EXPORT PROCESSING ZONES: PAST AND FUTURE ROLE IN TRADE AND DEVELOPMENT

Organisation de Coopération et de Développement Economiques
Organisation for Economic Co-operation and Development
OECD Trade Policy Working Paper No. 53
23-May-2007

PART IV CONCLUSIONS

111. Export processing zones (EPZs) as a policy tool for development and export-oriented growth has proliferated over the last four decades. More than 100 countries have currently implemented some form of zone policy for the supply of goods and services to foreign markets. EPZs have had mixed impacts on countries’ economic development. While in some countries it has led to export diversification and growth,
employment creation, and foreign exchange generation, in others results have been disappointing.

112. In this paper, we reviewed the evolution of EPZs and reviewed EPZs from and economic and trade rule perspective. The analysis in this paper indicates that:

• EPZs are a suboptimal policy from an economic point of view. Improvement of the business environment through trade and investment liberalisation, establishment of good infrastructure, rule of law and administrative simplification remains the optimal policy option to promote investment, employment and growth.

• EPZs however can provide an interim solution to developing countries with poor business environments where bridging deficiencies at a national level is not possible. This type of policy – with resources and market incentives focused on a subset of the economy– may be less timeconsuming and require less political capital in the short term as it allows for continued protection of domestic industry.

• As an interim solution EPZs should not be considered a substitute for general economic reform. While incentives may make up for certain deficiencies, governments should bear in mind that such incentives are provided by taxing other parts of the economy, and thus should provide commensurate benefits to the economy.

• EPZs and similar policy instruments can logically serve as a stepping stone to trade liberalisation on a national basis. They reduce anti-export bias of high tariffs by allowing an exporting company to access inputs at global prices, and thus may facilitate the creation of an export industry and improve a country’s trade balance.

• Governments should consider all available policy options when examining strategies for export promotion, including general trade liberalisation, bonded warehouse schemes, duty drawback schemes, zone type EPZs and enterprise type EPZs. Each scheme has its advantages and disadvantages. In some cases countries have pursued a combination.

• In designing an EPZ policy, a government should set realistic expectations and conduct a thorough cost/benefit analysis. In conducting such an analysis, it should bear in mind that benefits are dependent on private investment which are unpredictable and rely on external factors. Thus governments should minimise upfront costs (e.g. infrastructure costs) whenever possible.

• Choice of location is critical for zone type EPZs. Companies look for, among other things,reliable infrastructure (energy, logistics, telecommunications), adequate supply of labour, and a TD/TC/WP(2006)39/FINAL 53 well-functioning legal environment. A good location will minimise the costs of putting these
requirements into place. Tax incentives provided to compensate for deficiencies are costly and unsustainable. More importantly, access to local suppliers is the key to promote technology transfers from foreign companies to domestic companies.

• While the use of financial and other incentives to attract foreign investors may be necessary in the short term, such incentives have government revenue implications and do not provide a substitute for policy measures towards a sound investment environment. Such incentives should be minimal and time bound. Long-term commitments create equity problems by discriminating an EPZ company and non-EPZ company which both are inherently equally important for the economy and go against the “temporary” nature of EPZs.

• Improved legal services, enforcement of the rule of law – even designated courts for dispute settlement - and streamlined procedures can significantly reduce business risk and help attract investors. Bearing in mind that FDI may pull out when incentives phase out, improvements in the business environment should be made expeditiously. EPZs can be a first step to such improvements by providing an avenue for consultation between governments and businesses. Improvements in the business environment thus achieved should be extended on a national basis.

• Exemptions or relaxation of labour rules and other regulations have often been detrimental by creating differential standards within a country which may disadvantage certain classes of workers and contribute to economic distortions.

• Interaction of EPZs and regional trade agreements may also lead to MFN tariff cuts. Phase out provisions for EPZs and duty drawback schemes often contained in regional trade agreements to avoid circumvention may force governments to respond in different ways. Governments can either phase-out tariff exemptions on inputs for exports to RTA partners and risk losing FDI, or allow continued access to inputs at global prices by cutting tariffs on an MFN basis.