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FOR ZONE DEVELOPMENT

LEARNED, AND IMPLICATIONS
PERFORMANCE, LESSONS
SPECIAL ECONOMIC ZONES
Copyright © 2008
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Special Economic Zones
Performance, Lessons
Learned, and Implications
for Zone Development

April 2008
Acknowledgements
This publication was produced by a team led by
Gokhan Akinci and James Crittle of FIAS, the
multi-donor investment climate advisory service
of the World Bank Group. The draft report that
formed the basis for this publication was developed
by a team at BearingPoint led by Kishore Rao, and
including Sheri Pitigala, Michael Hoverter, and
Jean-Paul Gauthier. The report benefited from the
valuable comments and support of Vincent Palmade,
Suzanne Smith, Cecilia Sager, and Andrew Stone.
Christopher Geurtsen, Samir Stewart, and Etienne
Kechichian provided insightful research support and
inputs. Nena Terrell and Patricia Steele provided
key comments and editorial assistance in finalizing
the report for publication.
Contents
Executive Summary.............................................................................. 1

Introduction.......................................................................................... 7
Study Objectives 7
Report Organization 8

Zone Definition and Development Trends.............................................. 9

The Challenge of Definition 9
Rationale for Zone Development 12
Major Trends in Zone Development 13

Zone Growth and Key Characteristics.................................................. 23

Overview 23
Zone Development Characteristics by Region 25

Economic Performance and Impacts.................................................... 32

Defining Zone Benefits and Costs 32
Economic Impacts 34
Social and Environmental Impacts 39
Special Economic Zones and Countrywide Reforms 42
Lessons Learned: Common Obstacles to Zone Success 43
Are Private Zones Better Performers? 45

Lessons Learned and Implications for Zone Development.................... 48

What Determines Zone Success? 48
Guidelines for Zone Development 51
Outlook for Zone Development 57

Annexes
1. Acronyms and Abbreviations 60
2. Profiles of Zone Programs by Region 61
3. Bibliography 71

iii
Tables
Report Tables
1 Basic Policy Framework for SEZs..................................................................... 6
2 Types of Zones........................................................................................... 10
3 Examples of Specialized Zones.................................................................... 11
4 Free Zones in Selected Industrialized Countries............................................... 13
5 Traditional Zones Were Developed as Enclaves.............................................. 14
6 Zone Concepts in Selected Developing and Transition Economies..................... 15
7 Examples of Freeports/Specialized Zones...................................................... 17
8 Private and Public Sector Zones in Developing and Transition Economies........... 18
9 Examples of Public-Private Partnership in Zone Development............................ 19
10 Examples of Zone Administrative Models ...................................................... 19
11 Zone Administrative and Regulatory Bodies .................................................. 20
12 Dates of Establishment of Zone Programs....................................................... 24
13 Zones in Developing and Transition Countries................................................ 26
14 Zone Development Rankings........................................................................ 27
15 Direct Employment Impact of Special Economic Zones..................................... 34
16 Impact of Zones on Exports.......................................................................... 36
17 Zones as Catalysts and Enclaves................................................................... 41
18 Obstructed Zone Examples........................................................................... 44
19 Export Development Mechanisms.................................................................. 51
20 SEZ Basic Policy Framework......................................................................... 53

Annex Tables
2–1 Profile of Zone Programs in the Americas............................................................. 61
2–2 Profile of Zone Programs in Asia and the Pacific................................................... 64
2–3 Profile of Zone Programs in the Middle East and North Africa................................ 66
2–4 Profile of Zone Programs in Western Europe . ...................................................... 67
2–5 Profile of Zone Programs in Central and Eastern Europe and Central Asia............... 68
2–6 Profile of Zone Programs in Sub-Saharan Africa.................................................... 69

iv
Boxes
1 Types of Zones................................................................................................... 3
2 Special Economic Zone Facilities and Services..................................................... 21
3 ZonaAmerica Business and Technology Park, Uruguay.......................................... 28
4 Zones within Zones: The Unique Case of China.................................................... 29
5 Shannon Free Zone, Ireland............................................................................... 30
6 Pomeranian Special Economic Zone, Poland........................................................ 31
7 Both Sides of the Zone Debate........................................................................... 33
8 Government Revenues and Costs from Zone Development...................................... 39
9 Difficulties in Establishing Industrial Linkages: The Case of the ............................... 43
Dominican Republic
10 Obstacles Faced by the Dakar EPZ .................................................................... 45
11 Private Free Zone Development in the Dominican Republic..................................... 46
12 Private EPZ and Industrial Estate Designation Criteria in Thailand........................... 47
13 Why Are Tax Holidays an Ineffective Incentive?.................................................... 50
14 Prohibited and Actionable Subsidies under the Uruguay Round ............................ 55
15 Advantages of Using U.S. FTZs........................................................................... 58


EXECUTIVE SUMMARY

For developing countries, special economic zones raised about the impact of zones on employment
(SEZs) traditionally have had both a policy and an (in terms of gender, wage levels and benefits, worker
infrastructure rationale. In terms of policy, the SEZ rights and work conditions), the environment, and
can be a useful tool as part of an overall economic related social factors.
growth strategy to enhance industry competitiveness
and attract foreign direct investment (FDI). Through To a great extent, the fate of zone initiatives has
SEZs, governments aim to develop and diversify been determined from the outset, by the choices
exports while maintaining protective barriers, to made in the establishment of policy frameworks,
create jobs, and to pilot new policies and approaches incentive packages, and various other provisions and
(for example, in customs, legal, labor, and public- bureaucratic procedures. The experience suggests
private partnership aspects). SEZs also allow for that maximizing the benefits of zones depends on
more efficient government supervision of enterprises, the degree to which they are integrated with their
provision of off-site infrastructure, and environmen- host economies and the overall trade and invest-
tal controls. ment reform agenda. In particular, when zones are
designed to pilot legal and regulatory reforms within
This paper examines 30 years of experience in zones, a planned policy framework, they are more likely to
reviewing development patterns and economic reach their objectives.
impacts of zones worldwide. The experience shows
that while zones have been effective in addressing Policymakers and practitioners in zone development
economic growth and development objectives, they may find the key considerations and lessons pre-
have not been uniformly successful; successes in sented in this paper useful in planning and evalu-
East Asia and Latin America have been difficult to ating their zone initiatives. The end result of this
replicate, particularly in Africa, and many zones have project is a general framework for zone development,
failed. Moreover, since the onset of zone develop- which is intended to optimize future results for both
ment in developing countries, concerns have been host countries and investing firms.


Trends in Zone Development Ownership Arrangements and
Development Approach
While special economic zones are often treated as
an innovative topic in development economics, Perhaps the most notable trend over the past 15
city-wide free zones with goals and methods not years has been the growing number of privately
too different from those employed in modern zones owned, developed, and operated zones worldwide.
were in place in Gibraltar and Singapore as early as According to the stocktaking exercise conducted for
1704 and 1819, respectively. This paper generically this study, 62 percent of the 2,301 zones in develop-
uses the term special economic zone to encompass ing and transition countries are private sector devel-
the range of modern free zone types worldwide1 oped and operated.2 This contrasts greatly with the
(Box 1). SEZs are generally defined as geographi- 1980s, when less than 25 percent of zones worldwide
cally delimited areas administered by a single body, were in private hands. The key factor behind the rise
offering certain incentives (generally duty-free of private zones is the realization that such facilities
importing and streamlined customs procedures, can be profitably operated on the part of developers,
for instance) to businesses which physically locate and that the burden such SEZs place on government
within the zone. resources can be reduced.

Formal public-private partnerships have also become

Zone Growth and Key Characteristics increasingly popular around the world, with a num-
ber of different models evolving, including:
Since the first privately developed and operated
zones came on line in the 1980s, zone development
n Public provision of off-site infrastructure and fa-
has exploded, especially with the emergence of new
cilities (utilities connections, roads) as an incen-
programs in the countries of Eastern and Central
tive for private funding of on-site infrastructure
Europe, the Commonwealth of Independent States
and facilities.
(CIS), and the Middle East and North Africa.
Widespread as this development may be, zone
n Assembly of land parcels with secure title and
activity is still relatively concentrated, with less
development rights by the government for lease
than a dozen countries accounting for the majority
to private zone development groups, develop-
of zone employment and exports generated. Zones
ment of better land use/ownership laws and
are concentrated in Asia and the Pacific (mainly
regulations and adoption of enforceable zoning
China), Latin America, and Central and Eastern
and land use plans.
Europe and Central Asia.
n Build-operate-transfer and build-own-operate
Despite recent diversification efforts, most zone
approaches to on-site and off-site zone infra-
enterprises worldwide are engaged in labor-intensive,
structure and facilities, with government guaran-
assembly-oriented activities such as apparel, textiles,
tees and/or financial support.
and electrical and electronic goods. The degree of
product specialization tends to be linked to the
n Contracting private management for govern-
level of industrial development of the host country.
ment-owned zones or lease of government
Female workers account for 60–70 percent of the
zone workforce worldwide, a number that has
remained consistent since the inception of export
processing zones (EPZs) with an explicit manufac- 1 In a few cases, the term “special economic zone” or “SEZ” is also
turing orientation. However, as economic activity used in this report when it is part of the name of a specific zone.
2 Of the 135 countries in the FIAS database, those not considered
diversifies away from simple assembly operations, transition or developing countries include 16 Western European
the percentage of women in the workforce decreases. countries, Australia, Japan, Singapore, Canada, the United States,
and Puerto Rico (included as a separate entity, but is counted as
part of the United States). The entities of Macau, Hong Kong
(China), and Taiwan (China) are included for separate consider-
ation under the Asia and the Pacific region.


 Box 1

Types of Zones

The first “modern zone” was established in Ireland in 1959. Since then, a variety of different zone setups have
evolved that are subsumed under the SEZ concept in this paper, namely:
n Free trade zones (FTZs; also known as commercial free zones) are fenced-in, duty-free areas,
offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations.
n Export processing zones are industrial estates aimed primarily at foreign markets. Hybrid EPZs are typically
sub-divided into a general zone open to all industries and a separate EPZ area reserved for export-oriented,
EPZ-registered enterprises.
n Enterprise zones are intended to revitalize distressed urban or rural areas through the provision of tax
incentives and financial grants.
n Freeports typically encompass much larger areas. They accommodate all types of activities, including
tourism and retail sales, permit on-site residence, and provide a broader set of incentives and benefits.
n Single factory EPZ schemes provide incentives to individual enterprises regardless of location; factories
do not have to locate within a designated zone to receive incentives and privileges.*
n Specialized zones include science/technology parks, petrochemical zones, logistics parks, airport-based
zones, and so on.

*Single factory EPZ programs are similar to bonded manufacturing warehouse schemes, although they typically offer a broader set of benefits and
more flexible controls.

zone assets by a private operator (beneficial cater to higher value-added industries and are able to
ownership). charge premium rates.

n Equity-shifting arrangements whereby a private

contract manager of a government zone can
exercise a purchase option once pre-defined Policy Considerations
performance levels have been reached.
The economic performance and impact of SEZ
programs in developing countries has been evaluated
The entry of the private sector into zone develop-
in numerous studies. Most of these, however, have
ment has also changed the range of facilities, services,
and amenities available within zones. Recent trends focused on government-developed and -run zones
tied to the increase in private zone development and largely neglected the economic impact of private
include the development of SEZs and industrial zone development.
estates on an integrated rather than stand-alone basis,
increased specialization of facilities catering to the EPZs are viewed as highly effective tools for job
unique needs of target industries (hi-tech, petro- generation, particularly for women entering the
chem, software, among others) and the provision of a workforce. Evidence suggests that such zones are
greater range of business support services and special- a much more significant source of employment in
ized facilities. Many of these “next generation” zones smaller countries with populations of less than


5 million (examples include Mauritius, the Special Economic Zones and
Seychelles, and Jamaica) than in larger countries. Countrywide Reforms

SEZs are also capable of contributing to export de- At a public policy level, a debate continues to be
velopment, not only in terms of accelerating export waged regarding whether special economic zones
growth, but export diversification as well. This is promote countrywide economic policy reforms
particularly important to poorer developing coun- by serving as “demonstration areas” or catalysts,
tries reliant on the export of primary products. In or whether they act instead as “pressure valves” for
addition, zones can play an important role in attract- unemployment, thereby reducing the incentive
ing foreign direct investment, offsetting some aspects to reform and diverting reform energies. A 1992
of an adverse investment climate by offering world- World Bank study cautioned against the possibility
class facilities and best practice policies. that SEZs could be used by developing countries to
“muddle along without reforms,” and stressed the
The scope for increased development of supply need to use zones as a supplement to countrywide
and other linkages through the use of free zones reform, as opposed to creating isolated free market
appears to be significant, due to a greater incentive enclaves. Two integration methods that have met
for local firms to sell goods and services to zone- with success have been “equal footing” policies for
based enterprises because such sales are typically domestic suppliers of capital and intermediate goods
“deemed” exports, eligible for duty drawback and and the extensive use of sub-contracting by zone-
other export incentives. based firms to local producers.

Achieving an appropriate budgetary balance can be

Are Private Zones Preferable?
tricky for host countries, and doing so can mean
the difference between profits and losses. Zones Available data suggests that private zones are less
can fall short of intended benefits for governments expensive to develop and operate than their public
under three scenarios: if development entails mas- counterparts (from the perspective of the host coun-
sive government capital outlays (for onsite or offsite try), and yield better economic results. Public expen-
infrastructure development), are not operated on a diture cost savings through private zone development
cost-recovery basis, and/or receive subsidized inputs depends significantly on where private zones are
for electricity or other services. located and whether they are subject to any designa-
tion criteria and development controls. Most modern
There are continuing concerns regarding work zone programs have developed such measures, which
conditions and social protections, including women’s aim to ensure that new zone projects are located
rights in some countries. However, wages and work close to existing public infrastructure and facilities,
conditions tend to be better within zones than thereby reducing government outlays. On the whole,
outside them, and adverse labor and social issues are privately operated zones tend to offer better facilities
almost wholly associated with countries featuring and amenities, command higher prices from
programs developed and run by the government, tenants and attract “higher end” types of activities.
especially older zones catering to “low-end” apparel- As a result, private zones generally have been more
assembly operations. profitable and have had better social and environ-
mental track records than public zones throughout
In evaluating environmental impacts, a distinction the world (with East Asian government-run zones
needs to be drawn between countrywide single fac- the notable exception).
tory EPZ programs and industrial park-style zones.
It is much harder for governments to adequately
enforce environmental standards for single factories,
as they tend to be widely dispersed.


Policy Implications ment reform efforts. They are one tool in a portfolio
of mechanisms commonly employed to create jobs,
Three decades of zone development experience generate exports and attract foreign investment,
suggests that the failure or success of a zone is linked through the provision of incentives, streamlined
to its policy and incentive framework, where it is procedures, and custom-built infrastructure.
located, and how it is developed and managed. This
experience shows that the use of generous incentives A critical determinant in configuring a zone develop-
packages to offset other disadvantages (such as poor ment program is the type of zones to be promoted.
location or insufficient facilities) is ineffective in International experience suggests that the recom-
terms of overall zone performance, due in large part mended approach is to adopt a SEZ model that
to the increasing commonality of zone investment incorporates these principles:
incentives in recent years.
n Allow SEZ enterprises as well as those licensed
The most common obstacles to success for zones are: under other regimes to co-locate within the same
area. The development of separately fenced-off
n poor site locations, entailing heavy capital areas solely for SEZ enterprises is a less prefer-
expenditures able, but acceptable approach.

n uncompetitive policies—reliance on tax holi- n Ensure that the SEZ regime is flexible, allowing
days, rigid performance requirements, poor a range of commercial as well as manufacturing
labor policies and practices activities. If properly supervised, a separate com-
mercial free zone regime is not required.
n poor zone development practices—inappropri-
ately designed or over-designed facilities, inad- n Promote private rather than public development
equate maintenance and promotion practices of zones.

n subsidized rent and other services n Develop an appropriate legal, regulatory, and
institutional framework to ensure adequate regu-
n cumbersome procedures and controls lation and facilitation, requiring greater adminis-
trative facilities within host governments.
n inadequate administrative structures or too
many bodies involved in zone administration The key elements of a good-practice policy frame-
work for SEZs are summarized in Table 1. A best-
n weak coordination between private developers practice policy and incentive framework is stream-
and governments in infrastructure provision. lined, encouraging zones to compete on the basis of
facilitation, facilities, and services rather than on the
The common mistake at the root of many of these provision of incentives. The importance of regulatory
obstacles to optimal zone performance is a lack of relief to investors is a crucial, yet overlooked aspect
effective coordination, both in terms of the parties of successful SEZ programs. The host government
involved and various physical and procedural aspects should aim to simplify investment approvals and
of the zone itself. expatriate work permits; remove required import and
export licenses; and accelerate customs inspection
Good Practice Guidelines for procedures and automatic foreign exchange access.
Zone Development
The institution charged with regulating zone opera-
One of the clearest lessons learned from decades of tions is another major driver in the outcome of the
free zone development—particularly EPZ develop- zone program. While a wide range of institutional
ment—is that zones cannot and should not be viewed arrangements have been used, experience suggests
as a substitute for a country’s larger trade and invest- that success is dependent on the autonomy of the


 Ta bl e 1

Basic Policy Framework for SEZs

International Standard

Concept of extra-territoriality Outside domestic customs territory; eligible for national certificates of origin; eligible to
participate in national trade agreements and arrangements.

Eligibility for benefits No minimum export requirement; manufacturers and services; foreign and local firms;
expansions of existing enterprises; private developers of zones.

Foreign and local ownership No limitations; equal treatment.

Private zone development Clearly defined in legislation; specific zone designation criteria; eligible for full benefits;
competition from government-run zones on a level playing field.

Sales to the domestic market Liberalized, provided on a blanket basis rather than case by case; treated as import into
domestic market; subject to payment of import duties and taxes.

Purchases from domestic market Treated as exports from domestic market; enterprises eligible for indirect exporter benefits.

Labor policies Full consistency with International Labour Organization labor standards; specialized
dispute settlement mechanism.

body; adequate funding; customer orientation and Outlook for Zone Development
ethos; powers over other government ministries;
partnerships with private zone operators and enter- The dynamics of recent trade liberalization place
prises; and maximizing the role of the private sector great importance on the continued development of
in service provision. To help minimize situations focused investment and export promotion mecha-
that present conflicts of interest, particularly in the nisms such as SEZs that can provide a simplified
context of an increasing number of private zones, regulatory environment. The prevalence of zones
it is critical that zone authorities remain engaged in industrialized countries with open economies
in purely regulatory functions, and do not own, also underscores the importance of the concept for
develop, or operate zones. competitiveness. Mechanisms that provide efficiency
advantages are even more important with the advent
Finally, the success of zones is critically linked to the of modern production and distribution concepts and
way in which they are located, developed, and man- approaches, and the reduction of transaction costs.
aged. Management of zones is enhanced when they There is also a continuing role for zones in many
are operated on a cost-recovery rather than subsi- countries to incubate and accelerate policy reform.
dized basis, and are market-oriented and customer- Given their potential flexibility and efficiency ad-
focused enterprises. This is often accomplished when vantages, SEZs could continue in the future to serve
zone development and operation are undertaken by as a viable tool for developing countries, especially
private sector groups on a commercial basis. when reforms are ex ante integrated into the overall
strategy.


Introduction

Study Objectives zones; the use of public-private partnerships for zone

development; the implementation of World Trade
The rapid proliferation and economic impacts Organization (WTO)-compliant policy and incen-
of special economic zones (SEZs)—especially tive frameworks; and innovative regulatory frame-
export processing zones—have been documented works.
in numerous studies. By some estimates, there are
approximately 3,000 zones in 135 countries today, These changes have important implications for the
accounting for over 68 million direct jobs and over economic impacts of zones, and offer significant
$500 billion of direct trade-related value added lessons to policymakers on how to maximize zone
within zones.3 Other studies have evaluated the success. The number of zones and the number of
economic impact of zone development, typically in countries hosting zones, particularly Organisation
terms of cost/benefit calculations of zone programs for Economic Co-operation and Development
(Warr, 1989, Jayanthakumaran, 2002, and Sinclair, (OECD) economies, continues to grow. This trend
2001). Still other studies have tried to examine the raises a number of questions: What is the continuing
relationship between free zones and economic reform rationale for zones in the face of global trade liber-
and trade liberalization efforts in developing coun- alization? And why do zones continue to expand in
tries (Madani, 1999, Cling and Letilly, 2001, and industrialized countries that already offer low duty
Schrank, 2001).
3 These figures were derived from a database developed by FIAS,
Most of these studies, however, focus on govern- in close consultation with the World Economic Processing Zones
Association (WEPZA), and International Labour Organization
ment-owned, -developed, and -operated zones. They (ILO) data from an ILO document dated April 2007. Puerto Rico
often miss the fact that there have been dramatic is mentioned as a separate entity in the database, since it has a
zone program completely separate from the U.S. zone program;
changes in the ways in which zones have been con- however, it is not counted as a separate country. Macau, Taiwan
ceived, developed, managed, regulated and governed (China), and Hong Kong (China), while included as separate
entities in the FIAS database, are considered by the international
in the past two decades. These include the growing community under China, hence these territories do not count as
prominence of private sector developed and run separate countries.


and tax environments? Do zone programs promote Report Organization
or detract from countrywide reform efforts?
This paper is organized as follows:
This study analyzes the major development trends
in terms of zone configuration, ownership, devel- n The next section, Zone Definition and Devel-
opment, management, and regulation approaches, opment Trends, documents growth patterns
and identifies good practices. It evaluates the overall and key characteristics of zones internationally
economic performance of zones in light of these and regionally.
changes, and assesses the relationship of zones and
economic reform efforts. The ultimate goal is to draw n The third section, Zone Growth and Key
out lessons and implications that will enable poli- Characteristics, outlines recent changes in zone
cymakers to design and facilitate zone development concepts, development approaches, and policy
that maximizes benefits to their host economies. and institutional frameworks.

The analysis is based on a review of recent studies n The fourth section, Economic Performance
and assessments of EPZs and free zones, as well as a and Impacts, evaluates the overall economic
stocktaking of zone programs worldwide, including performance of zone development and key
ownership patterns, legal and regulatory frameworks, socio-economic impacts.
institutional frameworks, ownership and manage-
ment approaches, incentives, and economic impacts. n The last section, Lessons Learned and Impli-
To evaluate the complex linkages and impacts of cations for Zone Development, assesses why
zones and economy-wide policy reform efforts, a some zones have failed, identifies key success
number of case studies of zone programs were under- factors, and delineates guidelines to maximize
taken and previous cost/benefit assessments analyzed. the success of new zones.


Zone definition and
development trends

The Challenge of Definition The core definition of a free zone, as well as proposed
guidelines and standards for them, are contained in
Free zones have existed for centuries. They were the Revised Kyoto Convention of the World Cus-
originally established to encourage entrepôt trade, toms Organization (WCO). 4 Specifically, Annex D
and mostly took the form of citywide zones located and the accompanying guidelines provide standards
on international trade routes. Examples include and recommendations on the treatment of imports
Gibraltar (1704), Singapore (1819), Hong Kong to and exports from free zones including territorial
(China; 1848), Hamburg (1888), and Copenha- limits (free zones are defined as “outside the customs
gen (1891). This paper focuses on modern special territory” for purposes of the assessment of import
economic zones, a generic term that encompasses the duties and taxes); minimal documentation require-
recent variants of the traditional commercial zones. ments; and issues to be covered by national legisla-
The principles incorporated in the basic concept of a tion. Free zones typically allow for duty- and tax-free
special economic zone include: imports of raw and intermediate materials and, in
many cases, capital equipment.
n Geographically delimited area, usually physically
secured (fenced-in) This generic special economic zone concept has
evolved over time, resulting in a large variety of zones
n Single management/administration

n Eligibility for benefits based upon physical

4 Annex D of the International Convention on the Harmonization
location within the zone and Simplification of Customs (revised in 1999) defines a free
zone as “part of the territory of a Contracting Party where any
n Separate customs area (duty-free benefits) and goods introduced are generally regarded, insofar as import duties
and taxes are concerned, as being outside the Customs territory
streamlined procedures. …..and not subject to the usual Customs control.”


 Ta bl e 2

Types of Zones

Type of Zone Development Physical Typical Eligible Markets Examples

Objective Configuration Location Activities

Free Trade Zone Support trade Size < 50 Ports of entry Entrepôt and Domestic, Colon Free
(Commercial Free Zone) hectares trade-related re-export Zone, Panama
activities

Traditional EPZ Export Size < 100 None Manufacturing, Mostly Karachi
manufacturing hectares; other processing export EPZ, Pakistan
total area is
designated
as an EPZ

Hybrid EPZ Export Size < 100 None Manufacturing, Export and Lat Krabang
manufacturing hectares; only other processing domestic Industrial Estate,
part of the area market Thailand
is designated
as an EPZ

Freeport Integrated Size >100 km2 None Multi-use Domestic, Aqaba

development internal and Special Economic
export markets Zone, Jordan

Enterprise Zone, Urban Size < 50 Distressed Multi-use Domestic Empowerment

Empowerment, revitalization hectares urban or Zone, Chicago
Urban Free Zones rural areas

Single Factory EPZ Export Designation Countrywide Manufacturing, Export market Mauritius
manufacturing for individual other processing Mexico
enterprises Madagascar

(Table 2), with differing objectives, markets, and licensed under an EPZ regime. Hybrid EPZs, in
activities, including: contrast, are typically sub-divided into a general
zone open to all industries regardless of export
n Free trade zones, also known as commercial orientation and a separate EPZ area reserved for
free zones and free commercial zones, are export-oriented, EPZ-registered enterprises.5
small, fenced-in, duty-free areas, offering ware-
housing, storage, and distribution facilities for n Freeports are generally a much broader concept
trade, transshipment, and re-export operations, and typically encompass much larger areas. They
located in most ports of entry around the world. accommodate all types of activities, including
A leading example is the Colon Free Zone in tourism and retail sales, permit people to reside
Panama. on site, and provide a much broader set of in-
centives and benefits. The large-scale freeports in
n Export processing zones, industrial estates of- China are a traditional example.
fering special incentives and facilities for manu-
facturing and related activities aimed mostly at 5 In most Asian countries, for instance Thailand and the Philip-
export markets, typically take two forms. In the pines, EPZ areas within hybrid zones are required to be fenced-in.
In contrast, many Latin American countries—such as Costa Rica
traditional EPZ model, the entire area within the and Mexico—permit EPZ-registered enterprises to be located in
zone is exclusively for export-oriented enterprises the same area as firms registered under other regimes.

10
Ta bl e 3

Examples of Specialized Zones

Type of Zone Development Objective Size Typical Location Activities Markets Example

Technology or Promote high tech and < 50 Adjacent to uni- High technology Domestic Singapore Science
Science Parks science-based industries hectares versities, institutes activities and export Park, Singapore

Petrochemical Promote energy 100–300 Petrochemical Petrochemicals Domestic Laem Chabang

Zones industries hectares hubs; efficient and other heavy and export Industrial Estate,
energy sources industry Thailand

Financial Development of off- < 50 None Offshore financial Export Labuan Offshore
Services shore financial services hectares and non-financial Financial Centre,
services Malaysia

Software Development of soft- < 20 Adjacent to Software and Export Dubai Internet City,
and Internet ware and IT services* hectares universities, other IT services* United Arab
urban areas Emirates

Airport-based Air cargo trade and < 20 Airports Warehousing, Re-export Kuala Lumpur
transshipment hectares transshipment and Airport Free Zone,
domestic Malaysia

Tourism Integrated tourism 200–1,000 Tourism areas Resorts and Export and Baru Island,
development hectares other tourism domestic Colombia

Logistics Support logistics < 50 Airports, ports, Warehousing, Re-export D1 Logistics Park,
Parks or hectares transport hubs transshipment Czech Republic
Cargo Villages

*Note: IT abbreviates information technology.

n Enterprise zones are intended to revitalize With the exception of the single factory zone scheme,
distressed urban or rural areas through the provi- these developments share most of the fundamental
sion of tax incentives and financial grants. Most principles underpinning the special economic zone
zones are in developed countries, for example concept described earlier—a delimited, secure area
the United States, France, and the United under single administration; a special incentive and
Kingdom, although South Africa is developing a regulatory regime; and location-based incentive
similar mechanism. eligibility.

n Single factory EPZ schemes provide incentives It is frequently pointed out that special economic
to individual enterprises regardless of location; zones have also evolved into highly specialized facili-
factories do not have to locate within a desig- ties, configured to the needs of specific industries
nated zone to receive incentives and privileges.6 and activities. Examples shown in Table 3 include
Leading examples of countries relying exclusively special zones to promote high technology or science-
on a single factory scheme include Mauritius, based industries; petrochemical and heavy industry
Madagascar, Mexico and Fiji; other countries
such as Costa Rica, the United States, and Sri
Lanka allow both industrial estate-style zones 6 Single factory EPZ programs are similar to bonded manufacturing
warehouse schemes, although typically offering a broader set of
and single factory designations. benefits and more flexible controls.

11
zones relying on cheap energy sources and specialized Madani (1999) and Cling and Letilly (2001) outline
facilities; financial services zones to promote offshore four broad policy reasons for the development of
financial and non-financial activities; software and zones, especially EPZs, in developing countries:
information communications technology (ICT)
zones accommodating software coding and other off- n In support of a wider economic reform
shore ICT services operations; airport-based zones, strategy. In this view, EPZs are a simple tool
specifically support aviation and air-based activi- permitting a country to develop and diversify
ties; tourism zones to facilitate integrated resort and exports. Zones are a way of reducing anti-export
leisure community development; logistics parks and bias while keeping protective barriers intact. The
cargo villages/cities, providing specialized facilities EPZs of Taiwan (China) and the Republic of
and support services to facilitate trade, supply chain Korea follow this pattern.
management, and logistics; and others.
n To serve as “pressure valves” to alleviate
Do these types of projects qualify as special eco- growing unemployment. The EPZ programs
nomic zones? The answer is not always clear-cut, of Tunisia and the Dominican Republic are fre-
and is the reason why so many studies have dramati- quently cited as examples of robust, job-creating
cally varying estimates of the number and types of programs that have remained enclaves with few
zones worldwide. The key criteria in this study for linkages to their host economies.
identifying eligible projects is whether they offer a
special regulatory framework and incentive regime n As experimental laboratories for the applica-
that is available only to enterprises locating within tion of new policies and approaches. China’s
the zone. In many cases this is not the case—enter- freeports are classic examples of this category.
prises receive general investment incentives available Financial, legal, labor, and even pricing poli-
to firms elsewhere. Applying this approach would cies were introduced and tested first within the
omit single factory programs and general industrial freeports before being extended to the rest of the
parks/estates/zones (which accommodate enterprises economy.
operating under a diversity of incentives), as well as
other developments that do not provide a specific n To attract foreign direct investment. Most new
incentive regime. SEZ programs, particularly in the Middle East,
are designed to attract foreign investment.

The “hardware” of special economic zones—fully

Rationale for Zone Development serviced sites with purpose-built facilities for sale
The rationale for the development of special eco- or lease—is aimed at enhancing the competitive-
nomic zones differs between developing and de- ness of manufacturers and service providers. It is
veloped countries. For developing countries, these also intended to realize agglomeration benefits
zones have traditionally had both a policy and an from concentrating industries in one geographical
infrastructure rationale. The typical special economic area. These benefits include efficiencies in govern-
zone policy package includes import and export ment supervision of enterprises, provision of off-site
duty exemptions, streamlined customs and admin- infrastructure, improved environmental controls, and
istrative controls and procedures, liberal foreign increased supply and sub-contracting relationships
exchange policies, and income tax incentives—all among industries, among others. This “infrastructure
meant to boost an investment’s competitiveness and rationale” is one of the most important driving forces
reduce business entry and operating costs. Export- behind zone development in infrastructure-poor
oriented zones are intended to convey “free trade countries.
status” to export manufacturers, enabling them to
compete in global markets and counterbalance the The rationale for free zone development in indus-
anti-export bias of trade policies. trialized countries is more varied. The new Free
Economic Zone program in the Republic of Korea,

12
 and manufacturing competitiveness remains the
Ta bl e 4 principal rationale behind special economic zone pro-
grams in most industrialized countries. Many compa-
Free Zones in Selected nies choose a zone location based on the advantages
Industrialized Countries of operating in a flexible, duty-free environment.

Country Name No. of Zones The U.S. Foreign Trade Zone program is a typical
example.7 Operating costs are lower in a zone as a
Australia 10 technology development zones
result of reduced insurance, security, and overhead
Canada 1 FTZ costs. Cash flow is enhanced by the ability to post-
pone duty payments until and only upon entry into
Denmark 10 FTZs
the domestic customs territory. Foreign trade zones
Finland 2 FTZs have been critical in enabling manufacturers to oper-
ate “just-in-time” systems. The efficiency advantages
France 2 FTZs, 85 enterprise zones
provided by these zones are arguably more important
Germany 8 FTZs for industrialized countries even with the advent
of modern production concepts and approaches,
Greece 3 FTZs
and the reduction of tariff and non-tariff barriers
Iceland 2 FTZs (NTBs). The fact that zones are expanding in OECD
Ireland 1EPZ, 1 FTZ
countries suggests that they may be much more
than tools for developing countries with bad policy
Italy 4 FTZs environments—they may be critical to firm-level
Japan 22 foreign access zones competitiveness in a globalized economic environ-
ment. (See also Table 4, which lists types of zones in
Malta 1 FTZ, 10 industrial zones selected industrialized countries.)
Portugal 2 FTZs

Spain 4 FTZs, 1 freeport

Sweden 4 FTZs
Major Trends in Zone Development
Switzerland 4 FTZs There have been profound changes in the free zone
concept and development approach since the first
United Kingdom 7 FTZs, 55 enterprise zones modern zone was established in Ireland in 1959.
United States 266 foreign trade zones Even more fundamental changes are foreseen over
the next decade, as the WTO agreement is imple-
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.
mented in full.

Free zones were traditionally developed as isolated

enclaves, both in terms of the underlying policy
which is a broader concept than a regular export framework and geographic location (Table 5). Access
processing zone, and the 22 foreign access zones to a generous set of incentives and privileges was
in Japan, for example, are explicitly intended to tightly controlled. Qualifying firms typically had
promote foreign investment. The main rationale to be 80–100 percent export-oriented (for EPZs),
for the Shannon Free Zone in Ireland, in contrast, engaged in recognized manufacturing activities, and
was to establish a “growth pole” in the economically
distressed southern part of the country. Revitalization
of economically distressed urban and rural areas is 7 In Table 4, the United States is mentioned as having 266 FTZs.
the motivation behind the many enterprise zone-style It should be noted that in addition, the United States has 173
programs in the United Kingdom, France, and the Federal Empowerment Zones, which do not provide zone-like
benefits that are comparable to other zones, and are therefore not
United States. But overall, enhancing trade efficiency included in the tables.

13
 Ta bl e 5

Traditional Zones Were Developed as Enclaves

Zone Location Comments

Kandla EPZ, India Remote area away from all amenities Developed to aid refugees from partition

Bataan EPZ, Philippines Remote area, four hours from Manila No support infrastructure existed

Masan EPZ, Korea, Rep. of Next to urban area Originally restricted to foreign investors

Moin Free Zone, Costa Rica Remote area with no amenities Eventually privatized

at times only foreign-owned. Zone location was omy. The new emphasis is on integrating zones into
restricted to relatively remote areas or near transport the domestic economy.
hubs, and zones were viewed primarily as growth
poles for regional development. Zones were exclu- As detailed later, this integration is evident in many
sively developed and operated by government bodies. aspects—special economic zone policy packages,
physical development approaches, governance
This rigid concept has changed quite fundamentally structures, and so on. Countries are facilitating the
over the past two decades. One of the major changes development of zones to meet specific objectives and
in thinking has been to permit zone development target markets.
countrywide, rather than to restrict zones to remote
areas. This change was in response to the failure of As depicted in Table 6, traditional EPZs are increas-
many government-run zones and the growing inter- ingly being augmented and sometimes supplanted
est of private property groups in zone development. by new, more flexible arrangements. Hybrid EPZs
Applications for new zone development projects are the preferred model in most Central and Eastern
are increasingly treated like any large scale property European countries and many Latin American
developments; they are subject to all applicable land countries. Commercial free zones have been the
use planning, zoning, building, and environmen- traditional development norm among most Middle
tal clearance processes. Governments have had to Eastern and North African countries, but are a
develop zone designation criteria and transparent relatively recent innovation in Asia, where zone
processes to govern the designation of new zones development has emphasized export manufacturing.
promoted by private groups.
The extent to which traditional zones have evolved
Another major development has been the re-think- is exemplified in the new generation of freeports,
ing of the role of zones in economic development. which are often called SEZs. Traditionally, freeports
Sinclair (2001) correctly points out that the develop- were city-states such as Hong Kong (China), Macau,
ment objectives behind the first EPZs were viewed Singapore, or islands including Labuan (Malaysia)
in relation to a trade-restricted or closed economy. and Batam (Indonesia), which were viewed as more
EPZs were intended to promote exports, create easily secured. In the past decade, led by the Chinese
jobs, and transfer technology through backward SEZs, zones established in the central territories
linkages. The rapid pace of globalization and trade of countries have increased. This is part a result of
liberalization is stimulating a much broader view of better customs and tax controls and technologies,
zones, their development objectives and performance but also reflects efforts to integrate zones with host
expectations. Increasingly, zones are viewed as a key economies and encourage balanced economic devel-
mechanism to promote two-way trade and facilitate opment, rather than dependence on single industries
liberalization and modernization of the host econ- such as apparel or electronics.

14
Ta bl e 6

Zone Concepts in Selected Developing and Transition Economies

Traditional Hybrid Commercial Single Freeport

EPZ Model EPZ Model Free Zone Factory

Asia and Taiwan (China) China China Fiji China

the Pacific Korea, Rep. of Indonesia Japan Hong Kong (China)
Indonesia Lao PDR Malaysia India
Vietnam Korea, Democratic Indonesia
Philippines People’s Republic of Korea, Rep. of
Bangladesh Philippines Macau
India Thailand Malaysia
Malaysia Vietnam Philippines
Pakistan Singapore
Sri Lanka

Americas Argentina Bolivia Argentina Jamaica Bahamas

Bahamas Brazil Bahamas Mexico Chile
Belize Colombia Belize Colombia
Dominican Republic Costa Rica Brazil Panama
Guatemala Cuba Canada
Jamaica Ecuador Colombia
Nicaragua El Salvador Curaçao
Peru Haiti Panama
Trinidad and Tobago Honduras
Uruguay
Venezuela, R.B. de

Middle East Algeria Bahrain Israel Iran, Islamic Rep. of

and Iran, Islamic Rep. of Egypt, Arab Rep. of Jordan Jordan
North Africa Sudan Syrian Arab Rep. Kuwait
Tunisia Lebanon
Turkey Libya
United Arab Emirates Morocco
Oman
Tunisia
Turkey
United Arab Emirates
Yemen, Republic of

Central and Slovenia Belarus Czech Republic Russian Federation

Eastern Europe Albania Estonia
and Central Bosnia and Herzegovina Latvia
Asia Bulgaria Romania
Croatia Serbia
Hungary Montenegro
Kazakhstan Slovak Republic
Kyrgyz Republic Ukraine
Latvia Uzbekistan
Lithuania
Macedonia, FYR
Moldova
Poland
Ukraine

(Continued)

15
 Ta bl e 6

(Continued)

Traditional Hybrid Commercial Single Freeport

EPZ Model EPZ Model Free Zone Factory

Sub-Saharan Cameroon Benin Burundi

Africa Cape Verde Djibouti Madagascar
Equatorial Guinea Gabon Malawi
Gambia, The Liberia Mali
Ghana Mauritius Mauritius
Kenya Tanzania Senegal
Mozambique Togo Seychelles
Namibia
Nigeria
Senegal
South Africa
Tanzania
Togo
Uganda
Zambia
Zimbabwe

Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

Freeports are fundamentally different from tra- n Duty-free privileges. All types of merchandise
ditional free zones. Instead of export drivers and can be introduced duty- and tax-free by regis-
investment magnets, they are designed as liberalized tered enterprises or individual residents.
platforms for diversified economic growth that not Enterprises can freely import any merchandise
only could but should spill over into the national in any quantity, and are not restricted to direct
economy. As summarized in Table 7, the freeport inputs for manufacturing (as is the case with
concept represents a major expansion over traditional EPZs). Duty- and tax-free merchandise can be
approaches, both physically and functionally: sold at the retail or wholesale level and some-
times consumed within the zone area. This is
n Larger size. Freeports tend to cover larger areas, in contrast to EPZs or even commercial free
therefore offering firms greater flexibility in zones that do not permit retail sales or on-site
terms of plant location and scope for inter-firm consumption of duty- and tax-free products.
linkages.
n Full access to the domestic market on a duty-
n Broader range of permissible activities. paid basis. Unlike EPZ enterprises that are
Firms can undertake any legal activity including usually required to export at least 80 percent of
manufacturing, tourism, duty-free shopping, their production, most freeports allow unre-
informatics, warehousing, transshipment, stricted sale to the local market or to consumers
and re-packaging activities, among others. as long as all applicable import duties, taxes, and
Individuals can reside within the zones, perma- other charges are fully paid.
nently or temporarily.

16
 n Provision of incentives for private zone develop-
Ta bl e 7 ers to facilitate private entry into zone develop-
ment. (Zone developers are treated as indirect
Examples of Freeports/ exporters.)
Specialized Zones
n Relaxation of minimum export requirements in
Size Date line with the WTO framework and to accom-
Zone (km2) Established modate the globalization of production.
City States
Singapore 693 1819 n Allowing zone developers and others to supply
Gibraltar 6.5 1830 utilities services (telecommunications, water/
Hong Kong (China) 1,042 1841 sewerage, power) to tenants of SEZ estates by
Macau 25 1887
treating them as indirect exporters.
Islands
Labuan, Malaysia 92 1990 n Treatment of sales of goods and services from
Batam, Indonesia* 416 1978
the domestic sector to zones as “constructive ex-
Cities/Provinces ports” eligible for all relevant export incentives.
Iquique, Chile 2.4 1975
Shenzhen, China 327 1980
Subic Bay, Philippines 300 1992 n Shift towards a universal set of fiscal incentives
Kaliningrad, Russian Federation 15,000 1995 for all promoted activities, rather than a sepa-
Aqaba, Jordan 375 2000 rate regime for zones. In Malaysia, for example,
Howard, Panama 1,500 2004
special economic zone-based enterprises receive
* The Indonesian government has announced plans to remove Batam’s the same income tax incentives as promoted
bonded zone status in favor of traditional EPZs on the island.
industries located outside the zones. This elimi-
nates the potential for unfair competition that
arises when identical operations located within
and outside a zone have different income tax
treatment.
Core Policies and Procedures
Zone legislation increasingly incorporates features
Another important trend has been the expansion and
to increase program transparency and automation.
liberalization of the core set of policies and privileges
Investment approvals have been transformed from
of most zone programs, especially EPZs. In general,
a case-by-case evaluation process to a simple regis-
these have taken the form of removing many of the
tration process, meeting explicit criteria. The use
distortions and restrictions previously associated with
of negative lists, default mechanisms that confer
EPZs, in line with best practices. Typical provisions
automatic approvals within a predetermined time-
now offered by many programs include:
period, and other mechanisms have greatly simpli-
fied investment approvals. Customs procedures have
n Expansion of activities to include commercial
been simplified by the use of single forms, automated
and professional services (such as warehousing,
systems, and other technologies.
transshipment, informatics) in addition to all
types of manufacturing and processing.
Headway has also been made by many EPZ pro-
grams to dismantle previous anti-labor provisions of
n Equal treatment of investors and forms of invest-
zone policies and management practices and move
ment. Zone legislation accords the same benefits
toward greater adherence to universal labor stan-
to foreign and local investors, and to various
dards, as defined by the 1998 International Labour
legal forms of investment. This reduces distor-
Organization (ILO) Declaration on Fundamental
tions in terms of the impact of incentives.
Principles and Rights at Work and various conven-
tions. (See also the fourth section, Economic Perfor-
mance and Impacts).

17
 Ta bl e 8

Private and Public Sector Zones in Developing and Transition Economies

Public Private
Region Zones Zones Total

Americas 146 394 540

Asia and the Pacific 435 556 991

Sub-Saharan Africa 49 65 114

Middle East and North Africa 173 40 213

Central and Eastern Europe and Central Asia 69 374 443

Total 872 1,429 2,301

Note: Excludes single factory programs.

Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

Ownership Arrangements and ments to install external infrastructure and facilities.

Development Approach In other countries, for example, the Philippines and
Vietnam, private developers had to install external
Perhaps the most notable trend over the past 15 years infrastructure (access roads and utility connections)
has been the growing number of privately owned, in addition to financing on-site infrastructure and
developed, and operated zones worldwide (Table 8). facilities (internal roads, utilities, common facilities,
According to the stocktaking exercise conducted for factory buildings, and so on).
this study, 62 percent of the 2,301 zones in develop-
ing and transition countries are private sector devel- This is gradually changing with the advent of formal
oped and operated. This contrasts greatly with the public-private partnership approaches to facilitate
1980s, when less than 25 percent of zones worldwide zone development. Examples include:
were in private hands. The key factor behind the rise
of private zones is the perception that private zones n Public provision of off-site infrastructure and
are more successful than most public zones, as well as facilities (utility connections, roads) as an incen-
a general lack of funding for new government zone tive for private funding of on-site infrastructure
development. and facilities.

The first wave of private zone development, in the n Assembly of land parcels with secure title and
Caribbean and Central America in the 1980s, and development rights by the government for lease
in Southeast Asia (the Philippines and Thailand) in to private zone development groups, develop-
the 1990s, was undertaken without much forward ment of better land use/ownership laws and
planning or government support. Governments regulations and adoption of enforceable zoning
responded to private initiatives without systematic and land use plans.
criteria for zone evaluation or designation. As a re-
sult, and exemplified by the experience of industrial n Build-operate-transfer and build-own-operate
free zones in the Dominican Republic, new zones approaches of on-site and off-site zone infra-
placed significant demands on public infrastructure structure and facilities, with government guaran-
and amenities, and outpaced the ability of govern- tees and/or financial support.

18
 Ta bl e 9

Examples of Public-Private Partnership in Zone Development

Country/Zone Role of Public Sector Role of Private Sector

Gaza Industrial Estate, Financing of all external infrastructure as well Financing of all internal infrastructure
West Bank and Gaza as factory shells; provision of land on long-term and management of zones
lease basis

Aqaba Industrial Estate, Jordan Financing of all external infrastructure; provision Financing of all internal infrastructure
of land on long-term lease basis and management of zones

Subic Industrial Estate, Philippines Financing of all external infrastructure; provision Financing of all internal infrastructure
of land on long-term lease basis; equity stake and management of zones
in industrial estate

Tan Thuan EPZ, Vietnam Provision of land on long-term lease basis; Financing of all internal and external
right of way development rights on access roads infrastructure and management of zones

n Contracting private management for govern- partnership approach that has been used in the
ment-owned zones (management contracting), development of several zones.
or lease of government zone assets by a private
operator (beneficial ownership).
Administrative Arrangements
n Equity-shifting arrangements in which a private
Another significant recent trend has been the evolu-
contract manager of a government zone can
exercise a purchase option once pre-defined tion of the types of bodies developing, administering,
performance levels have been reached. planning, and promoting zones on the one hand,
and regulating zone activity on the other. A variety of
There are various options for private sector partici- institutional frameworks has been used for SEZ regu-
pation in zone development, including concession lation, development, and management (Table 10).
agreements, management contracts, and build-op-
erate-transfer, build-own-operate, and build-own- These include autonomous government authori-
operate-transfer arrangements. Table 9 profiles the ties or corporations, specialized departments within

Ta bl e 10

Examples of Zone Administrative Models

Government Authorities Ministries Zone-Specific Investment

or Corporations Management Boards Promotion Agencies

Jordan Cape Verde India Sri Lanka

Bangladesh Taiwan (China) Turkey Uganda
Korea, Rep. of Senegal Ukraine Ireland
Zambia Slovak Republic Poland
Kenya El Salvador Vietnam

19
 Ta bl e 11

Zone Administrative and Regulatory Bodies (selected countries)

Country, Body Type of Body Key Functions Relationship with

Private Zones

Traditional Structures

Bangladesh Export Processing Autonomous government n Zone development and operation No private zones
Zone Authority authority n Regulation of zone activity

Pakistan Export Processing Autonomous government n Zone development and operation No private zones
Zone Authority authority n Regulation of zone activity

Jordan Free Zones Autonomous government n Zone development and operation No private industrial
Corporation corporation n Regulation of zone activity estate-style free zones

Shannon Development, Autonomous government n Zone development and operation No private zones
Ireland corporation n Regulation of zone activity

New Structures

National Free Zones Council, Autonomous government n Zone regulation, planning Regulator
Dominican Republic authority n Zone promotion

Philippine Economic Zone Autonomous government n Zone regulation, planning Regulator; operates
Authority corporation n Zone promotion original, four public zones

Industrial Estate Authority Autonomous government n Zone regulation, planning Regulator; operates a
of Thailand authority n Zone promotion few public zones

Free Zones Corporation, Autonomous government n Zone regulation, planning Regulator

Costa Rica corporation n Zone promotion

Free Zones, Board, Ghana Autonomous government n Zone regulation, planning Regulator
authority n Zone promotion

Kenya Export Processing Autonomous government n Zone regulation, planning Regulator; operates
Zones Authority authority n Zone promotion two public zones

a ministry, zone-specific management boards, and development function to the private sector, and
rarely, arms of investment promotion agencies. transformed their zone authorities into purely regula-
tory, planning, and promotional bodies (Table 11).
Traditionally, zones were developed, operated, and
regulated by the same body. This approach character- International experience has shown that countries
izes most of the original zones developed through embarking on private SEZ development often find it
the 1980s, particularly in Asia. But the focus of these difficult to reconcile the divergent functions of zone
bodies has changed significantly in many countries. management, regulation, and investment promo-
With the entry of the private sector into zone devel- tion. In many SEZ-sponsoring countries, conflicts
opment, most countries have either set-up specialized of interest have arisen when regulatory bodies are
public sector zone development and management also engaged in zone development activity, especially
agencies, or increasingly divested the physical project when existing public zones would directly compete

20
 substantial private sector participation at the board
Box 2 of directors level. This approach is more commonly
found among the industrial free zone programs in
Special Economic Zone Facilities Latin America (notably, Costa Rica and the Domini-
and Services can Republic), and it has been employed in Thailand
as well.

n Childcare facilities Physical Facilities and Services

n Medical clinics
The entry of the private sector into zone develop-
n Conference centers ment has also changed the range of facilities, services,
n Product exhibition areas and amenities available within zones (Box 2). In
n Commercial centers general, there has been a shift from price-based
competition (where zones competed on the basis of
n Training facilities
subsidized factory shell rentals) to product differenti-
n Shelter plans ation and non-price-based competition. Noteworthy
n Repair and maintenance centers trends include:
n Common bonded warehouse facilities
n Development of SEZs and industrial estates on
n Incubator facilities an integrated rather than stand-alone basis, as
n On-site banking facilities parts of commercial, tourism, residential, and
n On-site housing recreational “townships.” These integrated de-
velopment projects allow developers to offset the
n On-site customs clearance and trade logistics
relatively low profitability of industrial proper-
facilities
ties with higher margin commercial and residen-
n High-speed telecommunications and Internet tial facilities.
services, networked buildings
n Increasing specialization of facilities catering to
the unique needs of target industries. High tech-
nology SEZs have been established in Malaysia,
against new private zones. Opportunities for per- Taiwan (China), Singapore, and elsewhere. The
ceived and actual conflicts of interest are multiplied Laem Chabang industrial estate in the Thai
when the entity charged with guiding and monitor- Eastern Seaboard is configured for petroleum
ing SEZ performance is simultaneously one of the and chemical industries. SEZs catering to the
SEZ operators being monitored. software and informatics services industries have
been developed in India, Jamaica, the Domini-
However, traditional structures continue to charac- can Republic, Mauritius, and elsewhere.
terize most of the zone administrative bodies around
the world, despite the advent of private zones. In n Provision of a greater range of business support
countries such as Kenya, El Salvador, Honduras, services and specialized facilities. In well-run
Uruguay, and elsewhere, government bodies continue private zones, as much as 50 percent of revenues
to develop and operate zones, while regulating zone can be derived from these sources in addition to
activity in all zones, public and private. Frequently, traditional rental and sales income.
public zones are not operated on a cost-recovery basis
and undercut the competitiveness of private zones. The development of these “next generation” zones
has in many cases outclassed traditional EPZ estates.
Some zone authorities are becoming more user-re- In countries such as the Dominican Republic, private
sponsive by reorganizing themselves as corporate en- sector zones cater to higher value-added industries,
tities (to escape civil service limitations) and ensuring and are able to charge premium rates. Public zones

21
cater to low-margin, cost-sensitive industries like ap- electronics and ICT operations, leaving government
parel assembly. This pattern is increasingly apparent zones to accommodate apparel, handicrafts, and
in the Philippines, as private developers move “up- footwear assembly activities.
market” in terms of facilities and services catering to

22
Zone growth and
key characteristics

Overview for about 19 percent of these zones. Just over half of

them are privately owned and operated. Altogether,
The number of zones—especially EPZs—has grown these zones account for approximately $200 billion
dramatically, particularly over the last decade (Table in gross exports per annum and directly employ
12). Before the 1970s, most zones were clustered some 40 million workers, and perhaps some 60 mil-
in industrialized countries, primarily in Western lion indirectly. In 1975, in contrast, there were only
Europe. Inspired by the performance of the first 79 zones in 25 countries around the world, employ-
modern industrial free zone in Shannon, Ireland in ing about 800,000 people (ILO, 2003). All were
1959, a number of developing countries, mainly in government-owned and -operated.
East Asia and Latin America, initiated EPZ pro-
grams. In the 1980s, the pace of zone development Numerous studies have pointed to certain key
increased and expanded to new regions, including characteristics of zones in developing and transition
South Asia (Bangladesh, Pakistan), South America, countries:
and sub-Saharan Africa (Mauritius). The first pri-
vately developed and operated zones came on line n Concentration in a few countries. A relatively
in the Caribbean and Central America in the 1980s. small number of countries account for the ma-
Since then, zone development has exploded with jority of worldwide zone activity. Zones are con-
the emergence of new programs in the countries of centrated in Asia and the Pacific (mainly China),
Eastern and Central Europe, the Commonwealth Latin America, and Central and Eastern Europe
of Independent States, and Middle East and North and Central Asia. In general, less than a dozen
Africa. countries account for most jobs created within
zones and exports generated (Table 14). China
Today, according to this assessment, there are cur-
rently 2,301 zones in 119 developing and transition
countries, clustered mainly in Asia and the Pacific 8 This figure excludes single factory zone programs and sponsoring
and the Americas8 (Table 13). China alone accounts countries unless they also have a physically defined zone program.

23
Ta bl e 12

Dates of Establishment of Zone Programs

Before 1970 1970s 1980s 1990s 2000–Present

Industrialized Denmark Australia* Canada Japan

Countries Finland Malta France
Germany Portugal
Greece
Iceland
Ireland
Italy
Spain
Sweden
Switzerland
United Kingdom
United States

Americas Bahamas Chile Paraguay Argentina

Brazil Costa Rica Peru Belize
Colombia El Salvador Trinidad and Tobago Cuba
Dominican Republic Guatemala Uruguay Ecuador
Mexico Honduras Nicaragua
Panama Jamaica Venezuela, R.B. de

Asia and Hong Kong (China) Korea, Rep. of Bangladesh Korea, Democratic
the Pacific India Malaysia China People’s Republic of
Macau Philippines Fiji* Mongolia
Singapore Sri Lanka Indonesia Vietnam
Taiwan (China) Pakistan
Thailand

Middle East Cyprus Jordan Algeria Oman

and Egypt, Arab Morocco Bahrain
North Africa Rep. of Tunisia Iran, Islamic Rep. of
Israel Dubai, United Arab Kuwait
Syrian Arab Rep. Emirates Lebanon
Libya
Yemen, Republic of

Central and Bulgaria Belarus Albania

Eastern Europe Hungary Croatia Bosnia and
and Czech Republic Herzegovina
Central Asia Estonia Moldova
Kazakhstan
Kyrgyz Republic
Latvia
Lithuania
Macedonia, FYR
Poland
Romania
Russian Federation
Serbia
Montenegro
Slovak Republic
Slovenia
Ukraine
Uzbekistan

(Continued)

24
Ta bl e 12

(Continued)

Before 1970 1970s 1980s 1990s 2000–Present

Sub-Saharan Liberia Djibouti Burundi Gabon

Africa Senegal Mauritius Cameroon Gambia, The
Cape Verde Mali
Equatorial Guinea South Africa
Ghana Zambia
Kenya
Madagascar
Malawi
Mozambique
Namibia
Nigeria
Rwanda
Seychelles
Tanzania
Uganda
Zimbabwe

*Fiji and Australia withdrew their free zone schemes in 2003–04.

Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

hosts a greater number of zones, zone workers, n Reliance on a female workforce. Female work-
and exports than any other emerging market ers account for 60–70 percent of the zone work-
except for Mexico, which employs a single fac- force worldwide, a number that has remained
tory maquiladora scheme. consistent since the inception of EPZs. As
economic activity diversifies away from simple
n Concentration in a few product areas. The assembly operations, the percentage of women
majority of zone enterprises worldwide are in the workforce decreases. In the Malaysian
engaged in labor-intensive, assembly-oriented EPZs, for example, 40 percent of the workers are
activities such as apparel, textiles, and electrical female, down from 60 percent two decades ago.
and electronic goods. In 1999, it was estimated
that these activities accounted for more than
80 percent of zone output worldwide (Madani,
1999). This is less the case today, given the re- Zone Development Characteristics
cent increase in zones with a diversified output, by Region
especially in the CIS. The degree of product
Americas
specialization tends to be linked to the level
of industrial development of the host coun- The Americas are characterized by the widespread
try. Apparel assembly operations, for example, use of zones to support export development and
dominate activity in low-wage countries like facilitate trade. The U.S. Foreign Trade Zone (FTZ)
Bangladesh, Sri Lanka, Madagascar, and the program, which permits both trading and manufac-
Dominican Republic.9 Electronics, electrical and
automotive components predominate in middle-
9 Exceptions include the cases of Tunisia and Mauritius, which
income countries like Mexico, Malaysia, and tend to specialize in the apparel sector although they are middle-
Thailand. income countries. This is due to the outward processing benefits
granted to both countries by the EU (Cling and Letilly, 2001).

25
 Some of the key characteristics of these programs are
Ta bl e 13 presented in Table 2–1, Annex 2. In general, they
can be grouped into the Mexican maquiladora
Zones in Developing and program, comprised of a countrywide, single factory
Transition Countries EPZ approach; the Central American industrial free
zones, exemplified by the Dominican and Costa
Number of countries with zones 119 Rican zones; zones in the English-speaking Carib-
bean; and South American zones, typified by Colom-
Number of zones 2,301
bia and Uruguay. While similar in many ways, these
Asia and the Pacific 991 zones face quite different competitive environments.
China 187
n The Mexican maquiladora program consists
Vietnam 185 of some 3,700 factories spread throughout the
country, employs over 1 million, and exports
Americas 540
close to $80 billion per year. Unlike other zones
Central and East Europe and Central Asia 443 in the region, industrial activities are highly
diversified and important sources of foreign
Middle East and North Africa 213
investment from Japan as well as the United
Sub-Saharan Africa 114 States. The key competitor for the Mexican
Notes: Excludes single factory zone programs and sponsoring
zones is China, rather than other zones in the
countries. Zones in the entities of Macau, Hong Kong (China), region; since 2000, Chinese exports have been
and Taiwan (China) are included in the Asia and the Pacific region.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.
able to displace a number of Mexican products,
and have become the second-most important
supplier to the U.S. market in doing so.

n Unlike the maquiladoras, zones in Central Amer-

ica and the Dominican Republic are focused
turing activities, was established in 1934. The U.S. on the United States, both as an export market
FTZ program dominates zone activity in the Ameri- and the chief source of foreign investment. In
cas, with 266 industrial estate-style zones at ports of fact, FDI inflows fund 80 percent of Domini-
entry in the country. The region also hosts some of can zone enterprises, and 54 percent of those in
the most dynamic zone programs in the world—in Costa Rica. Most of the zones in these countries
Mexico, the Dominican Republic, and Costa Rica. are privately developed and operated, and focus
almost exclusively on apparel, footwear, luggage,
Over the past three decades, free trade zones and and other sewn good products. Even the phar-
export processing zones have become ubiquitous maceutical industry in the Dominican Repub-
in the region. Initially, most were developed and lic is comprised mostly of assembly activities.
operated by public sector entities. This approach was Industrial diversification is taking place much
quickly abandoned in favor of private zone develop- more rapidly in Costa Rica, where zone produc-
ment in most countries, influenced by the experience tion is dominated by electronic semiconductors,
of private zones in the Dominican Republic and due to the establishment of a large Intel plant.
Costa Rica, and private industrial parks in Mexico.
A number of countries in the region have fully or n Zones in the English-speaking countries of
partially privatized government-owned zones; promi- the Caribbean and Central America—mainly
nent examples include Costa Rica, Colombia, and Jamaica, Trinidad and Tobago, and Belize—
the Dominican Republic (with projects underway in remain mostly in public sector hands, and they
El Salvador and Honduras). Still others, such as Uru- have not kept pace with their Latin counter-
guay and Argentina, relied on private zone develop- parts. These zones depend almost exclusively on
ment initiatives from the beginning. the United States as both investment source and
export market. Apparel and sewn goods

26
 Ta bl e 14

Zone Development Rankings

Number of zones Employment (thousands) Exports (US$ millions)

Regions Asia and the Pacific/Latin Asia and the Pacific/Latin Asia and the Pacific/Latin
America/Central and Eastern America/Central and Eastern America/Central and Eastern
Europe and Central Asia/ Europe and Central Asia/ Europe and Central Asia/
Middle East and North Africa Middle East and North Africa Middle East and North Africa

Countries China 187 China 50,000 China $145,000

Vietnam 185 Indonesia 6,000 Malaysia 117,013
Hungary 160 Mexico 1,300 Hong Kong (China) 101,500
Costa Rica 139 Vietnam 950 Iran, Islamic Rep. of 87,289
Mexico 109 Pakistan 888 Ireland 82,500
Czech Republic 92 United Arab Emirates 552 Czech Republic 68,626
Philippines 83 Philippines 545 India 49,000
Dominican Republic 58 South Africa 535 Algeria 39,423
Kenya 55 Thailand 452 Argentina 36,478
Egypt, Arab Rep. of 53 Ukraine 387 Philippines 32,030
Poland 48 Malaysia 369 Korea, Rep. of 30,610
Nicaragua 34 Lithuania 369 Tunisia 20,544
Thailand 31 Honduras 354 Bangladesh 11,716
Jordan 27 Hong Kong (China) 336 Lithuania 11,404
United Arab Emirates 26 Tunisia 260 Mexico 10,678

Notes: Excludes zones in OECD countries. Also, for India, the updated FIAS database using WEPZA data shows 341 zones having received final
approval, but exact operational figures for India are not available. According to WEPZA, data on exports from zones is not easily available and
makes it difficult to issue meaningful rankings.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

dominate, although zones in Jamaica, Barbados, development and management approaches (Table
and elsewhere have been successful in diversify- 2–2 in Annex 2). Zones in East Asia and South Asia
ing into data entry, call centers, software coding, continue to be mostly government-run, usually by
and other information technology (IT) services. central government zone authorities (for example,
the Republic of Korea, Singapore, and Bangladesh),
n The majority of South American zones, with the state government corporations (Malaysia, India) or
notable exception of Colombia, are relative late- ministerial departments [Taiwan, (China)].
comers to zone development. Most of these were
in private hands from the start, or were later Traditional export processing zones have played a key
privatized. Many—particularly in Colombia and role in the development of export sectors in a num-
Uruguay—are “high-end” zones, offering cut- ber of Asian economies, including Sri Lanka, Taiwan
(China), and Malaysia. However, only a few of these
ting-edge facilities and services (Box 3).
economies have been able to break away from low-
skilled textiles and apparel manufacturing into higher
Asia and the Pacific value-added manufacturing and services. Thailand,
Malaysia, and Taiwan (China) are all often pointed
The Asia and the Pacific region has been at the to as models in utilizing their zones to both promote
forefront of zone development over the last three and diversify their export bases. Each of these econo-
decades, led by the “Asian Tigers” in East and mies has succeeded in moving from low value-added
Southeast Asia. The region displays a wide range of manufacturing to attracting investment and encour-

27
 private Tan Thuan EPZ in Ho Chi Minh City.
Box 3 Indonesia’s bonded zones are in government hands,
but its over 100 export-oriented industrial estates are
ZonaAmerica Business and almost wholly privately developed and run.
Technology Park, Uruguay
While most zones host traditional light manufactur-
ZonaAmerica is one of the leading-edge special ing and assembly-style export processing activities,
economic zones oriented to IT, software, regional Asia has taken the lead in promoting large-scale free-
headquarters, and bio-technology and electronics ports. Following the phenomenal success of China’s
operations. freeports (Box 4), a number of other countries in the
Tata Consulting Services (India) is among the region have sought similar results, including:
leading companies engaged in software develop-
ment for the Spanish-speaking market. n The Philippines, which converted a number of
Examples of specialized facilities provided by
former U.S. military bases into large-scale free-
the zone include: ports—Subic Bay and Clark—with impressive
results.
n Fiber optic and Wifi network
n Teleport and microwave links n Indonesia, which provided bonded zone status
n Internet security and on-site help desk to Batam and Bintan islands, located 20 minutes
n Intelligent buildings away from Singapore.
n Wireless perimeter security
n India, which has launched a major freeport
n Research lab facilities development initiative—some 26 freeports have
n Business services center been approved for development, 5 of which
n Medical and daycare facilities are underway, several by leading private sector
consortia.
Source: www.zonamerica.com.
n The Republic of Korea has initiated a major
large-scale Free Economic Zone development
program, with three large-scale zones being
implemented by private property development
aging exports in a wide range of industries, including consortia; it has also designated Cheju island as
electronics assembly and component manufacturing a “Free International City” with special benefits.
(Thailand, Malaysia, and Taiwan, China), automo-
tive assembly (Thailand), and chemical processing A number of Asian countries have also implemented
(Thailand). specialized zones for financial services, informa-
tion technology, science-based industries, and other
A trend towards private zone development in Asia industries requiring tailored infrastructure, facilities,
has developed recently, particularly in the Southeast and business development services.
Asian countries. In the early 1990s in Thailand and
the Philippines, for example, the decision was taken
Middle East and North Africa
to stimulate the development of private zones and
industrial parks rather than expand public ones; the Several countries in the Middle East were early
Philippines has completely eschewed the develop- adopters of free zones. The Arab Republic of Egypt,
ment of new public sector zones since new legislation the Syrian Arab Republic, Israel, and Jordan, for
was passed in 1995. Vietnam has relied mostly on example, established government-run zones in the
private zone developers from the very start of its 1960s and 1970s, at about the same time that zones
program in 1991 with the establishment of the were first set up in the Philippines, the Dominican

28
 Box 4

Zones within Zones: The Unique Case of China

Special economic zones were established by China to serve as “demonstration areas” for policy reforms and to
encourage foreign investment. The economic impact of these zones has been far-reaching, transforming entire
regions and economies.
The Shenzhen Special Economic Zone provides a snapshot of the impact of the SEZs on China’s economic
development. Twenty-three years of growth has transformed Shenzhen from a small, sleepy fishing village into
a thriving urban metropolis. Today, Shenzhen is an export-oriented economy with an export value in 2003 of
$48 billion (14 percent of the national total), some $30 billion in FDI, and 3 million directly employed.
What is less well known is the fact that the SEZs host hundreds of national level zones, all with special and
differing incentive regimes, including:
n 14 open coastal cities
n 15 free trade zones
n 17 export processing zones
n 54 economic and technological development zones
n 53 high technology development zones
n 15 border economic cooperative areas
Many other provincial- and city-level zones exist as well.

Republic, the Republic of Korea, and Taiwan hub, has become an important development model
(China). The majority of zones in the Middle East in the region. Its success has spawned an increasing
and North Africa region are free trade zones (Table number of similar zone developments in the Gulf,
2–3 in Annex 2), aimed at facilitating trade with not just within the other Emirates, but also in Oman
their host countries. Though many of these zones and Bahrain. Dubai has also taken the lead in devel-
permit manufacturing, trading and associated activi- oping new, specialized zones, including both Internet
ties (for instance, packaging and repackaging, break City and Media City, which promote exports in IT
bulk) remain predominant. With a handful of excep- and media-related services. A $3.3 billion large-scale
tions, the economic contribution of zones in the offshore financial services zone and commodities
Middle East has been negligible compared to zone market is being developed on Saadiyat Island, Abu
programs in the Far East and Latin America, largely Dhabi.
due to their traditional focus on trading activities
rather than manufacturing. The notable exceptions
to this are zones in Egypt and Jordan, which have
developed a manufacturing focus. Enterprises in the
qualified industrial zones (QIZs)10 in Jordan, for 10 The QIZ framework was successfully implemented by extending
the provisions of the Israel-United States Free Trade Area Agree-
example, are engaged in apparel assembly operations ment. The key requirement is that a qualifying product must be
for the U.S. market. a “substantially transformed” good, with at least 35 percent of
its value added in Israel, a Jordanian QIZ, or the West Bank/
Gaza. Of that 35 percent, a minimum of 11.7 percent must be
The government-developed Jebel Ali Free Zone in added in a Jordanian QIZ, 8 percent in Israel, and the remaining
15.3 percent can originate from a Jordanian QIZ, Israel, or the
Dubai, a major regional distribution and logistics West Bank/Gaza.

29
 Box 5

Shannon Free Zone, Ireland

The Shannon Free Zone is the world’s oldest EPZ, established in 1958. Located at Shannon International
Airport, the zone offered investors secure access to European markets, attractive tax benefits, and subsidized
rent and facilities. Specialized training and manpower development facilities were integrated into zone
design from inception. As a result, export manufacturing activities accelerated.
There are presently 120 companies employing over 7,500 within the zone. As a large share of the zone’s
activities are in service sectors, the zone’s contribution to overall merchandise exports is relatively small,
accounting for less than 3 percent of the total. On a yearly basis, zone exports total $2.5 billion and imports
$1.2 billion.
Over time, liberalization of the Irish economy outside the zone has reduced its relative importance. Never-
theless, it remains an important catalyst for the region, leading the economy’s diversification into new,
value-added sectors.

Western Europe have been designated in the country to promote the

revitalization of distressed urban areas.12
The concept of special economic zones is not new to
Western Europe (Table 2–4 in Annex 2). Many of
these countries (the United Kingdom, Italy, Den- Central and Eastern Europe and
mark) have used free trade zones for centuries. Most Central Asia
Western European zones restrict manufacturing and
other activities, only allowing packing/re-packing Following the break-up of the Soviet Union, many
and warehousing. This is due in large part to EU countries of the former Soviet bloc turned to free
regulations.11 As a result, processing operations are zones as a means of attracting foreign investment and
only permitted in the Hamburg FTZ (Germany), integrating their economies with the global economy
and in the FTZs of the Canary Islands (Spain), through export-led expansion (Table 2–5 in Annex
Azores and Madeira (Portugal) and overseas depart- 2). In some cases in Central and Eastern Europe, free
ments. All other zones in the EU must operate as free zones pre-dated the dissolution of the Soviet Union
trade zones. Because most of these zones are located and were carried forward as export development
in ports, they are controlled by port or customs tools. Early reformers in the region include Bulgaria,
authorities, and are therefore publicly developed and Romania, the Kyrgyz Republic, and the former
managed. Yugoslavia.

The Shannon Free Zone in Ireland (Box 5) was Another interesting feature of several zone programs
the world’s first EPZ, inspiring the development of is the reliance on the re-use of existing infrastructure
EPZs in emerging markets worldwide. Although less and facilities in addition to “greenfield” development
important now as a catalyst for economic growth, (new facility construction by investors). Several
the zone was critical to the growth of exports, attrac- Polish and Ukrainian SEZs, for example, cover
tion of FDI, and outward orientation of the Irish parts of existing towns and specialized facilities (Box
economy. 6). Likewise, the Klaipeda zone in Lithuania is the

Another noteworthy program is the Urban Free

Zone program of France. Modeled after the United 11 Countries must abide by Council Regulation (EEC) No. 2913/92,
Kingdom’s Enterprise Zones and Empowerment Title IV, Chapter Three, entitled “Free Zones and Free Ware-
houses” (Articles 166 through 182).
Zones in the United States, over 85 urban zones 12 France also hosts an additional 751 Zones Urbaines Sensibles.

30
conversion of a former Soviet air force base. This
approach avoids the need for huge outlays of public Box 6
funding and improves the economic returns of zone
development, as discussed in the next section. Pomeranian Special Economic
Zone, Poland
The accession to the European Union of a number of
the countries in the region will require some adjust- Poland has 14 free zones established throughout
ments to their zone programs. Each of the countries the country. Though identified as SEZs, the zones
needs authorization from the EU to retain its free generally cover only a limited land area and focus
zones and must negotiate the relevant terms. In some on traditional EPZ and FTZ activities. The program,
cases, such as Hungary, it is expected that many established in 1995, has been designed as a
zones will be eliminated, particularly those that do regional development tool.
not serve any regional development purpose. The experience of the Pomeranian Special Economic
Zone exemplifies the Polish approach to re-use
existing infrastructure for zone development. The
Sub-Saharan Africa Pomeranian SEZ was established in 2001 as a
result of the merger
. of two special economic zones
Several African countries were pioneers in using free
in Tczew and Zarnowiec. The Zone covers an area
zones as economic development tools. Liberia and
of 677 hectares and is located in the Pomorskie
Senegal, for example, established EPZs in the early Province, Kwidzyn,´ Starogard Gdanski,
´ Tczew,
1970s. In 1981, Mauritius started a single factory- .
and Zarnowiec. The Zone will operate until the year
based EPZ program whose prominence and success 2017.
led to a wave of zone development throughout the
By the end of June, 2007, the total number of
continent in the late 1980s in East, Southern, and permits granted to conduct business activities in
West Africa. the Pomeranian SEZ was 60, with a total invest-
ment outlay of $870 million in projects employing
As shown in Table 2–6 in Annex 2, most countries in 13,866 people.
the region implemented both pure EPZ approaches
One of the key aims of this zone is to make effective
along with single factory models. With the notable use of existing buildings and infrastructure, and to
exceptions of Ghana (which opted for private sector develop the grounds of the former site of. the discon-
zones) and Kenya (where most zones are private), tinued nuclear power station project in Zarnowiec.
most zones are developed and operated by govern-
ment, typically by an EPZ authority. A number of
countries—Madagascar, Mali, Mauritius, and the
Seychelles—operate single factory EPZ programs although sales to the United States under provisions
that have been quite successful in terms of job cre- of the African Growth and Opportunity Act frame-
ation and exports. work are increasing.

The dominant industries in African zones are ap- South Africa has two new industrial development
parel/textiles and food processing. Traditionally, the zones in East London and Port Elizabeth, which are
bulk of FDI to Africa has come from the EU, but attracting a diverse group of investments, including
an increasing number of East Asian and South Asian automobile assembly, metalworking, and other fairly
companies have located in African zones in recent capital-intensive operations.
years. The key export market remains the EU,

31
Economic performance
and impacts

The economic performance and impact of zone pro- n Export growth and export diversification
grams in developing countries have been evaluated n Foreign exchange earnings
in numerous studies. Most of these, however, have n Foreign direct investment
focused on government-developed and -run zones n Government revenues
and largely neglected the economic impact of private
zone development. Social critics of zone develop- The impact of these benefits is obviously amplified
ment, on the other hand, have emphasized the social in poorer countries where jobs and foreign exchange
and environmental impacts of zones and largely earnings and government resources are scarce. The
dismissed economic contributions. And almost all dynamic benefits are much harder to measure, but
studies have failed to evaluate the contributions of are far more important to the long-term contribu-
zones relative to other duty-abatement mechanisms. tions from zone development. These include:
How do zone-based enterprises compare to firms
operating under other incentive regimes in terms of n Indirect employment creation
their economic, social, and environmental impacts? n Skills upgrading
This section outlines the major policy issues associ- n Female employment
ated with zone development and documents their n Technology transfer
overall socio-economic economic benefits and costs. n “Demonstration effect” arising from application
of “best practices”
n Regional development

Defining Zone Benefits and Costs Zone development also entails a range of financial
The economic benefits from zone development are and economic costs, including: salaries of government
both static and dynamic. The static benefits are quite workers in the zone authority and other operating
straightforward and include: expenses; infrastructure development outlays; import
duties and charges lost from leakages of duty-free
n Direct employment creation and income goods; and taxes foregone from firms relocating from
generation the domestic customs territory to the zone. But it is

32
 Box 7

Both Sides of the Zone Debate

Topic Critics Proponents

Foreign exchange earnings Zones host import-dependent Countries can increase value-
activities with low value-added. added through “equal footing”
policies.
Industrial activity Zones perpetuate low-skill Many zones have promoted
assembly operations. industrial and skill upgrading.
Policy reform Zones help avoid country-wide Zones are catalysts to broader
reforms. reforms.
FDI Zones attract the “wrong” FDI Zones are an effective tool to
in low-tech, low-skill, and foot- attract FDI and most industries
loose activities. are not footloose.
Women Zone industries segregate Zones are an important source
women and pay them lower of employment for women and
wages. higher wages.
Labor rights Zones suppress basic labor Most zones comply with ILO
rights. standards.
Working conditions Zones permit companies to get Better run zones offer much
away with poor work place better working standards and
health and safety conditions. conditions than elsewhere.
Environment Zones have lax environmental Well-run zones have better
controls to attract polluting environmental controls and
industries. practices.

important to note that a government’s costs associ- unfairly compete with domestic products. Tax losses
ated with zone development are those that are incre- can also result from the relocation (rather than
mental—additional costs not otherwise entailed—and expansion) of existing, tax-paying enterprises in the
not recovered through service charges and assessments. domestic customs territory to a tax-free zone.
Many studies have made the mistake of focusing on
total rather than incremental costs specifically linked SEZs in some countries have also been criticized
to zone development. Public expenditures are clearly for negative socio-economic impacts, particularly in
the highest in the cases where governments develop relation to the role of women, labor, and working
zones, and even worse when they do not operate on a conditions in zones (ILO, 1998). These include:
cost-recovery basis, providing the subsidies typical of
most government-run zones. n Exploitation of women—lower wage levels, lack
of training or skill upgrading, use of trainees to
Adverse financial impacts may also arise from leak- lower wage costs
ages of duty-free merchandise from zones, which n Suppression of labor standards and core labor
not only have negative fiscal consequences but also rights including trade unionization

33
n Poor employment conditions (work hours, Table 15, SEZs account for less than 1 percent of the
health and safety) global workforce, and are above 1 percent only in the
n Lax environmental standards Americas and the Middle East and North Africa.

Another important issue is whether zone develop- While the direct employment impact of zones on
ment diverts developing countries from implement- average is marginal, the indirect employment ef-
ing broad-based economic reforms. Some analysts fects can be quite substantial. The ratio of indirect
have proposed that zones may act as “pressure valves” to direct jobs created ranges from 0.25 percent in
for countries with growing unemployment, and Mauritius (ILO, 2003) to 0.7 percent in Madagascar
allow them to avoid implementing painful structural (Cling, Razafindrakoto and Roubaud, 2004), to 2.0
reforms (Madani, 1999). Proponents argue, on the in Honduras (ILO, 2003). This implies that the indi-
other hand, that when implemented properly, zones rect employment effect of EPZ development globally
can serve as catalysts for countrywide reform by al- could range from 9.6 million to 77 million jobs.
lowing countries to pilot and test new reforms and
approaches before extending them countrywide. Zones can and do play a major role in employment
creation in certain countries. The rate of job creation
Related to this is the opportunity cost of zone devel- in a number of programs, for example, has been
opment. Does a focus on zone development divert remarkable. Employment in the Dominican Repub-
scarce government resources from addressing other lic’s industrial free zones rose from 500 in 1970 to
pressing needs such as education, health, or infra- almost 200,000 today. Almost 1 million workers are
structure? Does the establishment of zone authorities employed in the Philippine eco-zones. The share of
draw away scarce human resources in government zone employment of national employment varies
from other priorities, or does the implementation of
best practices in governance enhance the capacity of
government employees to benefit governments more
broadly? Tab l e 1 5

Another consequence of zone development fre- Direct Employment Impact of

quently raised by critics is the impact on industrial Special Economic Zones
upgrading. Do zones stimulate and/or perpetuate
a dependence on low-skill, low-technology, assem- Direct Percentage of
bly-type operations and a dangerous dependence on Employment National
(millions) Employment
one sector (such as apparel)? Or do zones actually
promote industrial upgrading and diversification? Global 68.441 0.21%
(See also Box 7, which summarizes key issues in the
Asia and the Pacific 61.089 2.3%
zone debate.)
Americas 3.084 1.15%

Western Europe .179

Economic Impacts Central and East Europe
and Central Asia 1.590 0.001%
Employment Generation
Middle East and North Africa 1.458 1.59%
One of the key objectives for EPZ development is
Sub-Saharan Africa 1.040 0.20%
employment generation. EPZs are viewed as highly
effective tools for job generation, particularly for Note: Estimates from FIAS database were formulated on ILO data.
In some cases where discrepancies arise due to inclusion of indirect
women first entering the workforce. Experience sug- employment figures (as identified by WEPZA), a revised direct employ-
gests, however, that the direct employment impact ment figure was calculated using a standard ratio of 1:2; that is, for
every one direct job created, two indirect jobs are in turn created.
of zones is marginal. In most countries, zones are
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.
not a major source of employment. As shown in

34
widely, with Honduras at 4.6 percent, the Domini- n Sub-Saharan Africa: Ghana (22.4 percent);
can Republic at 6.2 percent, Tunisia at 8 percent, Fiji Madagascar (80 percent); Mauritius (34.4
at 10 percent, the Seychelles at 12 percent, Mauritius percent).
at 24 percent, and the United Arab Emirates at 25
percent. The impact of these jobs in countries with EPZ programs also spearheaded export diversifica-
high rates of unemployment and underemployment tion efforts in most countries, from an almost total
are significant; as Madani (1999) points out, “for reliance on primary commodities to manufactured
workers, the alternative to EPZ employment is often exports. For example, most of the countries of the
unemployment, underemployment or return to vil- Caribbean and Central America exported mainly
lage subsistence life.” fruits and vegetables before the establishment of
EPZs. In Costa Rica, the EPZ share of manufactured
Evidence suggests that zones are a much more signifi- exports jumped from less than 10 percent in 1990 to
cant source of employment in smaller countries with 55 percent in 2003. Ten years ago, the main exports
populations of less than 5 million (examples include of the zones were apparel and textile products; today,
Mauritius, the Seychelles, and Jamaica) than in larger over half of zone exports are modular circuits and
countries. Even in Mexico, for example, the highly other electronic components, even excluding exports
visible and successful maquiladora program accounts generated by the Intel plant opened in 1997. Many
for only 3.2 percent of total jobs (Sadni-Jallab and other countries have had similar experiences. In
Blanco de Armas, 2002). Tunisia, the EPZ share of manufactured exports has
more than doubled since 1990; in Kenya the share
increased from 3.5 percent in 1997 to 19.3 percent
Export Development in 2003; and in the Philippines the eco-zones’ share
Another primary goal of zone development is the of national merchandise exports increased from 22
contribution to export development, not only in percent in 1995 to 76 percent in 2003.
terms of accelerating export growth, but also export
diversification, particularly important to poorer Foreign Direct Investment
developing countries reliant on the export of primary
products. In contrast to the relatively marginal role Zones can also play an important role in attracting
that zones have played in terms of employment FDI. Supporters claim that by offering world-class
creation, EPZs account for a significant share of facilities and best practice policies, zones can offset
manufactured exports in most regions, particularly in some aspects of an adverse investment climate.
the Middle East and North Africa and sub-Saharan Unfortunately, the impact of zones on FDI is hard
Africa (Table 16). to gauge given the lack of data. Many zones do not
track foreign investment flows separately, and data is
In many countries, zone programs accounted for a uneven.
major share of exports in 2005. Examples include:
Available data suggests that SEZs are an important
n Americas: Nicaragua (79.4 percent); the destination of FDI in some countries. In the Philip-
Dominican Republic (77 percent); Panama pines, for example, the share of FDI flows going to
(67 percent). the country’s eco-zones increased from 30 percent in
1997 to over 81 percent in 2000 (UNCTAD, 2003).
n Asia and the Pacific: Bangladesh (75.6 percent); In Bangladesh, $103 million of the $328 million of
Sri Lanka (67.1 percent); the Philippines FDI inflows were registered in EPZs. In Mexico, the
(78.2 percent); Pakistan (50.3 percent). share of annual FDI accounted for by maquiladora
operations increased from 6 percent in 1994 to 23
n Middle East and North Africa: Lebanon percent in 2000 (Sadni-Jallab and Blanco de Armas,
(36.3 percent); Bahrain (68.9 percent); 2002). And in China, SEZs account for over 80
Morocco (61 percent). percent of cumulative FDI. However in many other
countries, as reviewed later below, zones have played

35
 for example, increased only slightly from 6.6 to 7.2
percent in 1988–1998. Even worse, skill levels in
Ta bl e 16
the non-maquila workforce were much higher at
Impact of Zones on Exports about 30 percent (Sadni-Jallab and Blanco de Armas,
2002). The high import composition of exports and
Zone Exports Percentage the low skill levels may suggest that technology diffu-
(US$ millions) of Exports sion from the maquila sector is lower than expected.
Global 851,032 40.8%
Other analyses have suggested just the opposite.
Asia and the Pacific 510,666 41.0% There is clearly substantial evidence of the catalytic
Americas 72,636 39.0%
role played by EPZs in the industrial upgrading and
technology transfer in the East Asian newly indus-
Central and East Europe and trialized economies, especially the Republic of Korea
Central Asia 89,666 38.7%
and Taiwan (China). In Malaysia and the Philippines,
Middle East and North Africa 169,459 36.4% there has been significant industrial upgrading in the
electronics sector located mainly within zones (Lall,
Sub-Saharan Africa 8,605 48.7%
2000). The Philippine Economic Zone Authority has
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research. documented the substantial rise in skill levels in the
Philippine eco-zones, with decreases in the propor-
tion of the production workforce in electronics
industries in favor of more skill-intensive design and
research activities. The software technology parks in
a marginal role in FDI attraction and most invest- India, for example, were critical to the expansion and
ment is of domestic origin. upgrading of ICT activities, not just in terms of rou-
tine data entry and software coding operations, but
Industrial Upgrading and Technology also in much more complex software development,
Transfer content development, and multimedia operations.

The fact that zones have played a major role in di- But as with many issues concerned with zones, the
versification of export bases would suggest that they key issue is whether enterprises located in EPZs or
have contributed to upgrading the “skill content” of other special economic zones are any different from
their output. Critics claim that the opposite is true— those located in the domestic customs territory of a
that while zone production diversifies from apparel country, registered under a different regime. While
to electronics, skill requirements and production it could be argued that the technology transfer and
processes remain static and thus zones perpetuate product upgrading is suppressed because special eco-
“dead end” simple assembly operations. They suggest nomic zone-based enterprises are provided duty-free
that firms engaged in EPZs tend to be low-quality status, this is a common benefit given to export-
FDI, compete more on the basis of price, and invest oriented FDI generally. Surveys indicate no signifi-
little in advanced technologies or enhancing produc- cant differences between EPZ and non-EPZ-based
tivity and skills development. export-oriented firms in terms of technology transfer
and linkages, suggesting that EPZ enterprises may be
Unfortunately, the lack of zone- and firm-level data wrongly singled out (UNCTAD, 2002).
precludes any systematic analysis of the issue. An
indication of the skill content of zone exports is the
share of skilled labor in the total zone workforce. Foreign Exchange Earnings
Certain assessments have suggested that skill levels
in zone workforces have remained steady over time An increase in foreign exchange earnings is one of
and have not increased as would be expected. The the main benefits expected of zone development. The
share of skilled labor in the maquila work force, foreign exchange contribution of zone programs is

36
hard to establish directly since most do not collect through the mid 1990s (Jayanthakumaran, 2002).
foreign exchange earning statistics. Earnings can be In the apparel industry, nearly 90 percent of fabrics
approximated by tracking net exports (gross exports are imported. In most under-performing zones,
minus imports) as an indicator of the local value- the value-added consists mainly of the wage bill. In
added from zone activity. The net economic impact Mexico, it has been estimated that domestic inputs
of zones is increased as local value addition is raised. comprise only 3 percent of inputs of maquila en-
terprises (Sadni-Jallab and Blanco de Armas, 2002).
The success that some zones have had in increasing In most Central American EPZs, wages constitute
local purchases of zone-based goods and services is 55–65 percent of total domestic expenditures, and
exemplified by the East Asian newly industrialized rent, utilities, and transportation services account for
countries. In the Republic of Korea, for example, an additional 25–30 percent (Jenkins, Esquivel and
net EPZ exports were over 60 percent in 2000 Larrain, 1998).
(Schrank, 2001). Korean zones were successful in
developing significant backward supply linkages What accounts for this discrepancy in performance,
and sub-contracting relationships with domestic especially in countries with similar cost structures,
firms, particularly in footwear operations (Healey locations, and resource endowments? There are a
and Lutkenhorst, 1989). In Indonesia, net exports number of reasons, including exchange rate devalu-
of firms located in bonded zones reached 62 percent ations that raise import prices, distorting the value
in 1990. The net export ratio among the Philippine of net exports. Another important factor appears to
eco-zone firms was 45 percent in 2003, according to relate to the degree of success countries have had in
the Philippine Export Zone Authority. fostering backward linkages with suppliers in host
economies, in particular, the extent to which domes-
The experience of other zone-sponsoring countries tic inputs are used in the production process. Several
in other regions has been similar. In Mauritius, for theories have been put forward to explain the relative
example, net EPZ exports increased from 23 percent paucity of backward and forward linkages formed
in 1980 to 41 percent in 1995 and nearly 50 percent by zone-based enterprises and the tendency for some
in 2002. The net export ratio of Costa Rican zones EPZs to remain enclaves:
rose from 18 percent in 1996 to 40 percent in 2000.
Free zones in Honduras increased net exports from n High import dependence of most EPZ activi-
3.3 percent in 1990 to 24.5 percent in 1995; in El ties. Apparel, footwear, and electronics opera-
Salvador, the increase was from 3.8 percent in 1990 tions in particular have import ratios of 60–85
to 20.4 percent in 1996. percent.

There are numerous examples where local value n Impact of certain export market access
added of zone operations is low or has not changed arrangements. “Outward processing relief ”
over the years. It is notable that even in a relatively schemes—such as United States’ Section
dynamic economy like Mexico, for example, the net 806/807 of the U.S. Tariff Code (now 9802.0)
export ratio of the maquiladoras has remained steady in which duty-free access to the U.S. market is
at about 30 percent between 1991 and 2000 (Sadni- linked proportionally to the use of U.S.-made
Jallab and Blanco de Armas, 2002). Similarly, in the components—effectively discriminate against
Dominican Republic, the share of domestic value- the use of domestic inputs favoring imported
added in total output actually fell from 40–45 per- inputs.
cent in the early 1980s to 25–30 percent by the end
of the decade (Jenkins, Esquivel and Larrain, 1998). n Ban against local sales by EPZ enterprises in
Net zone exports were negligible in Nicaragua and some zone programs which preclude the devel-
Guatemala, at 8 percent and 9 percent, respectively, opment of forward linkages.
in 1996. The proportion of raw material purchases
that were of domestic origin among Sri Lankan n Lack of competitiveness of local firms.
zones remained static at 5 percent from start up Domestic enterprises in many developing and

37
 transition countries are unprepared, unable, and governments. Income tax holidays in particular are
at times uninterested in servicing EPZ firms regarded as “giveaways” because they are not useful
with completely different quality, scale, price to foreign affiliates in reducing their home country
and delivery requirements.13 tax burden. Still, the issue with EPZ incentives, as
with all fiscal incentives, is whether investors would
n Preference by global firms to rely on their have located in the zone without the provision of
international suppliers for raw materials and incentives in the first place.
intermediate goods as part of their global sourc-
ing strategies. Zone development results in complex revenue
impacts for governments (Box 8). The main revenue
n Lack of awareness and information about gains are from personal income taxes (wage bill) and
prospective domestic suppliers on the part of income from import duties and charges on zone
EPZ-based firms, and potential market opportu- output sold into the domestic customs territory.14
nities on the part of local enterprises. Corporate income taxes, even where they are as-
sessed, are a marginal part of the revenue stream.
From a policy perspective, the precise relation- In the case of government-run zones, revenue is also
ship between limited backward linkages and EPZs derived from fees and service charges and land and
and other special economic zones remains unclear. building rentals and sales.
Export-oriented companies located outside zones
and benefiting from a special incentive regime (under Set against these are the incremental costs of regulat-
an investment code, manufacturing under bond, ing a zone program, and in some countries, develop-
bonded manufacturing warehouse, duty drawback, ment and management. These are both one-time and
or other scheme) seem particularly averse to forming recurrent expenditures. Zones can become financial
backward linkages. These firms are generally import- failures for governments under three scenarios: if
dependent operations that take part in segmented, zone development entails massive government capital
global production chains, frequently exporting under outlays (for onsite or offsite infrastructure develop-
outward processing relief types of mechanisms. ment); if the zones are not operated on a cost-recov-
ery basis; and/or, if they receive subsidized inputs
It can, in fact, be argued that the scope for supply such as electricity or other services.
and other linkages to develop is greater with special
economic zones. There is a greater incentive for The earliest EPZs [in the Republic of Korea, Taiwan
local firms to sell goods and services to zone-based (China), India, the Philippines, for instance] were
enterprises because such sales are (typically) developed and run by governments on a subsidized
“deemed” exports and therefore are eligible for duty basis. In most cases, land and building rates were
drawback and other export incentives. The imple- set below cost-recovery levels and zones were not
mentation of these types of “equal footing” policies expected to recover operating, let alone development,
aimed at domestic enterprises is one reason that costs. In a few other cases, zone-based enterprises
linkages are more prevalent in some zone programs. benefited from subsidized energy, water, and other
inputs. And in still other cases, zones were developed

Budgetary Impacts
13 “In most developing countries a modern, high volume, produc-
The budgetary impact of special economic zones tive sector, producing essentially for export is superimposed on a
depends in part on the tax policies and fiscal incen- small-scale, non-specialized sector, with low productivity, produc-
ing for the domestic market.” (Cling and Letailly, 2002). This
tives offered to qualifying enterprises. The typical makes the development of supply linkages difficult.
package of fiscal incentives offered by EPZs almost 14 The contribution of taxes on EPZ wages can be considerable. In
universally includes corporate income tax holidays or Madagascar, over 20 percent of employers’ social contributions are
derived from free zone companies, and the program contributed
reduced tax rates, import duty exemptions, indirect to 2 percent of GDP in 1998. If spillover effects are taken into ac-
tax abatements, and so on. Some analysts claim that count, the free zones contribution to GDP increases to 7 percent
and an additional 5 percent in tax revenues (Razafindrakoto and
these incentives represent revenue forgone by host Rabaud, 2002).

38
 Box 8

Government Revenues and Costs from Zone Development

Revenues
n Corporate income tax (if no tax holiday)
n Personal income tax on direct and indirect employment
n Permit fees and service charges
n Rental or sales fees (from sale or rental of public land to developers)
n Import duties and taxes on zone products sold to the domestic customs territory
n Concession fees for other facilities (port, power plant, and so on), linked to zone development

Costs
n Wage bill of government workers needed to regulate zone activity or operate the zone and
other operating expenditures
n Public sector capital outlays for external infrastructure (and internal infrastructure and facilities in
the case of a publicly developed zone)
n Import duties and charges lost from smuggling
n Taxes forgone from enterprises relocating from the domestic customs territory to the zone
n Subsidies

in remote areas requiring massive public sector and work conditions, environmental impacts, and
outlays. A much cited example is the Bataan EPZ in related factors. In recent years, the advocacy efforts
the Philippines, which required the construction of of trade unions and non-governmental organizations
a $25 million dam to provide water to zone enter- and improved enforcement by the International
prises (Warr, 1989). In recent years, however, public Labor Organization have had a positive impact in
infrastructure development costs have been reduced improving labor policies and practices within zones.
through better location and planning of zones and In many important respects, significant headway
associated infrastructure, and a greater reliance on has been made in dismantling the anti-union and
the private sector to develop and operate zones. labor-suppressing aspects of several EPZ laws. Most
zone-sponsoring countries have ratified relevant ILO
conventions, and national labor legislation applies to
Social and Environmental Impacts EPZs in most countries. There is a general realization
that a zone’s competitiveness in attracting quality
investors is largely based on the productivity of its
Labor Standards, Pay, and Working
workforce and labor-management practices.
Conditions

Since the onset of zone development in develop- Nevertheless, significant issues remain with some
ing countries, concerns have been raised about countries, as documented by the ILO (2003) and
the impact of zones on labor, particularly in terms International Confederation of Free Trade Unions
of gender, wage levels and benefits, worker rights (ICFTU, 2004):

39
n Restrictions on the freedom of association according to the size of firms, nationality, industry,
and collective bargaining (in Bangladesh, the and labor market conditions (Madani, 1999).
Dominican Republic,15 Nigeria, Pakistan, Occupational health and safety practices are bet-
Panama, Sri Lanka, Egypt) ter with foreign multinationals inside zones than
domestic enterprises outside. What is more telling
n Bans on the right to strike (in Bangladesh, Na- is that the adverse labor and social issues are almost
mibia, Zimbabwe, Nigeria,16 Panama, Turkey17) wholly associated with countries featuring programs
developed and run by the government, especially
n Non-observance of national labor legislation older zones catering to “low-end,” apparel-assembly
within zones (in Islamic Republic of Iran, operations.
Sudan).

Even where policies are ILO-consistent, there are Human Resource Development
discrepancies in the implementation of those policies One of the positive impacts expected of EPZ
in some zones. These include weak labor inspection development is workforce upgrading and skills
practices, intimidation of workers, limited access development, both through formal training and
to zones by organizers, formation of company- apprenticeship programs, and “learning by doing.”
controlled unions, and other anti-union practices However, some claim that anticipated benefits have
(ICFTU, 2004). Several countries have instituted fallen short in many zones because EPZ produc-
special mechanisms for dialogue and dispute resolu- tion processes typically involve basic skills and low
tion of labor issues. Zone authorities in the Philip- technology (ILO, 2003). There is little incentive for
pines, Singapore, and Trinidad and Tobago have firms with short time horizons to invest in productiv-
trade union representatives on their boards (ILO, ity enhancement and skills development. The learn-
2003). ing that does take place may be limited to industrial
discipline, work habits, and routine. Labor is often
There are continuing concerns regarding work seen more as a cost to be contained than as a resource
conditions and social protections, including women’s to develop (UNCTAD, 2002).
rights in some countries. Some headway has been
made in respect to gender discrimination and gen- Other assessments, however, are quite positive about
der-related barriers in zones, including equal pay, the knowledge spillover effects of EPZs, especially
pregnancy, and childcare. Mexican legislation, for those catering to higher value-added or knowledge-
example, now explicitly prohibits discrimination intensive industries (Madani, 1999). The Penang
on the basis of pregnancy. But gender discrimina- Skills Development Centre in Malaysia, for example,
tion continues in some zones, especially in terms of is widely recognized as a very successful model of
unequal pay, inadequate rights during pregnancy, EPZ company-sponsored skills development. Rhee
suitable working hours, and forced dismissals when (1990) notes the sharp productivity improvements
women reach the fourth month of pregnancy. The among workers in Dominican zones in the first few
ILO (2003) indicates there are difficulties in Ban- years of employment. An emphasis on developing
gladesh, Honduras, Indonesia, Madagascar, Mexico, human resources is especially evident in zones in
Senegal, and Sri Lanka with working conditions, tight labor markets, as seen among the Thai Board of
hours of work, occupational health and safety, and Investment enterprises in the mid-1990s. In addition
related issues. to the benefits of industrial work discipline for new
Despite the seriousness of these issues, the prepon-
derance of evidence suggests that they may not be 15 The Dominican Republic government has since reasserted the
as widespread as noted by the ICFTU, and concern freedom of workers to join trade unions and engage in collec-
tive bargaining. There are 148 trade unions operating within the
only a fraction of the more than 100 zone programs industrial free zones in the country.
around the world. Evidence also suggests that average 16 Nigeria bans strikes or lockouts for a period of 10 years following
set up of a company in a zone (ICTFTU, 2004).
wages are higher at EPZ enterprises than outside 17 Turkey has evidently removed the ban against strikes within its
(Kusago, and Tzannatos, 1998). But wage rates vary free zones, but further information is not available.

40
 Ta bl e 17

Zones as Catalysts and Enclaves

Zones as Catalysts Zones as Enclaves

Republic of Korea Dominican Republic

n Equal footing policies extended to firms in domestic n Zones purchase only 0.001% of material inputs from
customs area enhancing competitiveness domestic customs area
n Almost $200 million of local capital and intermediate n Efforts to stimulate backward linkages are unsuccessful
goods purchased by zone firms per month n Domestic economy remains protected by high average
n Liberal FDI policies tested in free zones before tariffs, lack of competition, NTBs
extended countrywide

Jordan Tunisia

n Automated customs systems piloted and implemented in n Single factories, import-dependent with limited backward
the Aqaba SEZ prior to countrywide roll-out linkages
n Aqaba SEZ implements on-line, simple business registration n Domestic producers protected by high average tariffs
n Aqaba SEZ customs forces merged with national customs (34%), NTBs, lack of competition
to upgrade latter’s capabilities

Kuwait

n FTZ pilot for private infrastructure provision outside utilities

n FTZ law liberalizes foreign ownership restrictions; later
extended to countrywide FDI law

entrants to the workforce, typical of EPZ labor, skills “priority sector” status (Williams, 1995). Adverse
development of local middle managers has been an environmental impacts have also been raised with
enormous catalyst for technology diffusion. In the respect to older EPZs in Sri Lanka, the Dominican
Philippines and Mauritius, for example, local owner- Republic, and some EPZ factories in Mauritius.
ship of EPZ and other export enterprises increased
significantly as managers left foreign companies to In evaluating environmental impacts, however, a
start their own firms. distinction needs to be drawn between countrywide
single factory EPZ programs, as in Mexico and Mau-
Environmental Impacts ritius, and industrial park-style zones elsewhere. It is
much harder for governments to adequately enforce
The experiences of the Mexican maquiladora plants environmental standards for EPZ plants dispersed
are probably the most cited examples of the environ- around a country, as exemplified by the Mexican
mental degradation linked to EPZ development. As experience. Industrial park-style zones, especially
growth of the maquiladora plants far outpaced the private zones and more modern zones, on the other
ability of border cities such as Tijuana and Juarez hand, offer purpose-built facilities that are specifi-
to provide necessary waste treatment infrastructure cally tailored to the needs of target industries. These
and facilities, air and solid waste pollution quickly projects have a much better environmental record
became a health hazard for nearby populations. This due to zone-specific environmental regulations with
was compounded by weak monitoring and enforce- more effective implementation, planned facilities for
ment capabilities of national and local environmental waste treatment, and a realization that effective man-
authorities and a perception that environmental laws agement of the environment is a key selling point to
could be weakened in the maquilas because of their investors.

41
Special Economic Zones and Ireland, and Malaysia, deliberate efforts were made
to integrate zones into national economies at some
Countrywide Reforms point in their development process. Zones were used,
Some economists suggest that special economic variously, to facilitate a broader export orientation,
zones are a “second-best solution” to compensate for transfer technology, and improve the overall business
the anti-export bias of trade policies and other policy environment by extending best practice policy.
distortions typical of many developing countries.
Using different hypotheses and parameters, econo- The process of integration has typically been
mists have concluded that zones lead to economic undertaken by extending “equal footing” policies
distortions (Hamada, 1974) and, conversely, that to domestic suppliers of capital and intermediate
the establishment of a zone improves a country’s goods. In Taiwan (China) and the Republic of Korea,
well-being (Young and Miyagiwa, 1997). At a governments provided local producers with efficient
public policy level, the fundamental debate has been duty-free access to inputs that they supplied to
whether special economic zones promote country- zone-based firms. Local producers, including smaller
wide economic policy reforms by serving as “demon- businesses, received tax credits and rebates on duties
stration areas” or catalysts, or whether instead they paid on imported materials used in products sold
act as “pressure valves” for unemployment, reducing to zone-based firms. In the Republic of Korea, local
the incentive to reform and, thereby, diverting re- suppliers were able to import components on the
form energies (Table 17). A 1992 World Bank study basis of the original letters of credit of the zone-based
cautioned against the possibility that EPZs could be firms. Another important “transmission and integra-
used by developing countries to “muddle along with- tion mechanism” in these and other countries was
out reforms,” and stressed the need to use zones as the extensive use of sub-contracting by zone-based
a supplement to countrywide reform, as opposed to firms to local producers. Zone-based firms provided
creating isolated free market enclaves (World Bank, materials, technical assistance, and financing as part
1992). of the sub-contracting arrangement. These were
supported by broader trade and investment reforms
In this context, the experiences of the Republic of that exposed domestic firms to competition and
Korea and the Dominican Republic offer an in- enhanced competitiveness, and focused programs on
formative contrast. The Republic of Korea is an establishing backward and forward linkages between
example of a country where establishment of the zone-based firms and domestic enterprises.18
EPZ program in 1970 spearheaded broad reform and
structural transformation of the overall economy. By China, Malaysia, Jamaica, Kuwait, and Jordan have
the 1980s, almost 35 percent of total consumption used zones as demonstration areas to test the impact
of equipment and components of EPZ firms was of new policies and approaches designed to improve
bought locally. The Korean EPZs purchased almost the business environment. The Chinese SEZs, for
$200 million of locally manufactured capital and example, experimented with market-oriented FDI,
intermediate goods per month (UNCTC, 1991). In land, and tax policies before extending them to all
contrast, 30 years after the establishment of the first enterprises. Costa Rica used zones as efficient mecha-
industrial free zone in the Dominican Republic, the nisms to attract foreign investment prior to more
500 zone firms purchase no more than 0.01 percent broadly extending these approaches to enterprises.
of their material inputs from the domestic customs
territory. Very few zones coexist successfully with a
highly protected domestic economy (Schrank, 2001). 18 In Taiwan (China), the Republic of Korea, and Ireland, local
authorities promoted personnel exchanges, supported training
efforts, and provided technical assistance to potential suppliers.
Why are some countries able to use special economic The Irish program to increase linkages included the technical
zones as demonstrators of best practice and catalysts departments of local universities. The program also encouraged
purchasing managers of export-oriented firms to work with local
of reform and others are not? Perhaps some coun- suppliers to help them achieve the required quality standards
tries have consciously viewed zones as mechanisms and delivery times (Jenkins, Esquivel and Larrain, 2002). In
to change their economies and others have not. Singapore, the Local Industry Upgrading Program created in 1986
had 30 multinational corporations, 11 large local firms and 670
In countries as diverse as the Republic of Korea, domestic suppliers by 1999 (Sanchez-Ancochea, 2004).

42
 Box 9

Difficulties in Establishing Industrial Linkages:

The Case of the Dominican Republic

A backward linkages program in the Dominican Republic sponsored by the United States Agency for Interna-
tional Development illustrates the challenge some countries have experienced in developing linkages with EPZs.
While feasibility studies revealed abundant EPZ demand for textiles, precision plastic parts, metal stamping,
machine shops, and tool, mould and die making, backward linkages failed to develop.
Among the most important reasons:
n The relevant sectors frequently did not exist as the Dominican Republic never made significant inroads into
the manufacture of capital and intermediate goods.
n Local producers generally failed to meet world market standards for price, quality, and delivery terms.
n Local manufacturers frequently had no interest in supplying EPZs because they were satisfied with current
operations and profitability levels.

Source: Schrank (2001).

In Jamaica, high-speed telecommunications services industry.” The Dominican Republic is a case in point
were de-monopolized within the Montego Bay Free (Box 9). In larger markets, where a solid industrial
Zone prior to telecommunications deregulation foundation has already been established, backward
countrywide. The new SEZ regimes in Panama and linkages are more successful. In general, backward
India are being used to test ILO-consistent labor linkages (as measured by net exports) are stronger in
policies that are more flexible and market-oriented larger economies than in smaller ones.
than current approaches.

Special economic zones in a number of Middle East-

ern countries are being used to pilot dramatic liber- Lessons Learned: Common
alization in foreign investment ownership policies. Obstacles to Zone Success
In Kuwait, such policies were originally restricted to
the Kuwait FTZ and are being extended generally The economic and financial impacts of special eco-
to FDI in the country. New legislation in India and nomic zones, especially EPZs, have been extensively
Panama aims to use SEZs to remove labor market documented. A recent review of cost-benefit analy-
rigidities and promote ILO-consistent approaches. In ses of selected Asian EPZ programs applying the
the Aqaba SEZ, automated business registration and “enclave model approach” showed that EPZs in the
customs systems first fast-tracked and proven in the Republic of Korea, Malaysia, Sri Lanka, China, and
zone are now more broadly applied in Jordan. Indonesia are “economically efficient and generate
returns well above the estimated opportunity costs of
Schrank (2001) suggests that EPZs fail to become the respective countries” (Jayanthakumaran, 2003).
“bridges to structural reform” in small markets Only in the case of the Philippines were the results
or where an import-substituting industrialization negative due to the high government infrastructure
approach has resulted in inefficiency and lack of costs and subsidized utilities entailed in developing
competitiveness. In these cases, EPZs remain iso- the Bataan EPZ (Warr, 1990). Other assessments
lated enclaves and “grow at the expense of national measuring the dynamic impacts of EPZs (in addition

43
to static effects) find that the benefits of Asian zone
development were even greater. Sinclair (2001), Tab l e 1 8
for example, concluded that zones act as “a conduit
for transition to a stable and open economy.” He Obstructed Zone Examples
found that on average, a zone contributes about
0.52 of a percentage point towards the per capita Partial Performers Severely Obstructed
GDP growth rate of a given country. Africa Africa
Dakar, Senegal Senegal
These analyses fail to capture the whole picture for Walvis Bay, Namibia Namibia
Monrovia, Liberia Liberia
two reasons: they cover only Asian zones, arguably Athi River, Kenya Côte d’Ivoire
the most successful in the world, and they include Congo, Dem. Rep. of
only government-owned and operated zones.
Asia Asia
Systematic assessments of zones in other regions Kandla, India Pakistan
are scarce; evaluations of the economic performance Bataan, Philippines
of privately owned and run zones relative to public
Other Other
ones have yet to be undertaken. Zolic, Guatemala Ukraine
Moin, Costa Rica Moldova
Zone development initiatives around the world have Puerto Cortes, Honduras
Cartagena, Colombia
faced a wide array of difficulties, hampering zone San Bartolo, El Salvador
performance to the degree that they are described Aden, Yemen, Republic of
as “obstructed zones.” These can be divided into
two categories: “partial performers,” in which some
but not all zones within a development program
were beset by serious difficulties, and “severely competitive pressures from new private zones and
obstructed,” in which performance has suffered forced to operate on a cost-recovery basis. The same
program-wide (Table 18). approach was also implemented in India and the
Philippines; in the latter case, government-run zones
The original wave of government-developed and were replaced mostly by private ones and the Philip-
-operated industrial free zones in Central America pine Economic Zone Authority has ruled out the
faced a host of severe obstacles as they pioneered development of new government zones.
the application of SEZs in developing economies.
As a result, both the Zolic Free Zone in Guatemala The impediments faced by EPZs in sub-Saharan
and the Moin Free Zone in Costa Rica were partial Africa have been more program-wide in nature, with
performers, with the latter attracting only three firms some notable exceptions. The Dakar Free Zone in
in its first eight years. Another partial performer, Senegal was beset by an assortment of constraints,
the Bataan EPZ in the Philippines, was kept from which ultimately resulted in “severe obstruction”
maximizing its potential by the need for massive in- (Box 10). Successful zone activity in Africa is very
frastructure investments, including the construction possible, however, as programs in Mauritius, Mada-
of a $25 million dam. gascar, and Kenya have all performed extremely well.

The mixed results of early Latin American and East The majority of economic zone programs in the
Asian EPZ programs prompted adjustment and re- Europe and Central Asia region have enjoyed at least
structuring in the projects that followed. Many pub- moderate success, with Poland, Bulgaria, and Roma-
lic sector free zones in Latin America—Costa Rica, nia leading the way. Other programs (particularly in
Colombia, the Dominican Republic—were divested the CIS) have faced more substantial performance
to private investors; in Costa Rica and Colombia, the barriers, however. In Ukraine, problems with both
government has avoided public zone development location and facilities investments and public sector
altogether. In El Salvador, Honduras, Nicaragua, and management capacity have undermined operations,
Guatemala, government-run zones were opened to and a significant proportion of zone investment

44
 Box 10

Obstacles Faced by the Dakar EPZ

Senegal was a pioneer in the creation of free zones, establishing its EPZ in 1974. The project generated sig-
nificant hopes, as Senegal expected to profit from the de-localization of enterprises from industrialized countries,
in the same manner as countries of the Maghreb, the Caribbean, or Southeast Asia had earlier. The scheme’s
promoters sought to exploit Senegal’s geographical position as well as the port and airport facilities offered by
Dakar.
In 1999, 25 years after its creation, Senegal’s authorities closed the Dakar EPZ, which at the time was home to
just 14 active enterprises. The principal obstacles to success for this program included:
n Excessive bureaucracy involving different institutions in the country, especially customs;
n Unnecessarily long delays in obtaining necessary permits (often more than one year);
n Unrealistic goals imposed on potential investors, both with regard to jobs to be created (each company was
required to employ at least 150 people) and to initial investment;
n Poor reputation of the local workforce, which was labeled unproductive and overly expensive;
n Elevated cost of other factors of production (energy, water, communications);
n Rigid and constraining labor regulations; employment contracts were permanent and employers did not have
complete freedom to recruit the people they wanted.

Source: Cling and Letilly, 2001.

seems to be the result of relocation rather than new maximum of 25 percent of onsite costs). In addi-
endeavors. tion, most private zones (the Dominican Republic
and the Philippines are good examples) are required
by law to provide offices and other facilities for
government authorities to be based onsite. Govern-
Are Private Zones Better Performers? ment costs of administering zone programs are also
reduced in a number of countries. Most private zones
Are privately owned and operated zones better eco-
in Latin America and the Philippines, for example,
nomic performers than public ones? Unfortunately,
pay overtime and other special benefits for customs
this is difficult to establish given the lack of analysis
officers and other officials to remain onsite on a 24-
of this issue. But available data suggests that—from
hour basis. In other programs (Kuwait, Costa Rica,
the perspective of a host country—private zones are Uruguay, Colombia), zone operators assume specific
both less expensive to develop and operate and yield “regulatory functions” such as inventory counts on
better economic results. behalf of customs authorities, thereby further reduc-
ing administrative costs of governments.
Private zones usually require less public funding
to establish and operate, mainly because private Public expenditure cost savings through private zone
developers finance onsite infrastructure and facili- development depends critically on where private
ties; governments are required only to provide offsite zones are located and whether they are subject to
(external) infrastructure and facilities, which are only any designation criteria and development controls.
a small part of total development costs (usually a When private EPZs were first developed in Mexico

45
and Central America in the 1980s, they were largely
uncontrolled developments with no specific zoning Box 11
controls and land use plans. As a result, rapid growth
of private zones strained public infrastructure, facili- Private Free Zone Development in
ties, and services. In the Dominican Republic (Box the Dominican Republic
11), for example, the proliferation of private zones in
the early 1990s resulted in growing calls to ban new
private zones.
The Dominican Republic’s 22 public zones were
established primarily as a means to encourage re-
Most modern zone programs, in contrast, have gional development outside the capital city of Santo
developed zone designation criteria and development Domingo. The private sector zones, which today
controls whose main aim is to ensure that new zone number 31 (including joint public-private ownership),
projects are located close to existing public infra- are, instead, heavily concentrated around the capi-
structure and facilities, thereby reducing government tal area, which is the country’s largest population
outlays. Box 12 outlines designation criteria applied center and is situated near critical port and airport
to private industrial estates and EPZs in Thailand as infrastructure. There are currently 194 companies
an example. operating in the public zones and 326 in private or
joint ownership zones.
On the whole, privately operated zones tend to offer Surveys of zone enterprises highlight the role of the
better facilities and amenities, command higher private sector in upgrading the facilities and services
required of export enterprises, particularly those in
prices from tenants, and attract “higher end” types of
manufacturing (Rhee, 1990). The private zones,
activities. Because private zones are run on a cost-
driven by market forces, are located primarily in the
recovery basis, they are generally more responsive to vicinity of Santo Domingo, providing access to the
tenant needs, and therefore provide a wider range of country’s highly qualified and productive labor force,
property management services and amenities, includ- as well as access to high quality transportation
ing specialized on-site telecommunications facilities, infrastructure.
health clinics, day care centers, and business support Most important, zone enterprises have demonstrated
services. a willingness to pay higher prices for their space
(in some cases, up to three times higher) in return
Private zones are generally able to command higher for high-quality services and infrastructure facilities.
rates. For example, standard factory building lease The private zones boast quality telecommunications
rates in the private industrial free zones in the Do- services, business support services, and manufactur-
minican Republic are up to three times higher than ing and office space.
in government-run zones. The preference for the
market to locate in better configured and run private
zones is common to many other countries where pines, for example, private zones accounted for over
such a choice exists, including Vietnam, Thailand,
70 percent of the $7.18 billion in total zone exports
the Philippines, Lithuania, El Salvador, Kenya, and
registered in the first quarter of 2004. In El Salvador
elsewhere. Most private zones also tend to have a
and Honduras, over 90 percent of exports and
better package of social and environmental facilities
employment take place in private zones. In Thailand
than government-owned zones. Due to physical,
budgetary, and operational constraints—as discussed and Vietnam, most foreign direct investment is in
further in the next section—many public sector private, rather than public, industrial estates/indus-
zones have crowded, poorly designed, and inad- trial zones and EPZs; private zones also account for
equately maintained facilities. the majority of exports. Outside East Asia, govern-
ment-developed and -run zones are generally less
Many private zones appear to be better economic profitable than their private counterparts, and have
performers than government zones. In the Philip- a worse track record in terms of negative social and

46
 Box 12

Private EPZ and Industrial Estate Designation Criteria in Thailand

Qualifying Areas Minimum area of 80 hectares. Zones must be located close to

infrastructure facilities and minimize public infrastructure requirements.
Projects located in Bangkok and Samut Prakan (considered over-
industrialized) will not be promoted.
Factory Space Not less than 60 percent and not more than 75 percent of the zone area
must be used for factories.
Minimum Road Two-way main roads: minimum 18 meters wide, of which not less than
Standards 12 meters is for traffic, with a shoulder of 3 meters on each side.
One-way main roads: minimum 13 meters wide, of which not less than
7 meters is for traffic, with a shoulder of 3 meters on each side.
Secondary roads: minimum 8.5 meters for traffic, with a shoulder of
2 meters on each side.
Sewage and Waste A wastewater treatment plant must be set up as approved by the
Water Disposal Board of Investment.
Refuse Disposal Refuse storage and incineration areas must be sufficient with suitable
refuse collection methods.
Estate Usage Factories must be kept apart from residential and other business areas.
Environmental Protection To prevent factories which generate smoke and foul odors from
being located in the industrial zones, factories in the industrial zones
must be approved by the Board of Investment.
Public Utilities The supply of water, electricity, telephones, and post offices must
be adequate.
Time Constraints Within two years of the date of issue of the promotion certificate,
25 percent of the land area must be developed with full public services
and utilities.

environmental impacts as well. These examples However, more systematic analysis at the individual
provide anecdotal data suggesting that private zones zone level needs to be undertaken to validate these
are not only less costly to develop and operate than premises.
public zones, but yield better economic impacts, too.

47
Lessons learned and
implications for zone
development

The previous discussions reviewed development Policy, Incentive, and Administrative

patterns and economic impacts of zones worldwide. Frameworks
That review suggests that SEZs have not been uni-
formly successful, and the most successful zones tend To a great extent, zone initiatives determine their
to be concentrated in East Asia and Latin America. own destiny from the start, with the establishment of
The majority of African zones have found it difficult policy frameworks, incentive packages, and various
to replicate this success, despite significant technical other provisions and bureaucratic procedures. Several
assistance and funding from donors. What accounts main policy issues commonly related to sub-optimal
for the remarkable variance in zone performance zone performance include:
between and within regions? The discussion below
identifies the major “lessons learned” from zone n Uncompetitive fiscal incentives
development, sets out key guidelines to maximize the
success of a zone development strategy, and evaluates n Restrictive controls on zone activity and cum-
the current and future rationale for zones. bersome regulations

n Exclusion of merchandise processed in zones

from entry under bilateral and regional trade
What Determines Zone Success? agreements.
Three decades of zone development experience sug-
Uncompetitive fiscal incentives. The package of fis-
gest that the failure or success of a zone is linked to
cal incentives offered by EPZs is increasingly similar
its policy and incentive framework and the way in
around the world. Over the years, this package has
which it is located, developed, and managed.
expanded from simple import duty exemptions to a
combination of corporate income tax reductions or
holidays, exemptions from most indirect and local

48
taxes, unrestricted repatriation of capital and profits, Other weaknesses are found in terms of elabo-
and unrestricted management of foreign exchange rate procedures and excessive documentation. For
earnings. Zones in the Middle East and North Africa example, until recently, the investment application
region often go further, offering personal income tax for zone status in Egypt was 40 pages long, and
exemptions for expatriate workers19 and zero corpo- investment approvals took anywhere from 12 to 24
rate income taxation in perpetuity. months.

Experience shows that the use of generous incentives n Weak administrative bodies. The lackluster
packages to offset other disadvantages (such as poor performance of some programs can also be
location and facilities) is ineffective in terms of over- traced to weak government bodies established to
all zone performance, due in large part to the increas- develop and operate zones, and to regulate zone
ing commonality of zone investment incentives in activity. In many countries, zone authorities lack
recent years. Moreover, the reliance of zone programs necessary powers and autonomy and are under-
on incentives with limited effectiveness (such as funded or poorly managed. Decision-making
income tax holidays) imposes significant costs on in older zone authorities in Jordan, Syria, and
government budgets with little benefit (Box 13). Egypt, for example, is excessively centralized;
alteration of a land lease rate usually requires
The negative impact of restrictive policies and approval of the country’s cabinet. Some are
practices embedded in many zone programs has subject to political influences and are chronically
been proven even greater than that of uncompetitive overstaffed. At one point in Egypt, for example,
incentives schemes. Examples include: the Egyptian General Authority for Investment
and Free Zone had over 4,000 employees. Still
n Restrictive treatment of real assets. For ex- others lack control over their budgets and have
ample, Jordanian zone-based firms are unable to restrictive civil service limitations on remunera-
own land within zones, hold title to leasehold tion and employment conditions.
improvements, or dispose of real assets after lease
expiration. As a result, firms cannot use real as- n Trade exclusions on zone merchandise. Some
sets for collateral financing and must hand over bilateral and multilateral free trade agreements
such property to the Free Zones Corporation (FTAs), such as the Arab FTA and MER-
after lease expiration. COSUR in Latin America, exclude products
produced in free zones. Products processed in
n Inappropriate application of extraterritorial- these zones cannot qualify for entry under these
ity principles. Many Arab special economic agreements. Products produced in Arab zones
zones have an extreme concept of extraterritori- are not granted national certificates of origin;21
ality. As a result, zone products are not granted preferential access through the MERCOSUR
national certificates of origin. agreements is denied to products produced in
zones in qualifying countries.
n Performance requirements. Senegalese zone-
based firms were subjected to severe employment
creation and minimum investment require- 19 Free zone companies in the United Arab Emirates zones are able
to import expatriate labor and pay them wages and other benefits
ments. In Liberia, foreign investors faced inordi- below that mandated by law for the country’s citizens. This has
nately high initial investment requirements. created artificial competitive advantages and increased dependence
on foreign labor.
20 This refers to free zones in Jordan, not private industrial estates,
n Prevention of private sector development of most of whom have QIZ status. In Egypt, private free zones refer
zones. Jordanian and Egyptian laws provide a to single factory zones.
21 Some free zones—such as the Jebel Ali Free Zone in Dubai—rou-
total government monopoly for zone develop- tinely ignore these provisions and provide national certificates
ment, financing, operation, and regulation.20 of origin to products processed in the zone destined to regional
markets.

49
 The Katunayake EPZ in Sri Lanka was poorly de-
Box 13 signed, resulting in congestion, over-crowding, and
social unrest. The design of the Kingston Free Zone
Why Are Tax Holidays an in Jamaica did not provide enough open space and
Ineffective Incentive? social amenities, resulting in over-crowding and con-
tinuing labor problems. Other zones were over-devel-
A tax exemption is of little benefit if the company is
oped, much ahead of investor demand. For example,
not making profits, which is usually the case in the in its first two years of operations the Zolic Free
initial years of operation. Firms that are profitable Zone in Guatemala constructed over 24,000 square
from the outset might not have needed incentives in meters of factory space, which sat empty without
the first place. adequate marketing support (TSG, 1991).
Tax holidays encourage income shifting from
non-tax-exempt enterprises to tax-exempt companies Inadequate coordination and the lack of effective
through transfer pricing of inter-company tran- partnerships between private zone developers and
sactions. governments in terms of external infrastructure pro-
Tax holidays reduce the appeal of debt financing
visions have also caused problems in the past. Most
of capital investment by removing the benefits of private EPZs and industrial zones in Vietnam, for ex-
interest deductibility. This equity funding bias is ample, sat vacant because local and national authori-
accentuated if dividends of tax-exempt firms are ties could not provide road and other infrastructure
also exempt from personal income tax. connections to the site.
Tax exemptions tend to benefit investments with a
short-term time horizon. Longer-term projects that One of the most significant factors accounting
generate profits beyond the tax holiday period do for the financial and economic underperformance
not benefit, unless firms are permitted to accrue and of some zones is the once-common practice of
defer asset depreciation deductions beyond the tax subsidizing land and building lease and sale rates.
holiday period. Many government zones do not operate on a
Tax exemptions do not benefit investors from many cost-recovery basis, leading to drains on national
OECD countries that tax income on a global basis, treasuries. This is exacerbated if water, power, and
unless a “tax sparing” agreement is in place. other utility services are also subsidized. The lack
of adequate funding has meant that many public
zones are inadequately maintained (as exemplified
by zones in the Dominican Republic), and/or do not
have robust promotional efforts.
Physical Design, Development, and
Management Practices In summary, the most common obstacles to success
for zones are:
Difficulties in harnessing the full potential of zones
are often linked to poor site location, design, and n Poor site locations, entailing heavy capital
development practices. Most government-developed expenditures
zones, for example, were located in remote areas to
act as growth poles. The location of many others n Uncompetitive policies—reliance on tax
reflected political rather than economic and technical holidays, rigid performance requirements, poor
factors. While the Philippines Bataan EPZ is prob- labor policies and practices
ably the most common example of this, it is certainly
not alone. The Cartagena Free Zone in Colombia n Poor zone development practices—inappropri-
was located on a swamp resulting in extremely high ately designed or over-designed facilities, inad-
capital development costs. The San Bartolo Free equate maintenance and promotion practices
Zone in El Salvador had to be subsidized to offset
high development costs due to poor site conditions. n Subsidized rent and other services

50
 structural reforms that enhance the competitiveness
Ta bl e 19 of domestic enterprises and facilitate the develop-
ment of backward and forward linkages.
Export Development Mechanisms

Mostly Export-Oriented Enterprises Zone Concepts

EPZs
Bonded manufacturing warehouses A critical issue that needs to be addressed in the con-
figuration of a zone development program is the type
Partial Exporters
Inward processing relief (duty suspension) of zone to be promoted (Table 19).
Duty drawback/rebate
International experience suggests that the recom-
Indirect Exporters
Common bonded warehouses mended approach is to adopt a SEZ model with the
Duty drawback following features:
Mechanisms for Infrastructure Provision
EPZs n Permit industrial estates to host SEZ enterprises
Industrial estates/industrial parks as well as those licensed under other regimes.
Industrial zones The preferred approach is to allow all enterprises
to co-locate within the same area, although the
development of separately fenced-off areas solely
for zone enterprises (as in Philippine and Thai
zones) is an acceptable approach.
n Cumbersome procedures and controls
n Ensure that the SEZ regime is flexible, allowing
n Inadequate administrative structures or too a range of commercial as well as manufactur-
many bodies involved in zone administration ing activities. If properly supervised, a separate
commercial zone regime, as in Malaysia and
n Weak coordination between private developers Thailand, is not required.
and governments in infrastructure provision.
n Promote private rather than public development
of zones. International experience suggests that
private rather than public development of zones
Guidelines for Zone Development
increases the chances of success. Outside East
One of the clearest lessons learned from decades Asia and Dubai (United Arab Emirates), the
of zone development—particularly EPZ develop- vast majority of government-developed and -run
ment—is that zones cannot and should not be viewed zones have been consistently less effective than
as a substitute for a country’s larger trade and invest- their private counterparts.
ment reform efforts. They are one tool in a portfolio of
mechanisms commonly employed to create jobs, gen- However, the implementation of this approach
erate exports, and attract foreign investment, through requires greater administrative capabilities within
the provision of incentives, streamlined procedures, host governments to ensure adequate regulation and
and custom-built infrastructure. facilitation. In particular, facilitating private zones
requires the development of an appropriate legal,
But maximizing the benefits of zones depends on the regulatory, and institutional framework, including:
extent to which they are integrated with their host
economies. The static and economic impacts of zone n A legal framework that outlines private zone
development are suppressed when zones are oper- designation criteria, incentives and privileges of
ated as enclaves. They are multiplied when they are private zone developers and operators, and rights
accompanied by countrywide economic policy and and obligations of zone developers/operators and

51
 the government with respect to zone develop- developed to regulate economic activities within the
ment and operation; zone. The Authority has its own revenue officials (tax
and customs) that are better qualified, trained, and
n A public-private partnership framework for equipped than their national government counter-
zone development, outlining rights, responsi- parts. Staff capabilities have had to be upgraded to
bilities, obligations, and commitments of all adequately control duty-free retail sales and a special
parties with respect to all aspects of zone devel- income tax and VAT regime. Several SEZ authori-
opment, financing and operation, regulation, ties have contracted with private master developers
and promotion. to manage SEZ assets and facilities, mobilize private
investment, and reduce demands on government
Some countries have tried to encourage private services. In the final analysis, SEZ development ef-
zones without first developing an appropriate legal forts should be undertaken only rarely, and only by
and regulatory framework, instead relying on a those countries that have the requisite institutional
zone development agreement. The risk with this capabilities, expertise, and commitment to make
approach is that the terms and conditions of each them succeed.
zone concession may vary greatly, as in the case of
Vietnamese zones, and the zones may lack a firm
legal foundation. Core Policy Framework

The earlier discussion showed how the policy envi-

Should the development of other types of zones— ronment in a typical EPZ program has evolved over
including technology parks, research parks, and the years from simple customs duties abatement.
software development zones—be pursued? Best International experience suggests that a best-practice
practice suggests that there is a difference between policy and incentive framework needs to be stream-
the “hardware” and services offered by a zone and lined, encouraging zones to compete on the basis of
the “software” of incentives and privileges. Certainly, facilitation, facilities, and services, rather than on the
all types of zones should be permitted, offering provision of incentives (Table 20).
customized infrastructure, facilities, and services
tailored to the specific needs of target industries. The key elements of a best-practice policy framework
But as far as possible, all zones should have a com- include the following:
mon set of incentives and privileges, rather than
duplicating and overlapping regimes which can n Concept of extra-territoriality—As defined
result in revenue loss.22 in the Revised Kyoto Convention, free zones
should be treated as outside the domestic cus-
There is the final and unique case of the so-called toms territory, but should be eligible for national
“large format” SEZs. Should these be encouraged as certificates of origin and participate in trade and
a zone development mechanism? Certainly, large- market access agreements.
scale zones can have significant economic impacts,
particularly in terms of exports and foreign invest- n Private zone development—Private zones,
ment. The Subic and Clark freeports in the Philip- benefits, obligations, rights and public-private
pines, for example, together account for almost 10 partnerships for zone development are clearly
percent of national merchandise exports. The Shen- defined. Where government-run zones exist, the
zhen SEZ in China has attracted almost $30 billion legal framework should ensure that competition
in FDI and generates 14 percent of Chinese exports. among private and public zones is on a “level
SEZs can also be very effective in promoting the dif- playing field” and that public zones do not have
fusion of new policies, procedures, and governance unfair advantages (such as subsidies) which
structures. But administering and regulating an SEZ
regime is extremely demanding on governments.

In the case of the Aqaba SEZ in Jordan, for example, 22 Both China and Vietnam have run into difficulties with tax regu-
lation due to the existence of numerous zone regimes featuring
a new, 800-person regulatory authority had to be varied incentive packages.

52
Ta bl e 20

SEZ Basic Policy Framework

International Standard

Concept of Extra-territoriality Outside domestic customs territory

Eligible for national certificates of origin
Eligible to participate in national trade agreements/arrangements

Eligibility for Benefits No minimum export requirement

Manufacturers and services
Foreign and local firms
Expansions of existing enterprises
Private developers of zones

Foreign and Local Ownership No limitations

Equal treatment

Private Zone Development Clearly defined in legislation; specific zone designation criteria
Eligible for full benefits
Competition from government-run zones on a level playing field

Sales to the Domestic Market Liberalized

Provided on a blanket basis rather than case by case
Treated as import into domestic market, subject to payment of import duties and taxes

Purchases from Domestic Market Treated as exports from domestic market; enterprises eligible for indirect exporter benefits

Labor Policies Full consistency with ILO labor standards

Specialized dispute settlement mechanism

undercut private projects. The respective rights, ownership forms permitted. The best approach
responsibilities, and obligations of government is to maximize the flexibility of the regime by
and the private sector need to be defined to en- removing minimum export obligations (in line
able partnerships for zone development. with WTO requirements, analyzed below);
broadening the range of eligible activities
n Zone designation criteria—Physical devel- (subject to restricted or prohibited activities
opment standards and clear criteria for the enumerated on a “negative list”); removing any
designation of new zones are put in place. ownership restrictions; ensuring equal treatment
Generally, basic criteria include zone design and of foreign and domestic investments; and ensur-
environmental standards, financial and techni- ing that indirect exporter benefits and privileges
cal track record of the zone development group, are given to firms in the domestic customs
and minimum equity requirements by the zone territory that supply goods and services to zone-
developer. The objective is to guide, but pre- based enterprises.
serve, the flexibility of individual zone develop-
ment proposals, while optimizing the impact on n Labor regime—International experience
government funding for off-site infrastructure strongly suggests that the long-term competi-
connections. tiveness of a zone depends on the quality and
productivity of its workers. To achieve this, it is
n Eligibility criteria—The openness of an EPZ important that labor regimes are fully consistent
regime is defined in terms of minimum export with ILO standards and obligations, includ-
requirements and the types of activities and ing core rights of assembly, organization, and

53
 collective bargaining. At the same time, there The general consensus is that SEZ regimes are
should be the opportunity for freely negotiated consistent with the WTO so long as benefits are
labor productivity packages within zones and a not contingent on export performance, use of local
generally flexible and liberal labor market regula- content, or maintenance of a foreign exchange
tory framework. Additionally, the foreign worker balance; or primarily benefit a specific firm, indus-
employment regime should be transparent, yet try, or other interest. Zone regimes that have specific
discourage excessive dependence on foreign incentives linked to export performance—such as
workers at the expense of domestic ones. minimum export requirements, subsidized rent or
utilities, or a lower tax on export income—are not
compatible with WTO mandates and need to be
Incentive Framework
altered. In addition, some analysts conclude that
There has been a great deal of debate regarding the the broad exemptions of import duties and charges
types of fiscal incentives and other privileges at the granted to EPZ enterprises may constitute a pro-
heart of an SEZ regime. Countries are under pressure hibited export subsidy since firms operating under
to offer a generous package of tax and duty exemp- other regimes are permitted duty-free importation of
tions in order to keep pace with their competitors. only those inputs used in the production of goods.
The package of fiscal incentives has become almost This “excess” may be incompatible with the WTO
standardized among zones internationally—corporate (Granados, 2003).
tax reductions or exemption; duty-free importation
of raw material, capital goods, and intermediate in- The original deadline of January 1, 2003 in the Uru-
puts; no restrictions or taxes on capital and profits re- guay Round for the elimination of export subsidies
patriation; exemption from foreign exchange controls in developing countries has been extended to 2010.
(where applicable); no charges on exports; exemption The Doha Round established a set of procedures for
from most local and indirect taxes; and so on. developing countries to submit requests to extend
the original eight-year deadline in the SCM. Eligible
There is considerable evidence to suggest that some countries are those whose share of total world exports
of these are ineffective and a drain on public re- was below 0.10 percent in 1998–2000, and whose
sources. In particular, the use of income tax holi- gross national income was below $20 billion in
days and other differentiated corporate income tax 2000. To date, most of the thirty eligible developing
regimes has been widely abused. Some policies also countries have submitted requests to the WTO for
create explicit and implicit export subsidies, increas- extension of the deadline. While a few non-qualify-
ingly at odds in today’s rules-based trading system. ing countries such as Thailand have amended their
zone legislations (by removing mandatory export
Although SEZs do not appear in the WTO agree- requirements), most are attempting to delay confor-
ments, some of their provisions affect the zone mance with the SCM deadline on export subsidies.
incentive regime. In particular, the Agreement on
Subsidies and Countervailing Measures (SCM) poses The following are guidelines for design of a special
potential compliance problems for zones. Prohibited economic zone incentive framework:
subsidies are those conditional on export, or the use
of national rather than imported inputs (Box 14). n Leverage the introduction or reform of zone
Actionable subsidies, by contrast, may give rise to regimes as an opportunity to rationalize
consultations if they injure another WTO member’s income tax incentives. Ideally, this would result
domestic industry, nullify tariff concessions, or seri- in harmonization of zone corporate income taxa-
ously prejudice another WTO member’s interests. tion policies with national policies, or at least
These subsidies are, however, permitted under the make zone enterprise taxation comparable to
WTO, and are actionable only in that the affected that of “promoted industries.” The best-practice
parties have legal recourse under the WTO dispute approach for income tax incentives is to have
resolution mechanism. performance-based incentives within a country’s

54
 Box 14

Prohibited and Actionable Subsidies under the Uruguay Round

Prohibited Subsidies are non-agricultural subsidies that are contingent on export performance,
and subsidies that are contingent on the use of domestic goods in place of imported goods.
Examples of prohibited export subsidies are:
n Currency retention schemes which involve a bonus to exporters
n Internal transport and freight charges on export shipments that are more favorable than for
domestic shipments
n Provision of goods and services for export manufacturing more favorable than domestically
consumed goods
n Exemptions or allowances for direct taxes or other charges to exports or for export performance
n Exemption or remission of export taxes or indirect taxes in excess of those levied on products
when sold for domestic consumption
n Export credit guarantees or insurance at premium rates which are inadequate to cover the
long-term operating costs and losses of the insurer
n Export credit rates below the cost of funds.
Actionable Subsidies are those that are granted by a WTO member country that have “adverse effects” on
international trade, because they either cause injury to the domestic industry of another member country; nullify
or impair WTO benefits; or cause “serious prejudice” to the interests of another member country.

tax code rather than through special legislation of investment approvals, expatriate work permits, re-
such as EPZ regimes. moval of required import and export licenses, and so
forth, as well as accelerated on-site customs inspection
n Use zone regimes to advance de-monopoliza- procedures and automatic foreign exchange access.
tion and deregulation of telecommunications
and other utilities where applicable. Jamaica Special economic zone legislation is increasingly
and other countries have used their zone regimes incorporating features to increase the transparency
to accomplish this. and “automaticity” of programs. Default mechanisms
that confer automatic approvals within a pre-deter-
n Design an incentive framework that is WTO- mined time period have greatly accelerated the evalu-
compliant. This is best done by removing any ation and approval of EPZ applications. In many
export obligation and allowing zone enterprises countries, the investment approval examination
full access to the domestic market on a duty- process has been transformed from one of case-by-
paid basis. case evaluation of applications to a process of simple
registration of investment, meeting clearly defined
criteria. Applications are automatically approved by
Regulatory Framework utilizing a “negative” list of ineligible activities. A key
In contrast to the attention given to incentives, the global trend is the movement toward the establish-
importance of regulatory relief to investors is fre- ment of one-stop shops to consolidate and expedite
quently overlooked. Yet a crucial aspect of successful government approvals.
EPZ programs is the simplification and streamlining

55
There is also enormous scope to streamline customs and fast-track implementation of automated
procedures within special economic zones. In fact, customs systems, with proper inventory controls
many zones are used to fast-track customs automa- and audit systems, within the special economic
tion systems and the application of new policies. zones.
Because the imports of EPZ enterprises are physically
secured and do not enter the domestic customs ter-
ritory (unless subsequently sold to the local market), Institutional Framework
customs functions are simplified. They do not have Another major factor contributing to the outcome of
to assess and collect duties and taxes and focus on the zone program is the autonomy and effectiveness
ensuring that merchandise has not been improperly of the body charged with regulating zone operations.
diverted to the domestic customs territory. The While a wide range of institutional arrangements
main customs principles for zone operations are: have been used, international experience suggests
the rapid physical transfer of merchandise, reduced that success is dependent on the autonomy of the
documentation, and flexible physical controls during body (particularly over staff hiring/firing and control
processing. Generally, these are achieved by develop- over budgets); adequate funding; customer orienta-
ing a single declaration form to be administered by tion and ethos; powers over other government min-
customs; providing single, on-site inspection of zone istries; partnerships with private zone operators and
imports and exports to avoid redundant inspections; enterprises; and maximizing the role of the private
and developing enhanced enforcement techniques. sector in service provision.
The tools for a simplified customs regime are con-
tained in the Revised Kyoto Convention and various One element is particularly important, especially
WTO rules.23 in the context of the increasing number of private
zones: it is critical that zone authorities remain
The following are key guidelines for the development engaged in purely regulatory functions, and do not
of a best-practice zone regulatory framework: own, develop, or operate zones. As the experience
in many zone-sponsoring countries has shown,
n Install streamlined procedures for business conflicts of interest arise when regulatory bodies are
registration that embody a simple declarative in- also engaged in zone development activity, especially
vestment registration system rather than any sort when existing zones compete directly with new
of investment approval regime. Key elements private zones. Opportunities for perceived and actual
include: application to a single government of- conflicts of interest are multiplied when the entity
fice that provides the license; promulgation of charged with guiding and monitoring zone perfor-
a negative list of ineligible activities and other mance is simultaneously one of the zone operators.
explicit criteria for approval or denial; and a
default clause authorizing automatic approval Good-practice guidelines for the development of
of the application if no ruling has been issued an effective institutional framework ensure the
within the review period. following:
n Facilitate provision of secondary permits and n Sufficient autonomy of the zone authority,
authorizations. Additional permits—land, build- particularly over staffing, budgets, spending,
ings, labor, health and safety, and so on—can be and policymaking;
facilitated by vesting all such authorizations with
the zone authority rather than with other min- n Adequate authority by constituting an indepen-
istries and agencies. The zone authority should dent board comprised of key government minis-
have offices within each zone to perform these ters and private sector representatives reporting
services.

n Develop special customs rules and regulations

23 For example, customs valuation, harmonized system, and rule of
drawing upon WCO and WTO provisions, origin.

56
 to the highest level of government. Ideally, allow adequate planning and support of offsite infra-
private sector representatives to constitute the structure provision.
majority of board membership to ensure flex-
ibility, results-orientation, and customer-focus;

n A one-stop shop approach through legislation Outlook for Zone Development

that provides the body with single-point author- What is the outlook for special economic zones in
ity over other government agencies in core areas; the context of global integration and trade liberaliza-
tion? Some analysts argue that the rationale for zones
n The zone entity delegates, outsources, and priva- is diminishing as average tariff rates fall around the
tizes as many non-core functions and services as world. Others foresee a diminished role for zones
possible to focus on core activities. now that the Multi-Fibre Arrangement has been
dismantled, given the dependence of many zones on
Physical Development and Management the apparel and textiles industry.

The success of zones is critically linked to the way Nevertheless, the case for zones may actually be
in which they are located, developed, and managed. stronger in the context of trade liberalization. First,
Management of zones is enhanced when they are even with full implementation of the Uruguay
operated on a cost-recovery rather than a subsidized Round, tariff and non-tariff barriers will remain
basis, and are market-oriented and customer-fo- in most countries. Developing country exporters
cused. This is best accomplished when zone devel- will still need to compete with exporters in other
opment and operation are undertaken by private countries who are operating in a duty- and tax-free
sector groups on a commercial basis, rather than by environment. Second, even with lowered tariffs, anti-
government organizations that frequently are subject export biases will not be removed. Various policy dis-
to political pressures and funding constraints. At the tortions, procedural inefficiencies, and infrastructural
same time, the rapid proliferation of private zones inadequacies—many that can be directly addressed
can place significant, unanticipated costs on govern- only over the long term—will deter exporters. This
ments, especially in terms of offsite infrastructure places great importance on the continued develop-
and facilities, as exemplified by the Dominican ment of focused investment promotion and export
Republic, and more recently the Philippines and competitiveness mechanisms such as SEZs that can
Vietnam. provide a simplified regulatory environment.

The following are best-practice guidelines for the The prevalence of zones in industrialized countries
physical development of zones: with open economies also underscores the impor-
tance of the concept to competitiveness. The United
n Implement land use planning and zoning efforts States, with 266 foreign trade zones, is a particularly
in defined areas for industrial and commercial prominent example (Box 15). Many companies
development to guide the actions of private choose an FTZ location based on the advantages of
developers. operating in a flexible, duty-free environment. Oper-
ating costs are lower as a result of reduced insurance,
n Develop zone designation criteria in the zone security, and overhead costs. Cash flow is enhanced
law and implementing regulations to ensure by the ability to postpone duty payments until and
that private zones are conveniently located (near only upon entry into the domestic customs terri-
population centers and transportation hubs) tory. FTZs in the United States have been critical
and minimize offsite infrastructure development in enabling manufacturers to operate “just-in-time”
expenditures of government. systems. In fact, most vehicles manufactured in the
United States are located in FTZs or have facto-
n Establish a land use planning and infrastructure ries provided with FTZ status. Mechanisms such
development unit in the government to ensure as special economic zones that provide efficiency

57
 Box 15

Advantages of Using U.S. FTZs

n Improved cash flow through payment of duties upon shipment out of the warehouse/factory
instead of receipt into the facility;
n No customs duties on scrap, waste, or obsolete materials;
n Option of paying customs duties on the imported materials or the final product shipped from
the zones, whichever is less;
n No customs duties owed on the value to labor/overhead/profit incurred in zone processing
in the United States;
n No customs duties owed on exported merchandise;
n Ability to hold all goods in a duty-free environment until needed;
n FTZ may be used for quality control inspections to ensure that only merchandise that meets
U.S. specifications is imported and that duty is paid;
n Ability to consolidate all outbound shipments per week into one entry for customs purposes.

Source: National Association of Foreign-Trade Zones.

advantages are even more important with the advent reconfiguring themselves into efficient distribution,
of modern production and distribution concepts and production, and trade facilitation hubs to reduce
approaches, and the reduction of transaction costs. logistics costs in order to meet this demand from
international operations.
There is little doubt that zones must continue to
evolve in response to global integration, international There is also a continuing role for zones in many
trading rules, and the rise of regional FTAs. Zones countries to incubate and accelerate policy reform.
cannot and should not compete on the basis of fiscal In most developing country settings, the greatest
incentives, but rather differentiate themselves in scope may lie in introducing new customs control
terms of facilities, services, and most importantly, concepts. In others, zones might be used to side-step
streamlined procedures, and purpose-built technol- public or private monopolies in telecommunications.
ogy. International manufacturers have realized that In still others, such as the Korean SEZs which are
there is much greater scope to reduce logistics costs “English language-only,” zones may provide a better
than production costs. This can be accelerated within environment to attract foreign investment. This
a zone setting by reducing transaction processing demonstration effect is magnified through forward
times and paperwork requirements. Many zones, planning and participation of the private sector.
especially those that are privately run, are rapidly

58
Annexes

1. Acronyms and Abbreviations

2. Profiles of Zone Programs by Region

3. Bibliography
Annex 1
Acronyms and Abbreviations

CIS Commonwealth of Independent States MIGA Multilateral Investment Guarantee

EPZ export processing zone Agency
FDI foreign direct investment NTBs non-tariff barriers
FIAS Foreign Investment Advisory Service OECD Organisation for Economic
FTA free trade agreement Co-operation and Development
FTZ free trade zone QIZ qualified industrial zone
IBRD International Bank for Reconstruction SCM subsidies and countervailing measures
and Development SEZ special economic zone
ICFTU International Confederation of UNCTAD United Nations Conference on
Free Trade Unions Trade and Development
ICT information communications WCO World Customs Organization
technology WEPZA World Economic Processing Zones
IFC International Finance Corporation Association
ILO International Labour Organization WTO World Trade Organization
IT information technology

Note: All dollar amounts are U.S. dollars unless otherwise indicated.

60
Annex 2
Profiles of Zone Programs by Region

This annex includes six tables that summarize zone The regions profiled in the tables include: the Ameri-
activity in selected countries of the world’s major cas; Asia and the Pacific; the Middle East and North
regions.24 Africa; Western Europe; Central and Eastern Europe
and Central Asia; and Sub-Saharan Africa.

Ta bl e 2–1

Profile of Zone Programs in the Americas (selected countries)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

United States 1934 20 246a FTZ Japan, United Automobiles, petroleum, United States,
Kingdom electronics domestic

Panama 1948 2 8 FTZ, EPZ, United States, Transshipment/logistics, South America

Freeport Japan warehousing

Brazilb 1957 1 8 FTZ, EPZ, Japan, Warehousing and Brazil, Mercosur

Freeport Korea, Rep. of, assembly of electrical,
United States electronics

Colombia 1958 1 14 EPZ, Hybrid Japan, Petrochemicals, apparel, United States,

EPZ, Freeport Korea, Rep. of, electronics, services Mercosur
United States,
local, regional

(Continued)

24 The regional groupings of countries depicted in the tables are not

always the same as those used for World Bank Group regional
classifications.

61
Ta bl e 2– 1

(Continued)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Chile 1958 2 8 FTZ, EPZ, United States, Warehousing, duty Mercosur,

Freeport Brazil, Germany, free shopping United States,
EU, Canada Canada

Mexicoc 1965 2 107 Industrial United States, Automotive components, United States
Parks Japan electrical

Dominican 1969 20 38 EPZ United States, Apparel, health care United States
Republic Taiwan (China), products
Korea, Rep. of

Guatemala 1973 1 15 EPZ, Hybrid United States, Apparel United States

EPZ Taiwan (China),
Korea, Rep. of

Jamaica 1976 2 3 EPZ United States, Apparel, United States

Taiwan (China), call centers
Korea, Rep. of

Honduras 1977 2 22 EPZ, Hybrid United States, Apparel United States

EPZ Taiwan (China),
Korea, Rep. of

El Salvador 1976 1 15 EPZ, Hybrid United States, Apparel United States

EPZ Taiwan (China),
Korea, Rep. of

Costa Ricad 1978 0 139 Hybrid EPZ United States Semiconductors, United States
electronics, medical
supplies

Uruguay 1987 2 7 Hybrid EPZ Japan, United Logistics, trade, Mercosur,

States, regional electronics, call centers United States

Trinidad and 1988 17e 0 EPZ United States Warehousing, break United States
Tobago bulk, petrochemicals

Belize 1990 0 3 EPZ, FTZ Local Trading, apparel, food United States

Cuba 1997 5 0 EPZ Local Agro-processing Mercosur,

Venezuela, R.B. de

Puerto Ricof 1942 142 0 FTZ United States Pharmaceuticals United States

Argentina 1995 5 0 FTZ, Freeport France, Spain, Forestry, food EU, Brazil, United
Italy, Germany, processing, metals, States, Canada,
Chile, other EU, chemicals, petro- Mexico
United States, chemicals, fisheries
Canada, Mexico

(Continued)

62
Ta bl e 2–1

(Continued)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Peru 1991 4 0 FTZ Brazil, Chile, Textile, automotive, Brazil, Chile,

Uruguay, Bolivia, agribusiness Japan, China,
Japan, China, United States,
United States EU, Canada

St. Kitts 1978 1 0 EPZ United States, Apparel United States

and Nevis United Kingdom

St. Lucia 1979 2 0 EPZ United States, Apparel, sporting United States
United Kingdom goods

Bahamas 1955 3 0 Specialized United States, Financial United States

zones EU, Japan

Cayman 1967 0 1 Specialized United States, Financial United States

Islands zone United Kingdom

a. Foreign trade zones in the United States, although they are sponsored by a town, county, or a state government, are counted as “private” if
they have private investors.
b. Export processing zones in Brazil, other than the public Zona Franca de Manaus, were established in 1989.
c. In Mexico, the maquiladoras have been organized into industrial estates, and are therefore counted as private zones.
d. Source: ILO database. According to WEPZA and ILO, Costa Rica has 127 empresas de perfeccionamiento activo, and 12 EPZs.
e. Source: ILO database. These are designated free zone areas.
f. Puerto Rico developed the first modern export processing zones as industrial parks beginning in 1942, although they finally put the first tax
exemption laws in place in 1951. Source: Journal of Flagstaff Institute, August 2007.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

63
Ta bl e 2– 2

Profile of Zone Programs in Asia and the Pacific (selected countries)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Indiaa 1965 87 254 Freeport, EU Textiles, electronics, United States,

Software jewelry, leather, textiles, EU
Technology food processing,
Park, Export- software
Oriented Unit

Taiwan (China)b 1965 14 0 EPZ, Science Japan Electronics, semicon- Japan, United
Park, Soft- ductors, electrical, high States
ware Park technology

Korea, Rep. of 1970 9 1 EPZ, Science Japan Electronics, Japan, United

Park, Freeport, high technology States
Foreign Invest-
ment Zone

Malaysiac 1971 10 3 EPZ, Science Japan, Electronics, semicon- Japan, United

Park United States ductors, electrical, States, ASEAN
automotive parts

Philippines 1972 7 76 Hybrid EPZ, Japan, Electronics, semicon Japan, United

Freeport, Philippines, ductors, electrical, States, ASEAN
Software United States, automotive parts
Technology EU,
Park Korea, Rep. of,
Malaysia

Thailand 1972 5 27 Hybrid EPZ, Japan Electronics, metalwork- Japan, United

Science Park ing, semiconductors, States, ASEAN
automotive parts

Sri Lankad 1978 15 1 EPZ, Science Hong Kong Apparel, gems and EU, United States
Park (China), EU, jewelry, luggage,
Korea, Rep. of, gloves, food processing
Japan, Sri Lanka

Chinae 1979 164 23 EPZ, FTZ, Taiwan (China), Apparel, electronics, United States,
ETDZ, OCC, Hong Kong electrical Japan, EU
HTDZ, (China), Japan,
BECA* United States

Bangladeshf 1980 8 1g EPZ Korea, Rep. of, Apparel, textiles, leather United States
Bangladesh,
China, Japan

Indonesia 1986 22 5 Hybrid EPZ, Japan Apparel, footwear, elec- ASEAN, Japan,
Freeport tronics, food processing United States

Mongolia 1999 13 0 EPZ, FTZ China, Russian Apparel United States

Federation

(Continued)

64
Ta bl e 2–2

(Continued)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Nepal 2006 1 0 EPZ India, EU, Apparel India, EU, Japan,

Japan, United United States,
States, China China

Cambodia 2001 3 0 EPZ China, United Apparel United States

States, Thailand,
Japan,
Taiwan (China)

Hong Kongh 1974 7 0 Industrial Global Printing, food process- Global

(China) Estate, ing, jet engine repair,
Science biotechnology, informa-
Park tion technology

Singapore 1960 42 0 EPZ, Industrial Global Software, financial Global

Park services

Pakistan 1989 26 0 EPZ United Arab Apparel, chemicals, United States, EU,
Emirates, pharmaceuticals, Gulf countries
United Kingdom, electrical machinery
United States

Vietnam 1991 20 165 EPZ, Indus- Japan, Apparel, footwear, Japan, ASEAN,
trial Zone, Korea, Rep. of, luggage, electrical, Taiwan (China)
HTDZ,* Taiwan (China), metal working
Software Park Hong Kong
(China), China

Korea, 1992 4 0 Freeport Korea, Rep. of N/A N/A

Democratic
People’s
Republic of i

Japan 1995 2 0 Foreign N/A N/A N/A

Access Zone

*Notes: OCC abbreviates open coastal city; ETDZ is economic and technological development zone; HTDZ is high technology development zone;
BECA is border economic cooperative area.
a. The data obtained is for zones that have received final approval, according to WEPZA data received directly from the government of India.
Available data for operational zones in India (134 in total), and for zones that have received approval in principle (171 in total) has not been received
in a format that indicates public or private ownership, and therefore has not been included.
b. There are ten EPZs, three science parks, and one software park in Taiwan (China), according to WEPZA data received from the Ministry of Economic
Affairs in Taiwan (China).
c. ILO data indicates there are over 200 industrial and hi-tech parks in Malaysia, but the ownership of these parks is not specified.
d. Sri Lanka has an export factory program, which includes single factories that have not been counted as zones.
e. WEPZA data shows that for China, there are 23 private zones not owned and managed by a Chinese government entity. These are authorized
by individual decree, and are not normally included in officially published data.
f. While ILO mentions that there are 5,341 other zones under the Bangladesh Garment Manufacturers Exports Association and Bangladesh Knitware
and Manufacturers Association, this figure essentially represents members of the associations that may or may not operate as single factories, or
may operate within existing zones. They have, therefore, not been included in the data table above.
g. Youngone Corporation of the Republic of Korea has begun development of a private zone in Chittagong in Bangladesh.
h. Industrial estates and science and technology parks are considered zones within the freeport of Hong Kong (China).
i. In the Democratic People’s Republic of Korea, one zone has been established by the Republic of Korea; the other three zones are entities of the
Democratic People’s Republic of Korea.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

65
Ta bl e 2– 3

Profile of Zone Programs in the Middle East and North Africa

(selected countries)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Jordan 1984 10 17 FTZ, EPZ, Hong Kong (China), Apparel, trading United States,
Freeport, Pakistan, India, Israel, Middle East
QIZa China, Korea, Rep. of,
Taiwan (China),
United States

Turkeyb 1985 0 21 FTZ, Science Turkey Food processing, Turkey, EU

Park apparel, trading

United Arab 1985 26c 0 FTZ, Middle East, Trading, electrical, Middle East,
Emirates Specialized EU, Japan, pharmaceuticals, Africa, EU
Zone Korea, Rep. of food, apparel

Tunisia 1994 6 0 Hybrid EPZ, France, Italy, Spain, Electrical industries, France and
Technology Germany, Belgium, apparel, mining, other EU
Park United States, United leather, textiles,
Kingdom, Japan services, tourism

Morocco 1994 2 0 Hybrid EPZ France, United Manufacturing, France and

Kingdom, agricultural, services other EU
Switzerland,
United States

Kuwaitd 1995 1 0 FTZ N/A Trading, logistics, food Middle East

Algeria 1997 4 0 FTZ N/A Agriculture, France and

manufacturing, fishing, other EU
glass industry

Gaza and N/A 0 1 Industrial Park N/A N/A N/A

West Bank

Bahrain 1999 1 0 FTZ N/A Textiles, footwear, N/A

leather packing

Iran, Islamic 1999 22 0 Freeport, FTZ N/A Textiles, shoes, leather,

Rep. of commercial N/A

Egypt, Arab 1974 53 0 FTZ, Freeport, EU, Middle East Apparel, petrochemicals EU,
Rep. of Industrial Park, Middle East
QIZ

Saudi Arabia 1975 24 0 Specialized Middle East, EU, Petrochemicals, logistics, Middle East,
Zone, United States finance, tourism EU, United
Freeport, States
Technology
Zone

a. Jordan’s zones include qualified industrial zones, which under a special program with the United States, allow for duty-free entry of all products,
including garments.
b. Turkey has 40 organized industrial zones, and 358 small-scale industrial estates that have not been included in the breakdown of public and
private zones since they do not offer trade benefits such as reduced customs duty. Other public zones are also not included in the table. Source:
Robert Haywood, World Economic Processing Zones Association.
c. A number of the United Arab Emirates zones are owned by Dubai Port World and/or its subsidiaries.
d. The Kuwait Ministry of Commerce has revoked the license of the original private operator of the Shuwaikh Port Free Trade Zone, and is now
directly controlling the project.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

66
Ta bl e 2–4

Profile of Zone Programs in Western Europe (selected countries)

Number of zones
Country Name Year established Public Private Type of zones

Cyprus 1973 1 0 FTZ

Denmark 1891 10 0 FTZ

Finland 1970 2 0 FTZ

France 1992 87 0 EZ,* FTZ

Germany 1888 8 0 FTZ

Greece 1914 3 0 FTZ

Iceland N/A 2 0 FTZ

Ireland 1958 2 0 EPZ, FTZ

Italy 1719 24 0 FTZ

Malta 1988 11 0 FTZ

Portugal 1980 2 0 FTZ

Spain 1998 5 0 FTZ, SEZ

Sweden 1785 4 0 FTZ

Switzerland 1854 4 0 FTZ

United Kingdom 1988 62 0 EZ,* FTZ

*Note: EZ abbreviates enterpise zone.

Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

67
Ta bl e 2– 5

Profile of Zone Programs in Central and Eastern Europe and Central Asia
(selected countries)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Bulgaria 1987 4 16 Hybrid EPZ, EU, Turkey, Trading, transshipment, EU, Central
Specialized Bulgaria food processing, Europe, Russian
Zone apparel Federation

Kyrgyz Republic 1991 4 0 Hybrid, Turkey, Russian Food processing,

EPZ, Single Federation, EU, garments, construction
Factory United States materials

Romania 1992 5 2 Hybrid, EU, Romania, Warehousing, re-export, EU, Central

EPZ, FTZ Turkey, Greece, food processing, apparel, Europe, Russian
Japan automotive Federation

Serbia 1994 0 3 FTZ N/A Trading, electrical N/A

machinery, food
processing

Poland 1995 0 48 Hybrid Germany, Automobiles, parts, EU, United States

FTZ/EPZ, other EU, furniture, machinery
Freeport, Japan,
Technology United States
Park

Latvia 1996 2 2 FTZ, Freeport EU, United Trading, transshipment, EU, United States,
States electrical machinery, Russian Federation
oil products

Croatia 1996 2 12 Hybrid EPZ EU, United Apparel, textiles, paper, EU, United States
States metal-working, glass

Russian 1996 6 0 Freeport Sweden, Automobiles, furniture, Russian Federation

Federation Germany, metal working, tourism
other EU

Ukraine 1997 5 11 FTZ EU, Ukraine, Food processing, metal- N/A

Russian working, coal, chemicals
Federation,
Korea, Rep. of,
United States

Lithuania 2000 10a 0 Hybrid EPZ, Denmark, Electrical, automotive EU, Russia
Freeport Norway, Russian components, food
Federation, EU, processing
United States

a. The industrial parks in Lithuania are currently all owned by municipalities, and are therefore public.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

68
Ta bl e 2–6

Profile of Zone Programs in Sub-Saharan Africa (selected countries)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Senegal 1974 1 0 EPZ, Single France, United Food processing, call France, United
Factory States, other EU center, pharmaceuticals States, other EU

Mauritius 1970 1 0 Single-Factory Mauritius, Apparel, textiles EU

EPZ, FTZ France, Hong
Kong (China)

Togo 1989 1 0 EPZ, Single France, Italy, Wigs, agro-processing, France, United
(mixed Factory Korea, Rep. of, metal products, apparel States, other EU,
ownership) Lebanon Ethiopia

Cameroon 1990 1 0 EPZ, Single Cameroon, Agro-processing, chemi- Cameroon, Spain,

Factory Spain, France cals, leather, wood France, other EU

Madagascar 1991 0 2 Single China, France, Apparel, textiles EU

Factory, India, Hong
Industrial Kong (China),
Park Mauritius

Nigeria 1991 5 1 EPZ, Single Taiwan (China), Wood processing, West Africa,
Factory China, food processing, Taiwan (China),
United Kingdom, apparel, textiles, oil EU, United
United States and gas Kingdom,
United States,
Korea, Rep. of,
India

Kenya 1993 2 53 EPZ United States, Apparel, textiles United States,

EU, India, EU
Sri Lanka

Namibia 1995 2 0 EPZ Germany, China, Automotive parts, South Africa,

Japan, Hong apparel, textiles Angola, United
Kong (China), Kingdom,
South Africa, Germany, United
Korea, Rep. of, States, other EU
India, Lebanon,
France

Seychelles 1995 1 0 EPZ, Single Hong Kong Apparel, textiles, food EU, Japan,
Factory (China), EU, processing Korea, Rep. of
Mauritius

Ghanaa 1995 0 4 EPZ United Kingdom, Apparel, textiles, printing, EU, United
United States, agro-processing Kingdom,
India, United States
Korea, Rep. of,
China, Nigeria

Zimbabwe 1995 3 4 EPZ, Single China, Hong Apparel, leather, metal- China, Japan,
Factory Kong (China), working, agro-processing India, Canada
Korea, Rep. of,
Japan

(Continued)

69
Ta bl e 2– 6

(Continued)

Year Number of zones

Country established Public Private Type of zones FDI sources Key sectors Key markets

Malawi 1995 1 0 Single-Factory United Kingdom, Apparel, textiles, agro- EU, South Africa,
EPZ Korea, Rep. of, processing United Kingdom,
South Africa Norway, Denmark

Mozambique 1999 1 0 EPZ United Kingdom, Aluminum smelting United Kingdom,

(mixed Portugal, other Portugal, other EU,
ownership) EU, South Africa, South Africa
China, Brazil

South Africa 2000 6 0 Hybrid EPZ Germany, Automotive, Germany, France,

France, other agroprocessing, other EU, United
EU, United aluminum Kingdom, United
Kingdom, United States, Canada
States, Canada

a. The charter of the Ghana Free Zone Board is to facilitate, regulate, and monitor the activities of private sector developers, operators, and enterprises.
Sources: BearingPoint; ILO database; WEPZA (2007); FIAS research.

70
Annex 3
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