regulation, excessive bureaucracy, the ECB’s negative interest rate policy and high tax burdens, another problem is the declining number of business start-ups, the low growth dynamics of young technology companies[4] and the decreasing international competitiveness of the German economy: in 2020, only around 5 percent of the working population took part in early-phase business start-ups, which put Germany in penultimate place compared to other important industrial nations. [5] Between 2005 and 2015, the number of domestic start-ups halved. [6] According to calculations by ZEW, venture capital investments amounted to just 0.06 percent of GDP in 2019, which means that Germany only occupies the lower average within the EU. [7] The effective average tax burden on a profitable investment project in Germany was almost 29 percent and thus exceeded the EU average by almost 10 percentage points.[8]

Potential design of the SEZ

The idea of special economic zones (SEZ) is a promising opportunity to increase private investments and the number of company foundations, especially in competitive future industries, and at the same time to stimulate the economic development of structurally weak regions, especially the communities affected by the phase-out of coal and nuclear energy.

In general, a SEZ defines a geographically delimited area with special rules for economic activities that differ from the rest of the country. Their aim is to create conditions that deviate positively from those generally applicable in the country and thus enable above-average growth and offset or at least reduce negative location factors. The improved framework conditions can take the form of tax breaks, investment subsidies, duty exemptions, business-friendly regulations and less red-tape or a combination of these measures. Deregulation and de-bureaucratisation can extend to the easing of approval procedures and permits, contract law, competition and planning law, but also labour and social law. Furthermore, they are often referred to as “regulatory sandboxes”: i.e. if administrative or tax incentives prove to be successful, these could be applied to the whole country.[9],[10],[11],[12]

There are around 100 SEZs in the EU, 14 of them in Poland, 4 in Spain, 5 in Latvia and 7 in Lithuania. The fact that Italy created 12 new SEZs in its Mezzogiorno region as late as 2018 shows that they are compatible with EU state aid law.

This development policy instrument has not yet been used in Germany. Nevertheless, the concept of the SEZ and its regulatory design is endorsed and proposed by, among others, the IW Cologne, [13] the Labour and Environment Foundation of the IG BCE[14] and the vbw.[15]

With the aim of accelerating regional development in the new federal states, increasing the start-up dynamic, especially of digital and technology-intensive companies, and compensating for the negative socio-economic effects of the energy transition, the federal and state governments should set up special economic zones that could provide the following support measures:

  • A reduction of the trade tax multiplier to the minimum rate of 200 percent.
  • A tax write-off option for investments in start-ups – immediately, easily and in unlimited amounts.
  • A tax advantage for capital gains if they are reinvested directly in the start-ups.
  • An increase in the tax allowances for the financial participation of employees of their start-ups to 3,000 euros or higher.
  • A lowering of electricity costs through the possibility of writing off electricity- and CO2 taxes.
  • A simplification of bureaucratic procedures based on the model of the North Rhine-Westphalian “unleashing packages”.[16]
  • The creation of “regulatory sandboxes” for applications in the fields of artificial intelligence, quantum computing, blockchain and other potential digital cutting-edge technologies
  • A targeted expansion of the local digital network infrastructure, especially of FTTP connections.
  • Accelerated planning for transport infrastructures through integrated planning and approval procedures, simplified procedures for the replacement of new buildings and extensions as well as “action laws”.
  • Active involvement of potential existing incubators.
  • Active involvement of the relevant university educational institutions and research centres, including through the offer of relevant lecture courses and opportunities for further cooperation.
  • Targeted funding with funds from the European Regional Development Fund (ERDF), “European Territorial Cooperation” (INTERREG), the joint task “Improvement of the regional economic structure” (GRW), the Central Innovation Program “SMEs” (ZIM), the Federal Ministry for Education and Research (BMBF), the program “WIR! – Change through innovation in the region”, the program “Regional entrepreneurial alliances for innovation” (RUBIN), the program “REGION.innovativ”, as well as all relevant regional support programs for the commercial economy at the state level.
  • Targeted funding with the funds of the federal states concerned, which are intended for the funding of start-ups and potential cutting-edge technologies.
  • Targeted funding with the resources of potentially existing growth or investment funds from the federal government and the relevant states.[17],[18]

In order to guarantee the establishment of the SEZ in Germany, the conformity of the aforementioned support measures with EU state aid legislation would have to be clarified and negotiated with the European Commission.

Economic benefits of the SEZ

Promotion of innovation

A recently published meta-study by the ifo Institute shows that tax incentives for R&D activities through a targeted reduction in corporate taxes and income taxes have a positive effect on private-sector R&D expenditure, the influx of R&D personnel and patent output.[19]

Calculations by the Technical University of Darmstadt and the Ludwig Maximilien University of Munich suggest that a reduction in capital gains tax on venture capital by one percentage point would mean that around 1.4 more start-ups per ten million inhabitants would be financed for the first time.[20]

Advantages for the economy, the tax authorities and the labour market

A recent study by Copenhagen Economics, which analyses the economic effects of special economic regions in Eastern and Southern Europe, attests to their overall positive effects on value creation, foreign direct investment, tax revenues and employment.[21]

Within three years, the Latvian free ports increased port revenue by between 15 and 18 percent.[22]

Free economic zones in Lithuania generated almost 50 million euros in additional value added and over 9 million euros in net state income per year. The average wage in the SEZ was 9 percent higher than in the entire Lithuanian manufacturing industry, due to higher productivity in the SEZ.[23]

In Poland, the free economic zones employed 186 thousand people directly, around 130 thousand indirectly, and created another 254 thousand jobs through induced employment. [24]

It is estimated that exports for companies based in the southern Italian SEZ will more than triple by 2028 compared to companies outside Italy or if the SEZ is not established at all. The authors estimate that the SEZ will create 16,000 additional jobs (direct, indirect and induced) in the Mezzogiorno region, almost seven times more than without them.

Studies from China and Southeast Asia also confirm that special economic zones increase foreign direct investment and integration into global value chains, generate net wage increases and reduce income inequality.[25],[26],[27]

Notes

[1] Statistische Ämter des Bundes und der Länder. Arbeitskreis „Volkswirtschaftliche Gesamtrechnungen der Länder“ (2021). Bruttoinlandsprodukt (BIP) je Einwohner nach Bundesländern im Jahr 2020. URL: https://de.statista.com/statistik/daten/studie/73061/umfrage/bundeslaender-im-vergleich—bruttoinlandsprodukt/

[2] The author’s own calculations based on: WNA (2021). Nuclear Power in Germany. March 2021. URL: https://world-nuclear.org/information-library/country-profiles/countries-g-n/germany.aspx | OECD. (2018). Measuring Employment Generated by the Nuclear Power Sector. URL: https://www.oecd-nea.org/jcms/pl_14912/measuring-employment-generated-by-the-nuclear-power-sector

[3] RWI (2018). Strukturdaten für die Kommission „Wachstum, Strukturwandel und Beschäftigung“. BMWi. URL: https://www.bmwi.de/Redaktion/DE/Publikationen/Studien/strukturdaten-der-kommission-wachstum-strukturwandel-und-beschaeftigung.pdf?__blob=publicationFile&v=4

[4] Dohse D., Felbermayr G. (2019). Zeit für eine neue Industriepolitik? IfW Kiel. URL: https://www.ifw-kiel.de/de/publikationen/kiel-policy-briefs/2019/zeit-fuer-eine-neue-industriepolitik-12387/

[5] Dohse D. (2021). Wahlcheck Industriepolitik: Parteien setzen auf zweifelhaftes Paradigma. IfW Kiel. URL: https://www.ifw-kiel.de/index.php?id=16548&L=1

[6] Pinkwart A. et al. (2016). Dean of HHL Leipzig Graduate School of Management

[7] Wambach A. (2021). Rahmenbedingungen für „Einhörner“ verbessern. ZEW. https://www.zew.de/handlungsempfehlungenwirtschaftspolitik#c15410

[8] Steinbrenner D. (2021). Mannheim Tax Index. ZEW. URL: https://www.zew.de/mannheim-tax-index

[9] Ostdeutscher Bankenverband (2021). Strukturschwache Regionen: Sind Sonderwirtschaftszonen der Weg? URL: https://ostbv.de/portfolio/strukturschwache-regionen-sind-sonderwirtschaftszonen-der-weg/

[10] Wrobel R.M. (2008). Sonderwirtschaftszonen im internationalen Wettbewerb der Wirtschaftssysteme: ordnungspolitisches Konstrukt oder Motor institutionellen Wandels? Ordnungspolitisches Portal. URL: http://www.ordnungspolitisches-portal.com/Diskurse/Diskurse_2008-06.pdf  

[11] Deutscher Bundestag (2018). Sonderwirtschaftszonen im Rahmen der Struktur- und Regionalförderung. Wissenschaftliche Dienste. WD-5-133-18. URL: https://www.bundestag.de/resource/blob/580768/e2ee0cb26fd3100499be735f83718c23/WD-5-133-18-pdf-data.pdf

[12] Röhl K.H. (2004). Sonderwirtschaftszonen als Instrument der Regionalentwicklung – Neue Ideen für die neuen Bundesländer. IW Köln.

[13] Röhl K.H., Bertenrath R., Hentze T. (2020). Sonderwirtschaftsregionen zur Flankierung des Strukturwandels in Kohlerevieren – Vorfahrt für Bildung und Investitionen. IW Köln. URL: https://www.iwkoeln.de/studien/gutachten/beitrag/klaus-heiner-roehl-roman-bertenrath-tobias-hentze-vorfahrt-fuer-bildung-und-investitionen.html

[14] Weingarten J., Wohlert J. (2018). Sonderwirtschaftszonen oder Sonderfördergebiete. Stiftung Arbeit und Umwelt der IG BCE. URL: https://www.arbeit-umwelt.de/wp-content/uploads/181207_ig_publikationen_sonderwirtschaftszone_web.pdf

[15] Kerler M. (2020). Was sich Bayerns Wirtschaft jetzt von China abschauen möchte. Augsburger Allgemeine. URL: https://www.augsburger-allgemeine.de/wirtschaft/Corona-Krise-Was-sich-Bayerns-Wirtschaft-jetzt-von-China-abschauen-moechte-id57415941.html

[16] MWiDE (2021). Entfesselungspakete der Landesregierung. URL: https://www.wirtschaft.nrw/entfesselungspakete-der-landesregierung

[17] Südekum J. (2020). Neustart für die Wirtschaft in Deutschland und Europa. Heinrich-Heine-Universität. Stellungnahme zur Öffentlichen Anhörung im Deutschen Bundestag. URL: https://www.bundestag.de/resource/blob/697770/cb0eea7a3ddcd6753a22b6e3c5542b4c/sv_suedekum-data.pdf

[18] Kofner Y. (2021). Enabling massive infrastructure and human capital investment with a Deutschlandfonds. MIWI Institute. URL: https://miwi-institut.de/archives/1136

[19] Falck O. et al. (2021). Steuern und Innovation: Wie steuerliche FuE-Förderung Innovationsanreize in privatwirtschaftlichen Unternehmen schafft. URL: https://www.ifo.de/publikationen/2021/aufsatz-zeitschrift/steuern-und-innovation-wie-steuerliche-fue-foerderung

[20] Bock C., Watzinger M. (2017). The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment. URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/jsbm.12373

[21] Copenhagen Economics (2020). European Special Economic Zones. URL: https://www.espon.eu/sites/default/files/attachments/Policy%20Brief%20SEZ%20corr%2003-12.pdf

[22] Raņķevica, V. (2006). Free Economic Zones in Latvia and Their Regional Impact.

[23] Investuok Lietovoje (2018). Free Economic Zones of Lithuania. Latvian University of Agriculture. URL: https://agris.fao.org/agris-search/search.do?recordID=LV2006000607

[24] The author’s own calculations based on: Pastusiak, R. et al. (2018). Effectiveness of special economic zones of Poland. University of Lodz. URL: https://www.researchgate.net/publication/326525620_Effectiveness_of_special_economic_zones_of_Poland

[25] Jin W. (2013). The economic impact of Special Economic Zones: Evidence from Chinese municipalities. Hong Kong University of Science and Technology. URL: https://www.sciencedirect.com/science/article/abs/pii/S0304387812000934

[26] Mariya Brussevich M. (2020). Socio-Economic Spillovers from Special Economic Zones: Evidence from Cambodia. IMF. URL: https://www.imf.org/en/Publications/WP/Issues/2020/08/21/Socio-Economic-Spillovers-from-Special-Economic-Zones-Evidence-from-Cambodia-49679

[27] Song Y. et al. (2020). Effects of Special Economic Zones on FDI in Emerging Economies: Does Institutional Quality Matter?  Institute of Chinese Financial Studies. Southwestern University of Finance and Economics. URL: https://www.mdpi.com/2071-1050/12/20/8409

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