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Andrew Singer Pres

Export Processing Zones (EPZs) were originally created to boost exports, jobs, and foreign direct investment by allowing firms to import inputs duty-free and operate with lower taxes and regulations. Over time, more countries adopted EPZs, with over 3000 zones existing by 2002. While EPZs can help developing countries initially, the document argues they are ultimately a "second-best" solution and governments should work to liberalize trade policies for all firms rather than relying on geographically confined zones long-term.

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Arun Ravindranath
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34 views11 pages

Andrew Singer Pres

Export Processing Zones (EPZs) were originally created to boost exports, jobs, and foreign direct investment by allowing firms to import inputs duty-free and operate with lower taxes and regulations. Over time, more countries adopted EPZs, with over 3000 zones existing by 2002. While EPZs can help developing countries initially, the document argues they are ultimately a "second-best" solution and governments should work to liberalize trade policies for all firms rather than relying on geographically confined zones long-term.

Uploaded by

Arun Ravindranath
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Export Processing Zones

[EPZ’s] – Are they Useful?


By Andrew Singer, May 2006.
The Basic Concept

• Aimed at boosting export earnings, jobs & FDI.


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

• In 1970, only a handful of countries with EPZ’s.


• By 1996, 73 countries, and over 500 zones.
• By 2002, 116 countries, and over 3000 zones.
43 million employed.
• Many variants – single-industry zones; single-
factory zones, “special economic zones” and
more.
• Early zones were publicly-owned and run. Now,
more and more are privately-run.
A Second-best Solution

• In a liberal, low-protection environment, EPZ’s


make no sense.
• Typically used as second-best solution to anti-
export bias – primarily in the area of access to
imported inputs.
• Also, aimed at by-passing Customs delays &
uncertainties at ports – using container sealing.
• Sometimes, mixed objectives – eg. regional
industrial development; or promoting FDI.
Some Issues to Consider –
Fenced or Unfenced?
• Traditionally, Customs controls on movements
were physical.
• Fenced EPZ’s are treated as enclaves “outside
the DTA.” Customs sits at the gate. Containers
are sealed at the port for transit to the EPZ.
• Fenced EPZ’s attractive to governments as
instruments of industrial promotion. Very visible.
• Modern Customs practice favors “paper-based
controls.” Audit each firm’s own systems. Rely
on paper returns, plus intelligence & random
spot checks.
Unfenced - more Flexible

• Mauritius showed how well unfenced could


work. Zone exports were 3% of total
exports in 1971, but jumped to 67% by
1995.
• Much more flexible. Allows for “single-
factory EPZ’s.” Any existing factory can
be designated an EPZ.
• Any factory, willing to limit itself to 100%
export, can benefit.
What about Local Investors?

• Where main objective is to attract in FDI,


local investors sometimes excluded.
• The problem is mixed objectives.
• If the incentives offered are for 100%
exporters, then treat local investors on a
par [“national treatment”].
What about Sales into the
Domestic Market?
• If there are tax breaks, or other subsidies
[eg. utilities], then allowing DTA sales is a
distortion.
• Pressure to allow DTA sales starts usually
with the problem of wastage.
• Each trade has a typical wastage rate –
usually well below 10%. This should be
the basis for allowing DTA sales.
What Role should the State
Play?
• Running multi-factory zones is now considered a
job better done by the private sector.
• The State’s role is to introduce the enabling
legislation, then set up a mechanism for
supervising and ensuring compliance.
• Some EPZ authorities develop their own zones,
and also supervise private zones. This creates
problems of conflict of interest.
Does the “One-Stop Shop”
work?
• The concept is that the EPZ authority organizes
all required clearances, permits, approvals, etc.
The investor needs only to make “one stop.”
• The usual reality is that other authorities rarely
agree to delegate full approval powers to the
EPZ authority.
• Result is “one more stop.” Investors soon learn
to deal direct with those with the real discretion
to grant approvals.
In Conclusion – It is time we
went for First Best!
• Clean up Customs. Move to paper-based controls.
• Clean up the various “approvals.” Move to the “negative
list” approach.
• Treat FDI promotion and regional industrialization as
separate issues. Use different instruments.
• Go for simple competitive corporate tax rates. If there
are tax breaks for exporting, allow these for all exporters,
not just those in EPZ’s.
• My view – EPZ’s are useful in the early stages. Later, a
mixed blessing. Can take the pressure off governments
to go for real liberalization.
• Once export take-off starts, donors should press for
“First Best.”

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