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 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.”