costs of such public investments should be considered more closely. Furthermore, there are
potential revenue losses from concessions on income taxes and tariffs.
· EPZs are sensitive to the national economic environment. They will perform better
when the country pursues sound macroeconomic and realistic exchange rate policies (Romer,
1993; Alter, 1991).
· Zones may contribute to the building of national human capital in two ways.
Previously unskilled workers have benefited from EPZ presence. Their productivity has
increased via job training and learning by doing. The benefits of this skill acquisition is limited
however, as most production processes are low-skill and low-tech. The most valuable aspect
of this type of employment, aside from the income earned, may be the workers’ learning of
industrial work discipline and routine.
· Training has also occurred at the supervisory and managerial level, with local
employees becoming privy to new organizational and managerial methods, negotiation and
marketing skills, general business know-how, foreign contacts and entrepreneurship.
· In addition, a successful zone, per se, is an efficient and competitive industrial
infrastructure. As such it provide the country in which it operates an industrial set-up which it
may lacks. Most African nations would fit this profile.
· There are many cases of catalyst and demonstration effects (Rhee, 1990, Rhee and
Belot, 1992) on the host economy. These effects, together with the labor training, may be the
zone’s lasting contributions to the country in which it operates.
· Creation of backward linkages seems largely conditional on the industrial base of the
nation. In countries which did not already enjoy a solid industrial base and which adopted EPZs
to encourage these linkages and foster a domestic industrial base, some linkage occurred,
though it was spotty and inconsistent, with firm zones complaining of the poor quality or the
incompatibility of local inputs.
· In countries where a solid industrial base existed prior to the establishment of the
EPZs -e.g. Taiwan and S. Korea- linkages have occurred. The transfer of know-how and
technology was facilitated by the existing technological sophistication and highly educated labor
force. In these cases, EPZs were only one tool in a panoply of governmental policies to foster
economic growth through export promotion. Even at the height of their influence, EPZs never
acquired a prominent role either in terms of exports value or employment creation in S. Korea
· Wages in most EPZs are equal or higher than average wages outside the zones.
However, there a noted variance around this average. Lax labor, work safety and health laws in
many zones have raised concerns with regards to workers’ welfare. The size, nationality and
corporate policy of the firm, the type of industrial production, labor market conditions and the
country’s institutions and regulations play a determining role in establishing the wage rate,
workers’ rights and work environment in EPZs.
· The environmental impact of zone production and lax government regulation and
monitoring has also raised some concern. There is some information confirming environmental
pollution, however, we lack systematic qualitative and quantitative analysis on the topic that
would lead to well targeted, sensible regulation and monitoring.
· Some consider a successful zone a good model for country policy makers to mimic in
formulating liberalizing domestic policies. In this case EPZs facilitate liberalization efforts.
Others argue that a successful zone may be used as a safety valve, providing jobs and foreign
exchange earnings, and thus easing the pressure on policy makers to undertake economy wide
reforms. Zones would then be a stumbling block to liberalization. A third and more recent
development is that of post -macro and trade- reform economies (such as Uganda) considering
or establishing zones (among other export promotion tools) to bolster low FDI inflows.
· Overall, the EPZs did not universally fulfill the role of “engines of industrialization and
growth” as some proponents had anticipated. They have been an engine --among others -- in
the economy, when they have been given their proper place as a policy tool, and where proper
perspective is taken as to the their ultimate achievements and costs. EPZs’ greatest contribution
seems to be job creation and income generation. Their lasting legacy can be three fold. They
can contribute to building human capital, and through their demonstration and catalyst effects on
the country entrepreneur pool. Also, an efficient, competitive zone is an industrial infrastructure
that many countries lack.
· EPZs face new challenges in the increasingly global economy. Rapid changes in
consumption preferences and the resulting competitive pressures to meet this demand can affect
the locational choices of investors. Furthermore, increased product sharing is changing the
reducing the need for country specific technical expertise. This phenomenon has a differential
impact on industries as a function of their technical sophistication.
· Exclusion of a country from a preferential trade/integration arrangement seems to
impact EPZ firms and EPFs which operate there negatively (e.g. Impact of NAFTA on firms
and EPZs in the Dominican Republic). These firms may or may not flourish from the
membership of their host country in preferential trade arrangements. The EPZ firms’ (and EPFs)
initial product mix, market orientation, technological sophistication, strategic business planning
and adaptability to the new competitive conditions will have a material influence on their
continued success and contributions to the country in which they operate.
· The compatibility of EPZ incentives with WTO rules is country specific. Many of
the incentives offered to firms are considered export subsidies and developing countries may or
may not qualify for a timed or extended exemption from them. Least developed countries and
developing countries with less than $1000 per capita GNP are exempted from disciplines on
prohibited export subsidies.
III. Policy recommendations.
A. General economic policy:
· An EPZ is not a first best policy choice. The best policy is one of overall
liberalization of the economy. Furthermore, EPZs and EPFs are only two of may trade
instruments used by firms and countries to promote export development and growth, and have
limited applicability. Other policy tools may therefore be more appropriate for a specific
country than an EPZ
· Nonetheless, zones can play a long term dynamic role in their country’s development
process if they are appropriately set-up, well managed, WTO compatible in its incentives, and
used as an integrated part of a national reform and liberalization program. At the very least they
should not constitute stumbling blocks to the reform process by being used as “safety valves”.
In this manner, the host economy will benefit more fully from the zones potential contributions in
terms of human capital and their demonstration and catalyst effects.
· Establishing an EPZ in a country that has undertaken trade and macroeconomic reform
is not recommended on three grounds. First, the low FDI inflow may be due to inadequate
legal or regulatory framework, or distorted economic incentives in other areas of the economy
(e.g. private property laws). Second, EPZs are distortionary trade instruments and introduce an
element of discretion into the policy environment. Finally, even if export promotion is in order
(i.e. WTO compatible and deemed a solution to the country’s low FDI inflow), an EPZ may not
be the best instrument to achieve such a goal.
If these economies are intent on establishing new zones, suggest minimal differential fiscal
incentives compared to the national standards, minimizing their distortionary impact on the host
· Bank Involvement: based on the discussion above, it is suggested that the Bank be
very selective and cautious in its support of EPZ projects. The decision and extend of the
involvement should be made on a case to case basis. In such cases, the Bank should seek
external expertise and advice in all aspects of the project it is involved in, including but not
limited to project design, development, implementation and management.
B. Detailed policy guidelines:
If a country intends on keeping its existing EPZs as distinguishable entities or in
establishing EPZs, the section below provides specific policy guidelines to enhance the
probability of success of such an undertaking.
· General economic environment:
Sound and stable monetary and fiscal policies (low inflation, budget management,
independent monetary policy), clear private property and investment laws provide a general
environment propitious for EPZ success. Most EPZs provide free flow of firms’ earnings at
market exchange rates.
· Taxation and tariff structure:
Moderate income and corporate tax rates are recommended. There is no need for
“overly friendly tax incentives (such as permanent tax holidays or waiving all taxes). Provide for
accelerated depreciation, rationalize and minimize indirect taxation and licensing practices.
Improved collection rates can partially compensate for potential revenue due to reduced tax
Ensure that EPZs can import and export free of trade taxation and tariffs.
· Provision of infrastructure and subsidized utilities:
Private development and management of EPZs, including on-site infrastructure
(pavements, building shells, etc...). Provision of infrastructure external to the zone proper can
have positive spillovers for the local and national economy by facilitating transportation and
communications (telephones, roads, ports and airports). In this case, if private development is
not available for the infrastructure external to the zone, the public role has an economic rational.
Subsidizing utilities encourages over-consumption and discourages economically rational
use of resources and factors of production, detracting from the zones benefits for host
· Labor rights, wages and workers safety:
Labor market constraints increase labor costs and slow market adjustment. In this
sense, more business friendly labor laws are beneficial. However, this need not be
accompanied by disregard or abuse of workers’ safety and labor rights as is the case in some
zones. Strengthening regulatory and monitoring activities will reduce labor turn-over and
absenteeism and improving workers’ productivity.
· Environmental issues:
Most developing countries have lax laws and implementation. Concern exit regarding
the EPZs large production volume -and its potential pollution level- compared to the host
economy production levels. In this area, a first necessary step is to form a better qualitative and
quantitative understanding of these industrial refuses and their impact on air, soil, water and
human health. Follow-up regulation, provision of incentives and monitoring should be tailored
C. Administrative and regulatory guidelines:
1. Perform a careful analysis of incentives offered, their costs to the country, and the
type of industries and investment packages (e.g. short or long term) they attract.
2. Incentives need to concorde with the WTO rules and time-lines on export promotion
3. Permit locationally diverse zones and export processing firms.
4. Ensure adequate infrastructure (roads, ports, electricity, water, sewage disposal or
5. Provide efficient, streamlined and prompt government for the establishment and
running of an EPZ (approval of firm applications; customs and other supervisory institutions).
6. Encourage establishment of privately owned and managed zones.
7. If interested in establishing and running public zones, ensure minimal bureaucratic red
tape by providing the zones with a large degree of autonomy from the central government.
8. Geographical location of the country (e.g. land locked) together with distance and
access to firms’ targeted markets and communications and transportation sophistication and
cost have a material influence on the attractiveness of the zone.
9. Preferential trade arrangements (regional trade hub or RIA, bilateral or multilateral
trade agreements such as CBI, Lome, ...) influence a country’s attractiveness because of the
potential enlarged size of the market and/or lower barriers to entry to desired markets.
A Review of the Role and Impact of
Export Processing Zones
I. Introduction and Definition
Export processing zones (EPZs) have become rather popular trade policy instruments
since their modern revival in the late 1950s
. While in 1970 only a handful of countries permitted
, a recent OECD publication (1996), places the total number of zones at 500 located in
. Most recently, Papua New Guinea and Namibia, among others, have either
planned or established one.
But what are EPZs? A first section of the paper provides a definition and a few variants.
It also discusses some of a zone’s characteristics and the major goals of countries who
The second section presents an overview of the theoretical pros and cons as well as the
actual experiences of EPZs in the last three decades, evaluating the merits and failings of this
increasingly popular policy tool. As such, it provides more recent qualitative and quantitative
information, updating the assessments of the literature with regards to the zones. This section
reiterates and emphasizes the potential long term gains to the host nations in terms of human
capital build-up, demonstration and catalyst impacts discussed in the literature (for instance:
World Bank (1992)). It also notes that in many developing economies lacking a modern and
efficient industrial infrastructure, a well managed EPZ provides such a structure, albeit in a small
The appendix in the World Bank publication Export Processing Zones, 1992, provides an excellent
historical background on the zones.
World Bank (1992) places this number in 1970 at seven countries.
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