1. Export processing zones in historical perspective

Problems with enclave zones

The first generation of economic zones tended to be enclaves somewhat artificially located in diverse locations. This was often to protect local industry (which was still in an import- substitution phase), from foreign competition, and customs scrutiny of the duty-free imports and exports was easier in the case of a sealed zone. In many cases, however, the choice was made according to political or other non-economic criteria, with inadequate feasibility studies and forward planing. The result was enclave zones in inappropriate locations which experienced some or all of the following problems:

• the zones failed to attract sufficient investment (there are many half-empty zones to testify to poor planning)
• they attracted the wrong brand of investment with the result that investors subsequently moved to find more appropriate conditions (such as skilled labour)
• the infrastructure was inadequate to meet the energy requirements of energy-intensive industries or to treat the industrial waste (in some countries, toxic waste is being pumped into rivers which empty into the sea and kill marine life, depriving the fishing and tourist industries of their livelihood)
• the zone was unable to sustain investment and employment growth because its location was not economically viable
• there was inadequate social infrastructure such as transport services to get thousands of newly employed people to work, or housing to accommodate the influx of new workers
• there were insufficient backward and forward linkages

An answer to these problems has been to integrate zones into the local economy and society, as in China where entire cities, and in one case an entire province, Hainan Island, were declared special economic zones; or as in Mauritius where the entire island is a zone. Another approach is to plan zones with all the necessary industrial and social infrastructure in an integrated concept, such as some of the new private zones in the Philippines which include housing, transport, recreational and commercial infrastructure in the initial design. In all cases it is necessary to define carefully the comparative advantages of the potential zone (strategic location, skilled labour, natural resources, abundant cheap energy) and assess whether they are substantial enough to merit the investment required to realize such a project. The planning of the zone, the design of the incentives and the marketing campaign should all be based on the comparative advantages as defined.