3.
Assessing the impact and potential
of EPZs in a global economy
Are zones
effective?
Most zone-operating countries consider two
issues when assessing the efficacy of zones, namely:
- Has the zone attracted a sufficient quantity
of investment?
- Has that investment created the desired
number of jobs?
To these they often add a third:
- Has the investment expanded exports and
increased foreign exchange earnings?
The data presented in Chapter 2 of this report
indicate that many zones have indeed succeeded in attracting significant amounts
of investment in labour-intensive industries with the result that large numbers
of jobs have been created. For those labour-surplus economies concerned solely
with the quantity of employment the assessment need not go any further, but
many zone-operating countries have started to pose questions about the quality
of that investment and the jobs created. The generosity of the investment
incentives, the peculiarities of the Multifibre Arrangement and the growth
of subcontracting resulted in many zones attracting small- and medium-scale
investments of a very expedient nature. Such investment does not bring with
it a longer-term commitment to the host country, and the enterprises involved
seek their comparative advantage in reduced costs of production rather than
through improvements in productivity. Many zones have consequently not managed
to attract the quality of investment and jobs that they had hoped for and
are now considering ways to upgrade them.
In a number of zone-operating countries, however,
the objectives of the zone strategy go a lot further than the quantity of
investment and employment. They hope to use foreign investment in the export
sector to promote broader economic development and higher standards of living
through:
- the establishment of backward and forward
linkages between zone investors and local enterprises
- the transfer of technology and skill
- the development of a diversified export
profile
- constant increases in the degree of value
added in zone enterprises
- frequent upgrading of the technology, skills
and organization of production
When measured against these broader economic,
social and labour objectives the results of the zone strategy are mixed. The
host government spends large amounts of money on the infrastructure, maintenance
and running costs of the zones, and may well have to upgrade the facilities
at a later stage. To that expense must be added the opportunity cost
which includes not only the lost earnings from taxes and duties but the diversion
of resources from other developmental activities. In return the country attracts
investors, collects rents, boosts exports, generates foreign exchange and
creates jobs. Zone investors increase demand for local goods and services,
particularly in the energy, construction, transport and packaging sectors,
and zone workers have some spending power which benefits local suppliers of
accommodation, transport and consumer goods. However, the positive impact
of these factors has been limited for the following reasons:
- Type of industry. In most zone-operating
countries the main attraction to investors has been the abundant supply
of relatively cheap labour, and they have accordingly attracted labour-intensive
industries, or the labour-intensive stages in the production chain which
are less likely to upgrade technology and human resources than enterprises
involved in integrated manufacturing.
- Type of enterprise. The generous
incentives and low entry costs of the labour-intensive activities have resulted
in the establishment of many small, undercapitalized operations whose value
to the zone and the broader economy is uncertain.
- Type of activity. The incentive
structure encourages investors to mount assembly operations because they
can import all their inputs duty-free, process them using relatively low
technology, and then export them duty-free, rather than consuming local
raw materials, goods and services.
- Type of employment. Given the abundant
supply of labour and the predominance of low-technology labour-intensive
industries, most of the jobs created in these are low-wage, low-skill jobs
with little scope for upward mobility.
- Foreign exchange earnings. Very
little of the foreign exchange generated stays in the country since the
zone investor consumes relatively few local goods and services and the incentives
normally provide for full repatriation of profits.
- Increased exports. The increase
in exports may be misleading in that a significant percentage of zone exports
are made up of products from enterprises whose presence is temporary and
which could not be replaced by local exporters.
- Investment profile. Rather than
a diversified profile capable of withstanding cyclical swings in demand,
zone investment has been rather narrowly concentrated in the electronics
or clothing and footwear sectors.
- Value added. The amount of value
added in the simple processing activities is limited, with the result that
the skill and wage levels remain relatively low.
- Technology and skill transfer.
Because zone investors engage only in simple processing tasks, the potential
for technology and skill transfer is limited.
- Stability of investment. The foreign
investment is not secure and could leave relatively easily, particularly
if the sole reason for investing in the first place was a temporary one
such as a tax holiday or a quota under the Multifibre Arrangement.
This consideration of the costs and benefits
of a zone strategy raises a number of important questions. How can zone-operating
countries ensure that the quality of zone investment improves, and that it
has knock-on effects in terms of broader social and economic development?
The answer may lie in changing the definition of EPZs.