ARE THEY EFFECTIVE?

Foreign investors have indeed been enticed to invest and create jobs in countries which otherwise would not have been obvious destinations for FDI. This raises an important question: Will such investors remain in the country once the financial incentives run out, or the labour costs rise, or the quota-based trading system for garments ends?

The costs and benefits of EPZs have to be carefully weighed-up. The government spends large amounts providing the infrastructure and running the zones, and foregoes taxes and duties for a period. In return it attracts investors, collects rents, generates foreign exchange and creates jobs. However-

• investment has been narrowly concentrated in the electronics and clothing and footwear sectors,
• the investors usually locate only simple processing tasks in EPZs, thus limiting the technology and skill transfer,
• most of the jobs are low-wage, low-skill jobs,
• very little of the foreign exchange generated stays in the country,
• the foreign investment is not secure and could leave relatively easily,
• the investors often import all their requirements, procuring little on the local market.

The very concept of export processing zones, with duty free imports being assembled for export implies that the impact on the host countries will be limited. This has indeed been the case.

• Because zone enterprises operate autonomously very little transfer of skills or technology to local partners takes place. Neither the human capital base nor domestic industry benefits significantly. In fact, many of the laws providing for the establishment of EPZs specify that the privileges apply only to such import-assembly-export type activities.
• Backward and forward linkages are not easy to create in developing countries and the difficulties are compounded because most governments do not have a strategy or the necessary agencies to promote such linkages between local and international firms. For example, hard disc manufacturers in one country we visited cannot find a local dry cleaner capable of washing the overalls used in clean rooms, and they are therefore forced to fly the overalls to Singapore to be cleaned to the required specifications. There should be an agency which identifies such potential links and assists local enterprises to procure the technology and skills required to supply zone investors.