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Special Economic Zones and distortions within economies In 1978, the establishment of the Greater Colombo Economic Commission (GCEC), the precursor to the BOI, didn’t attract widespread ire perhaps because it didn’t involve a giant Chinese corporation and the development of a landmass reclaimed from the sea the size of Monaco. Some of the controversy with the proposed Port City bill has been about its alleged inconsistency with the constitution. The Supreme Court will deal with such matters. However, the GCEC and the Port City Colombo have similar objectives for the special economic zones they established or propose to. Special economic zones cover a broad range of facilities and generally offer investors a geographically defined area, lower taxes and regulatory incentives than the rest of the country. For a country, establishing SEZs have two main types of benefits, which explain their popularity. The first are economic benefits such as jobs, export growth and increased government revenue due to expansion in economic activity. The second are more dynamic economic benefits such as innovation, economic diversification, higher productivity of local firms due to competition, technology transfer and skills upgrading. Some of the opposition to the Port City is due to its conferring tax, tariff and regulatory incentives unavailable to businesses elsewhere in the country. This may create distortions if Port City businesses offer products and services in the rest of the country. However, like the businesses in the first SEZs, which were enclaves for manufacturing, investors in the Port City will be attracted by the global service hub potential and not by serving the tiny Sri Lankan market. Like the SEZs under the GCEC and subsequently BOI transformed Sri Lanka’s manufacturing export sector, Port City can do the same for creating a globally competitive services sector in the county.

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