V. The Actual Experience : Two African Examples
Many African countries have established or are considering forming export processing
. Here we briefly review two opposite African experiences: Mauritius and Senegal.
This comparison highlights the material importance of the institutional and policy environment as
well as the actual incentive structure facing potential investors
The Mauritian EPZ law was passed in 1971. It was in response to the failure of import
substitution policies and the concern about a rapidly growing population and mono-commodity
export (sugar). The law provided a set of incentives to attract foreign direct investment. These
included: exemptions from excise and duties on productive machinery and parts, raw materials
and components; free repatriation of capital, profits and dividends from EPZ firms. Companies
also received preferential interest rates. Initially, they were not subject to corporate tax for 10
years and income tax on dividends for 5 years. The law was later amended. Now they must
pay 15 percent corporate tax over the lifetime of the company but there is a compensating
increase of income tax exemptions on dividends from 5 to 10 years. It also provides firms with
favorable labor laws for dismissal and overtime work. All production must be exported and
Among them: Ghana, Mozambique, Madagascar, Sao Tome/Principe, Uganda, Tanzania, Benin, Cape
Verde, Sierra Leone (before the recent military coup), Liberia (historical, before the civil war), Botswana
and Mauritania. All of these countries have some type of EPZ initiative at some stage of
Mr. James Emory of FIAS (Financial Investment Advisory Service) at the IFC, Washington, D.C. greatly
contributed to this section.
Appendix B provides basic information on EPZs in five Sub-Saharan African countries: Togo, Namibia,
Kenya, Zimbabwe and Cameroon.
export processing firms (EPFs) are allowed. Table 2 provides a brief outline of the incentives
provided to investors.
The Mauritius EPZ experience is considered a success because the island has managed
to achieve the primary goals of employment creation, export diversification, gross and net
export increase, attracting FDI and being on the receiving end of some demonstration effect and
human capital build-up.
Although in the early years (1970-80) foreign direct investment (FDI) did not play a
major role (Alter, 1991), it has become a major influence in the development of EPZs. In 1988,
FDI accounted for 25 percent of total EPZ investment. By one estimate foreign firms now
control 45 percent of the EPZ sector, largely concentrating in garment production
Taking advantage of the abundant, educated labor, foreign firms established production
facilities on the island. By 1976, 84 firms had started production. In 1983, 129 firms employed
23,424 workers. This number peaked in 1991 at 586 firms employing 90,861 workers. By
1995 the number of firms had dropped back to 481 and employment stood at 80,466 workers
or 17.10 percent of the national labor force. Some 50 percent of these firms are engaged
garment making, employing 82 percent of the zone workers. The Mauritian labor market has
been tight since the late 1980s and in 1994 unemployment rate was estimated to be at 1.6
, causing wage increases. These wage increases, some claim, are putting the Mauritian
EPZs at a competitive disadvantage and may encourage foreign firms to relocate to countries
From World Bank report No. 12518-MAU.
Data on Mauritius is obtained from Mauritius Economic Review, 1992-95 and various issues of
Economic Indicators - an occasional paper published by the Ministry of Economic Planning and
Development of Mauritius.
with lower labor cost. For instance, in 1991 the wage levels of garment workers were
estimated at $1.28 per hour while that of China stood at $0.25
. Although there are instances
of this occurring both in Mauritius and in other countries, firms by-and-large do not decide
setting up in or leaving a zone just based on wage competitiveness. Rather, firms also consider
factors such as political stability, the incentive “package” they are promised, the infrastructure of
the zone and labor productivity(education).
The zone firms have also been successful in increasing the gross and net exports of the
country. The share of the EPZ in gross exports has grown steadily. In 1986, EPZ gross
exports constituted 54 percent of total exports. In 1992 it reached 63 percent and in 1995, 67
percent. The ratio of net exports to exports has also increased from around 22 percent in 1985
to hover around 40 percent in 1995. This last statistic points to the fact that a certain degree of
backward linkage has occurred, increasing the domestic content of EPZ exports. However,
experts warn about reading too much into this number for they consider the Mauritian domestic
industrial sector shallow. Nonetheless, eyewitness accounts suggest that this backward linkage
has occurred in tandem with demonstration effects and catalyst influence (Rhee, 1990;
Curimjee, 1990). In fact, Curimjee (1990) argues that there is extreme inter-linkage between
the zone firms and the domestic economy.
Alder (1991) suggests that the EPZ’s strong performance was not independent of the
rest of its host economy. He argues that during 1978-82 when the economy was experiencing
From Findings - Africa Region - Number 37, April 1995.
external and internal difficulties, EPZ growth slowed. It recovered along with the rest of the
economy in the mid 1980s.
The Mauritian success is due to the coming together of all the necessary elements and
policies required (and described above) for the flourishing of EPZs. The incentive “package”
was attractive. There was an abundant and educated pool of labor available. The government
was stable, provided stream-lined services and interfered minimally.
The country has benefited from a preferential trade arrangement with the European Union
(Lome) and the Multi-Fiber Arrangement. Last but not least, the Mauritians hit upon idea of
setting up EPZs “at the right time”: Mauritius was one of the first countries to implement the EPZ
concept in modern time; it provided an economically attractive environment; and didn’t have
many other developing country zones to compete with in order to attract foreign firms(as many
newly established EPZs do now).
The Dakar EPZ established in 1974 has been considered by many experts as an
example of an unsuccessful zone.
Dakar zone became operational in 1976 but did not achieve its goals in creating
employment, foreign exchange or attracting FDI. Employment reached a high of 1200 in 1986
to drop back down to 600 in 1990. some 10 firms exported a meager 4 millions of FCFA
Information on Senegal EPZ was gathered from three sources: Background paper on the 1992 World
Bank paper : Export Processing Zones; A Note on Export Processing Zones
by the Services Group,
Inc., 1991; and “Mirage ou Miracle?” by C. Coste and M.L.Ewane in Jeune Afrique Economie, July
(approx. US $14.7 M) out of the zone despite a relatively stable political environment and
advantageous financial promotions. As shown in table 2, the Senegalese taxes and customs
incentives match those of its neighbors and competitors. They included: exemption from taxes
on corporate income and dividends; exemptions from customs duties and taxes on machinery,
inputs and semi-finished and finished goods; and unrestricted repatriation of capital and profits.
There are several reasons for the zone’s failure. First of all, bureaucratic red tape
delayed the potential investors’ application process. Moreover, minimum employment (150
workers) and investment floors (approximately $100,000) discouraged many national and
. Third, government mandated labor market rigidities made hiring and
firing of workers difficult. While the Senegalese hourly wages and salaries were competitive
with other countries such as Tunisia and Egypt, the workers’ productivity was much lower,
disadvantaging the Dakar zone
. Furthermore, the government did not provide standard rental
factory space. It required investors to lease and build their own factories, thus discouraging
FDI through imposition of increased business risks. Finally, Keesing (1992) claims that utilities
and transportation costs are rather high in Senegal ( to 25 percent of the cost of the final export
This rule was later abolished.
This lower productivity was due to both labor market rigidities and low educational level of the workers.
VI. Policy Suggestions
A. General policy suggestions
· Establishing an EPZ is not a first best policy choice. The best policy is one of overall
liberalization of the economy.
· Zones are only one of many trade instrument used for export development, and have
limited applicability. Other policy tools may therefore be more appropriate for a specific
country than an EPZ. Nonetheless, EPZs can play a long term dynamic role in their countries’
development process if they meet specific conditions. Appropriate set-up and good
management of these zones are paramount to their success (see specific policy suggestions
outlined below and section IV of the paper on administrative and regulatory outlines).
· Internationally, developing countries need to consider the WTO compatibility of the
incentives and subsidies that are provided exclusively to the zone firms.
· Domestically, they also need to view and use EPZs as an integrated part of a
national reform and liberalization program. If instead policy makers exploit them as “safety
valves” to attract FDI, provide jobs and foreign exchange earnings, avoiding or postponing
economy wide policy reforms, the zones could become stumbling blocks to liberalization and
long term economic growth.
· Successfully incorporating EPZs into the national economy will require periodic
revisions of the EPZ laws to accommodate changing national economic conditions. On the other
hand, domestic reforms should be formulated so that eventually the same incentives and
benefits apply to all firms (except for tax exemptions).
· Establishing an export processing zone in an economy that has already reformed its
trade and macroeconomic policies is not recommended on three grounds:
Low FDI flows may be due to inadequate legal or regulatory framework or
economic incentives in other areas of the economy (for instance: private property or
EPZs are distortionary trade instruments and will re-introduce an element of
discretion into the policy environment.
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 export promotion
tool to achieve such a goal.
B. Policy suggestions for World Bank practices guidelines
1. General guidelines
· Based on the discussion above, and lack of Bank specific know-how on developing
and managing EPZs, the Bank should be very selective and cautious in supporting EPZ projects.
Should the Bank become involved, the decision and extend of the involvement should be based
on a case to case basis. In these cases, the bank should seek external expertise and advice on
all aspects of the project, including project design development, implementation and
· In non-reformed and reforming economies we suggest economy wide policy reforms
and discourage formation of isolationist EPZ.
· Suggest that existing EPZs be an integrated part of the reform package, or at least
ensure that they do not constitute stumbling blocks to the reform process.
· Discourage establishment of new EPZs in post-reform economies due to their
distortionary impact and the fact that they provide a discretionary window for backsliding on
· In post-reform economies intent on establishing new zones, suggest minimal
differential incentives (in taxes, financial and fiscal incentives, subsidies...) compared to the ones
prevalent in economy, minimizing their distortionary impact on the economy.
· If a country insists on keeping its existing EPZs as distinguishable entities or in
establishing EPZs, the section below provides specific guidelines to enhance the probability
success of such an undertaking.
2. Specific policy guidelines
The literature insists on the necessity of business friendly policies in facilitating the
success of a zone. It is possible, however, for incentives to be ‘overly friendly’, such as
excessive fiscal or financial credit or subsidization of zone firms. To strike a balance, we
highlight a general framework that spells out the extent to which a policy should be “business
friendly”. In defining this framework, we rely on two principles: (a) we view the existence of
the EPZ and the incentives related to it as a transitory step towards the eventual liberalization of
the economy where all economic entities would benefit from the same policy terms; (b)
therefore, we frame the EPZ policies in terms of the following useful “rule of thumb”: if a policy
is good for the economy as a whole, it is likely to be good in an EPZ (or at worst not cause
harm in the EPZ)
. We acknowledge that this rule of thumb view ignores the fact that applying
these policies to EPZ but not the economy in which it operates will lead to distortions within the
latter. We offer five policy guidelines:
· General economic environment: foreign exchange policy and general economic
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 to economic growth. Both EPZ and non-EPZ firms are susceptible to
the absence of such an environment.
Foreign exchange restrictions or multiple exchange rates cause distortionary incentives
and mis-allocation of resources in an economy. EPZ incentives provide for unrestricted flow of
firms’ earnings at market exchange rates.
· Taxation and tariff structure.
Taxation: enacting moderate and simplified corporate taxation schedule (Chile’s is mid-
teens) encourages economic activities. So do simplified tax bands with progressive marginal
taxation. Furthermore, policy makers should consider provisions for accelerated depreciation,
rationalize and minimize indirect taxation and licensing practices. Improved collection rates can
partially compensate for revenue losses associated with reduced tax rates. In this sense, the
This idea was suggested by J. Nash, The World Bank.
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