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Export Processing Zones [EPZ’s] – Are they Useful?

Export Processing Zones [EPZ’s] – Are they Useful?. By Andrew Singer, May 2006. The Basic Concept. Aimed at boosting export earnings, jobs & FDI. Originally, essential benefit was access to imported inputs at world [duty-free] prices. Firms could operate as if in a free port like Hong Kong.

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Export Processing Zones [EPZ’s] – Are they Useful?

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  1. Export Processing Zones [EPZ’s] – Are they Useful? By Andrew Singer, May 2006.

  2. The Basic Concept • Aimed at boosting export earnings, jobs & FDI. • Originally, essential benefit was access to imported inputs at world [duty-free] prices. Firms could operate as if in a free port like Hong Kong. • Allowed exporters to look beyond poor or limited local inputs. Could utilize low labor costs for assembly operations, based on superior imported inputs. • Now, EPZ’s offer three more benefits to investors: • less red tape; • tax concessions; • better “industrial park” conditions [communications, power, water et al.],

  3. The Idea has taken off • In 1970, only a handful of countries with EPZ’s. • By 1996, 73 countries, and over 500 zones. • By 2002, 116 countries, and over 3000 zones. 43 million employed. • Many variants – single-industry zones; single-factory zones, “special economic zones” and more. • Early zones were publicly-owned and run. Now, more and more are privately-run.

  4. A Second-best Solution • In a liberal, low-protection environment, EPZ’s make no sense. • Typically used as second-best solution to anti-export bias – primarily in the area of access to imported inputs. • Also, aimed at by-passing Customs delays & uncertainties at ports – using container sealing. • Sometimes, mixed objectives – eg. regional industrial development; or promoting FDI.

  5. Some Issues to Consider – Fenced or Unfenced? • Traditionally, Customs controls on movements were physical. • Fenced EPZ’s are treated as enclaves “outside the DTA.” Customs sits at the gate. Containers are sealed at the port for transit to the EPZ. • Fenced EPZ’s attractive to governments as instruments of industrial promotion. Very visible. • Modern Customs practice favors “paper-based controls.” Audit each firm’s own systems. Rely on paper returns, plus intelligence & random spot checks.

  6. Unfenced - more Flexible • Mauritius showed how well unfenced could work. Zone exports were 3% of total exports in 1971, but jumped to 67% by 1995. • Much more flexible. Allows for “single-factory EPZ’s.” Any existing factory can be designated an EPZ. • Any factory, willing to limit itself to 100% export, can benefit.

  7. What about Local Investors? • Where main objective is to attract in FDI, local investors sometimes excluded. • The problem is mixed objectives. • If the incentives offered are for 100% exporters, then treat local investors on a par [“national treatment”].

  8. What about Sales into the Domestic Market? • If there are tax breaks, or other subsidies [eg. utilities], then allowing DTA sales is a distortion. • Pressure to allow DTA sales starts usually with the problem of wastage. • Each trade has a typical wastage rate – usually well below 10%. This should be the basis for allowing DTA sales.

  9. What Role should the State Play? • Running multi-factory zones is now considered a job better done by the private sector. • The State’s role is to introduce the enabling legislation, then set up a mechanism for supervising and ensuring compliance. • Some EPZ authorities develop their own zones, and also supervise private zones. This creates problems of conflict of interest.

  10. Does the “One-Stop Shop” work? • The concept is that the EPZ authority organizes all required clearances, permits, approvals, etc. The investor needs only to make “one stop.” • The usual reality is that other authorities rarely agree to delegate full approval powers to the EPZ authority. • Result is “one more stop.” Investors soon learn to deal direct with those with the real discretion to grant approvals.

  11. In Conclusion – It is time we went for First Best! • Clean up Customs. Move to paper-based controls. • Clean up the various “approvals.” Move to the “negative list” approach. • Treat FDI promotion and regional industrialization as separate issues. Use different instruments. • Go for simple competitive corporate tax rates. If there are tax breaks for exporting, allow these for all exporters, not just those in EPZ’s. • My view – EPZ’s are useful in the early stages. Later, a mixed blessing. Can take the pressure off governments to go for real liberalization. • Once export take-off starts, donors should press for “First Best.”

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