1. Export processing zones in historical perspective

Incentives or disincentives?

The incentive structure of most zones has limited the potential of this strategy to promote local economic development. Most zones offer a package of tax, duty and tariff concessions to attract investors. Those incentives may have time-limits and phases and can often be extended at the discretion of the zone authority. There are a number of problems with this approach:

• the cost to the host country in terms of lost revenue is high
• the incentives are based on the investors' presence and not on their performance, with the result that mediocre and bad companies benefit along with the good
• the incentives are in the form of a fiscal concession and not an inherent competitive attribute, which means that the investor may have no other reason for investing other than the fiscal advantage, and will likely leave when that advantage lapses or more attractive concessions appear elsewhere
• the tariff and duty exemptions encourage import-assembly-export activities which limit the knock-on effects on the local economy
• the incentives are static and do not provide for any upgrading of production or a move to higher value added activity