Even though the world has surpassed the heights of the Covid-19 pandemic, analysts predict that 25% of workers will continue working from home indefinitely.
The closure of office buildings is bad news for special economic zones (SEZs) reliant on traditional commercial real estate. The past three years have come with many shocks, all of which threaten to disrupt traditional business models. The pandemic, the supply chain crisis, inflation, war in Ukraine, and the OECD’s 15% minimum corporate tax have all taken their toll.
Unsurprisingly, the past six months have seen a wave of SEZs running into bankruptcies, including in Vietnam, India and the Philippines.
A very different type of SEZ has emerged to cater to so-called “digital nomads” — office workers and entrepreneurs who, thanks to the internet and trends following Covid-19, no longer need to be tied to a physical location.
Most SEZs look like industrial parks. Some, catering to digital nomads, look more like beachfront resorts. To see examples of SEZs successfully tapping into this new market, look no further than the Cayman Enterprise City or Prospera in Honduras. Some planned future SEZs — like Malaysia’s $1.2bn Iskandar Waterfront — are taking this strategy to an extreme.
The most savvy digital nomads practice ‘min-maxing’ — a video game term referring to the practice of using the mathematics behind games in order to win more using fewer resources. In the context of digital nomads, the term means maximising how far one’s income goes by deciding where to temporarily relocate. Typically, digital nomads attempt to min-max three key metrics: cost of living, tax rules and living standards.
If SEZs want to attract digital nomads, the first question that they must ask themselves is whether they can offer a low cost of living.
Many digital nomads work for companies that pay in strong currencies, such as the US dollar or euro. Their mobility gives them the ability to work from anywhere, and as a result, many choose to live in jurisdictions where their currency goes further. Although expensive jurisdictions such as the UAE, Singapore and Monaco have much to offer, the daily cost of living is simply too high to attract digital nomads. On the other hand, low-cost jurisdictions such as Thailand, Brazil and Morocco have a significant advantage.
The next metric digital nomads try to maximise is personal income tax rates.
For those who hold passports from countries that tax overseas income (such as the US or China), optimisation is possible, but significantly more complicated. However, many digital nomads from countries like those in the EU succeed in paying no income taxes whatsoever. SEZs that expect to suffer as a result of the OECD’s 15% global minimum corporate tax can instead shift their incentives to offer personal income tax incentives if they want to attract digital nomads.
Finally, what matters the most at the end of the day is quality of life.
Regardless of how a jurisdiction optimises the cost of living or taxes, intangible quality of life factors ultimately matter more than anything else. Many digital nomads base their decisions on factors such as the beauty of the scenery, the quality of nightlife, the presence of services like Uber, the quality of historical monuments, and the friendliness of local people.
Targeting digital nomads comes with drawbacks. They tend to create service sector jobs rather than export-oriented industries. They also are fickle and can leave at any moment. Most currently operating SEZs are zoned for industrial and commercial use rather than residential use. Countries like Portugal now offer digital nomad visas; countries with clumsy visa policies will be left behind.
While most SEZs are probably not good destinations for digital nomads, the few that successfully cater to them will become powerhouses over the next decade. As the world becomes more mobile, the collective economic power of digital nomads will become increasingly prominent.
Source: Article by Thibault Serlet, fDI Intelligence, 12 August 2022