the production process is low-tech, and no new higher technology is brought in (especially in the
garment industry), workers’ productivity stagnates after this initial period
What may be even more important and valuable in the long run than the actual skills is
the acquisition of the discipline required to work in an industrial environment.
Also, successful human resources development in this case depends on two critical
parameters: the sophistication level of the production work; and the starting level of education
and training of the workers being hired. These two parameters define a more or less steep
learning curve with concordant impact (positive spill-over a la Mankiw) on the economy. In
other words, the build up of human capital is optimized when the absorption capacity of the
workers matches ( or is slightly surpassed) by the technology they need to acquire, so that short
term training, as it is provided by firms, ensures a steep learning curve and productivity increase.
H. Wages, Labor and Safety Laws
Most of the literature emphasizes the importance of facilitating “doing business” to
attract FDI to the zone. One aspect of this is often thought to be low transaction cost and ease
of hiring and firing workers in allowing firms to reduce their costs rapidly in a business
framework highly prone to demand shocks. The burden of the cyclical nature of demand is
placed on workers.
We assume no endogenous technological progress here. Also note that the two dominant EPZ
industries have not provided an opportunity for elongated or repeated steep labor productivity
learning curve. The technology has not really changed in production of garments in many years. And,
electronics firms in the zones are mostly engaged in basic assembly of goods. So one does not expect
a large knowledge or technical spill-over effect in these areas beyond the medium term. There is a
possibility for a labor force to experience repeated occurrences of steep productivity learning curve.
This is when a country successfully manages to upgrade /upscale the mix of the firms active in its
zones from garment to basic electronics assembly and then to high-tech production activities and
informatics. This, however, is not a very common phenomenon. Anecdotal information suggests that
most countries have had difficulty effecting such a transformation, even Mauritius.
In the process of achieving a “business friendly” environment, wage, labor and safety
laws are often relaxed.
1. Minimum wage laws and wage levels.
a. Minimum wage laws
In many countries the existence of minimum wage laws do not seem to affect zones’
wage setting patterns. The reason for this is two fold. First, in many countries the minimum
wage laws are not extended to the zone firms. In some cases, they are explicitly left out to
attract FDI. For instance, prior to 1993, the Dominican Republican labor law did not impose
the minimum wage on its EPZs. Where zones are not excluded from the laws, they are not
necessarily enforced. This leads to some employers paying below domestic minimum wage
. Second, other employers pay wages higher than minimum wage anyway. Some zones
are even said to pay above market clearing salaries, following, it seems, the efficiency wage
. Table 7 conveys this dichotomy in setting minimum wages. In Central America,
minimum monthly wage in EPZs is higher than the national minimum monthly wage for
Guatemala, Honduras and El Salvador. The opposite is true for Costa Rica and Panama.
b. Wage levels
They use tactics such as keeping trainees - who are paid less than regular employees - in that position
for unjustifiably long period, or by not adjusting the salary of workers who are no longer trainees
That is, above equilibrium salaries increase worker productivity (reduces her slacking time at work)
because she does not want to risk to be fired. She does not want to be fired because her next best
option is either to join the pool of unemployed seeking an EPZ job or to accept a job at a domestic firm
at much lower salaries (Mankiw, 1987). Efficiency wages also increase company loyalty among
workers and reduce turn-over, which is reported to be large in many EPZs.
A majority of sources, including OECD (1996)
and Romero (1995), agree that
overall, wages in EPZs are higher on average than wages outside the zones
. According to
Karp (1989), the Caribbean and Central America zones typically paid 5-20 percent higher
salaries than domestic firms. In the early 1990s the Malaysian electronics and textile zone firms
paid 30 percent higher average wages than similar domestic firms.
Despite this general positive wage trend, wage rates vary according to the size of the
firms, their nationality and policy, type of industrial production, country regulations and
institutions, and labor market conditions. Tzannatos and Kusago (1997) show this wage
variance across several countries and even among different industries within Malaysian EPZs .
Zhu (1992) also documents this phenomenon for the Lat Krabang Zone (Thailand), the Masan
Zone (South Korea)
and Kaosiung Zone (Taiwan). The Lat Krabang Zone paid wages
similar to those in the metropolitan Bangkok area, or an average monthly rate of US $140 in
1990. For the Masan Zone, the real national manufacturing wage was often more than 10
percent higher than zone wages over 1971-1987, except for 1975 and 1985. In 1988 and
1989, this trend reversed due to large wage increases accorded to the zone workers. The
average monthly wage in the Masan Zone was some US $820.
In Taiwan, zone workers earned an average US $677 in 1990. Yet, the real wages in
the Kaosiung Zone (Taiwan) trailed national manufacturing wages consistently over 1967-1988,
expect for 1985. Zhu (1992) puts this difference at 14%.
OECD (1996) references a 1993 ILO publication.
For a list of reasons why averages wages are believed to be higher in EPZs than outside the zone, refer
to Romero (1995:253) or Maskus (1996:14).
2. Labor laws
There seems to be a definite relaxation of domestic labor laws to accommodate zone
firms. This relaxation has several facets: zone exemption from compliance with national labor
laws; lax governmental supervision where the zones are not exempted; and frequent overt or
covert opposition to labor unionization and union activities.
There are countries where domestic labor laws apply to the zones, but are hardly or
ever abided by. The lax governmental supervisory attitude gives firms much leeway in their hiring
and firing practices as well as the management and payment of overtime work. OECD (1996)
recognizes that while only 6 countries have deliberately reduced zone core labor standards
compared with the rest of the economy, there are a few other governments who do “not
sanction adequately cases on non-observance of the labor laws in EPZ (pg. 100)”. Other
countries have either drawn up specific favorable labor laws for EPZs or exempted or relaxed
domestic laws to accommodate them. Zimbabwe, and Malaysia are such examples (Maskus,
Unionization (freedom of assembly and association), while not illegal in many EPZs, is
discouraged by many government and firm tactics
. One such tactic would be to fire or not
hire known union leader or labor activists. In Sri Lanka and Jamaica labor organizers are even
prevented from entering EPZs (OECD, 1996). Work conditions can also make it difficult to
organize. In El Salvador EPZs there are no active unions due to the short work contracts(3-6
See also Romero, 1995.
A list of such steps is provided in Annex IV of A. T. Romero’s 1995 paper. It includes both laws and
employer tactics to discourage unionization in 16 different developing countries.
months) (Dijkstra and Aleman ,1996). Other countries declare unions and unionization illegal in
the EPZs. For instance South Korea restricted collective bargaining and unionization until 1987
and re-imposed restrictions in 1989 by declaring EPZ firms “public interest companies” (World
Bank, 1994). Bangladesh has a ban on unions in its zones. Pakistan, and India also have some
restrictions on unions in their zones. Only a few countries allow active unions. They include
Mexico, Mauritius and Philippines. Even then, the Bataan zone unionization (Philippines) was
not an automatic extension of the domestic law. It occurred only after workers’ strikes.
Although unionization is declared by ILO to be one of the core workers’ rights under
the international labor law, it does not have to be a necessary avenue to settle labor’s grievances
against their zone employers. Governments could firm up their labor and safety regulations and
insist on firms’ compliance with them. The governments’ increased supervisory and mediatory
activities would resolve most potential labor issues before they become problems. In fact, while
many experts highlight the importance of low transaction cost and ease of hiring and firing
workers in attracting FDI to the zone, they also point to labor protection and good working
conditions as key to higher labor productivity and less turn-over
3. Work environment safety and health issues
The government of the developing countries in which EPZs are active often has a weak
or non-existent regulatory and/or supervisory presence with regard to the work environment
Most EPZs are known for having high labor turn-over rates. Some is due to the natural attrition of
young female workers getting married and leaving their jobs. The cyclical nature of EPZ employment is
another explanation. A third reason for labor turn-over is prolonged periods of 50-60 hours work
weeks . The Starnberg Institute (1988) reports on this fact in certain factories in Costa Rica, the
Philippines, South Korea and Sri Lanka. Romero (1995), also reports a problem which she qualifies as
“excessive, and sometimes compulsory, overtime... in many zones”.
safety and health issues. Occupational hazards are a subject of concern in some EPZs (Dunn,
1994), especially as they pertain to the electronics and garment industries. These range from
allergies and stress from monotonous, repetitive movements to health risks associated with
inadequate canteens and washroom capacities, refuse disposal, blocked emergency exit
passages, etc... Several deadly incidents have raised awareness with regards to the issue. One
example is the 1993 Kader Industrial factory fire in Thailand where 240 workers died because
of blocked exits and the practice of storing flammable material on the factory site (Dunn,
Provision of amenities such as on-site canteens, day cares and health services enhances
the employees’ work and living standard and improves their productivity while reducing
absenteeism and labor turn-over. The literature agrees that privately run, high-end zones tend to
fulfill these services better than private low-end or public EPZs. For instance, the Dominican
Republican private EPZs were equipped with day care and health facilities early on. The 1993
labor law made them mandatory for all EPZs.
From the scant information available, overall, the safety and the health of the workers
still seem to be determined by the firm, the zone management, the type of activity undertaken,
and the country. The government tends to have a weak or non-existent regulatory or
supervisory presence .
Maskus (1996) argues that there is a strong positive correlation between occupational
and health conditions and the presence of foreign firms, who tend to follow higher standards
(especially those coming from developed countries). Finally, overall, high-end zones across
nations have a better record in this area.
The government should apply uniform regulations to all zones. Whether these
regulations should be less or more stringent than the ones governing the domestic industries is
still under debate. Proponents of a more stringent regulations argue that governments can use
them for demonstration effect, showing the domestic firms that cleaner, safer work environments
will not necessarily be more costly or reduce their competitiveness. Also, some would argue
that it may discourage polluting industries from migrating from highly regulated settings
(especially foreign firms from developed countries) to zones with much laxer laws
. The flip
side of this analysis is that if countries opt for standards that are too stringent - and therefore
potentially too costly to comply with - they may bid their zones out of the competition to
attract foreign firms.
In any event, more consistent implementation of regulations and supervision are
recommended to assuage overall work health and safety concerns. Addressing these issues
improves workers’ living standards and productivity while reducing absenteeism and labor turn-
I. Environmental Issues
Determining the toxicity boundaries of acceptable industrial pollution is difficult. So is
consistent and thorough monitoring of industrial discharges. Two factors compound this
difficulty. Some in developing countries’ governments and business communities believe that
industrialization and growth take precedence over environmental protection at an earlier stage of
Of course, the hypothesis of migrating polluting industries is a very contentious and as yet unsettled
issue and we do not claim here that such an event has occurred in the zones.
development. From these quarters the country often inherits diluted concerns about
environmental issues and weak or non-binding laws. In cases where awareness regarding
environmental degradation has increased, such as Dominican Republic, weak monitoring by the
government and lack of environmental education at the firm level, make progress slow.
Several authors (Kennett, 1990; Dunn,1994; Broad and Cavanaugh, 1993) have
expressed concern with regards to the environmental damage caused by zone activities. Others
dismiss such concerns arguing that EPZ firms are not outliers compared to the domestic
industries (World Bank, 1992), which in light of many developing countries’ lax attitude toward
environmental issues, is not reassuring.
We are not aware of a thorough and reliable documentation on the extent and gravity of
the problem. One of the few articles on this area ( Kennett, 1990) reports on the EPZ firms
contaminating water supplies in the Dominican Republic. Kennett also notes that while the
government recognizes the importance of sustainable development, environmental laws are
fragmented and monitoring institutions lack coordination and have no control over EPZs. J.
Alvarez provided a more complete view. He stated that the increase in environmental
awareness started a long time ago and many private park operators have been working on
environmental protection measures for a long time
The maquiladora activities on the Mexican-US border have also raised concern
because of the severe border pollution. In a 1995 report, Mungaray describes the severe
water pollution the city of Tijuana faces. She refers to several studies by the state’s offices
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