A flawed definition
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. 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. This has indeed been the case. Because zone enterprises operate autonomously with imported equipment and materials very little transfer of skills or technology to local partners takes place. Neither the human capital base nor domestic industry benefits significantly. This separation of zone investment from the local economy may have been intentional when the host country was still in an import-substitution phase, but most zone-operating countries now hope to use zone investment to stimulate local industry, promote strategic industries and develop the regional economy. To this end it is necessary to ensure that zone investors consume local raw materials, goods and services, develop local partnerships and alliances involving shared technology and expertise and investment in human resources development.
Backward and forward linkages between zone
investors and local industry are not easy to create in developing countries,
and the difficulties are compounded because most governments do not have a
strategy, incentives or the necessary agencies to promote linkages between
local and international firms. In Mexico the amount of local content in maquila
production has hovered around the 2 per cent level for the last decade. There
are often many obvious, almost banal goods and services which are not available
locally. For example, hard-disc manufacturers in one zone in the Philippines
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. In Mexico, the maquila sector
has proved highly effective in generating jobs, but after 30 years, the amount
of domestic raw materials consumed is still only 2 per cent of the total.
Singapore takes the high road
Singapore has succeeded in raising the quality of jobs created, and in 1996 and 1997 some 66 per cent of the new jobs were for workers recruited for their knowledge or skill. The major contributors to exportable services were regional headquarters (41 per cent) and communication and media services (38 per cent).
Singapore's continued appeal to foreign investors flies in the face of many of the conventional views on how zone-operating countries attract investment.
-- Singapore is not a labour-surplus economy with large amounts of cheap labour available. On the contrary, it has a very small population with expensive labour and a relatively high minimum wage set by the Government.
-- It is not deregulated or unregulated, and government agencies dealing with conditions of work, health and safety and the environment are very active.
-- It is not a trade union-free system but rather one with a strong emphasis on tripartism. Singapore authorities interviewed in the course of the Action Programme confirmed that they had turned away blue-chip companies who had asked for trade union-free arrangements.
-- Singapore has no particular market access or quota advantages to attract investors, and is surrounded by competitors which have more land, labour and natural resources, and lower cost structures.
This begs the question -- why do investors continue to flock to Singapore? The answer lies in the fact that Singapore has a proactive investment strategy. If Singapore had simply built a zone, offered incentives and waited for investors to arrive, it would probably have a weak investment base with a predominance of enterprises drawn from one country serving one market and concentrated in one or two industries. Instead, Singapore clearly identified the type of investment best suited to its rather unusual and limited situation and then developed incentives, infrastructure and, most importantly, government support services tailored to the needs of that investment niche. Electronics has been the dominant sector with over 45 per cent of investment and over 50 per cent of exports, but Singapore has made an effort to strengthen existing industries such as petroleum products and to diversify into new industries such as paints, pharmaceuticals and other chemicals. The Government is encouraging investment in the design and production of higher value added products, in services and trade and in research and development. The provision of quality human resources has been a priority and is a major incentive to high value added investors. In addition, Singapore has continued to improve on the package and to upgrade and elaborate the range of institutional supports available to investors.
A diversified investment and trade profile increases the stability and sustainability of a zone and its potential impact on social and labour conditions. Many zones have an investment monoculture in the sense that most investment comes from one country of origin or is crowded into one sector such as garments. In addition, output is often destined for one major market or region. This leaves the zone highly exposed to fluctuations in investment or trade patterns. The greater the representation of local capital in the zones the greater the likelihood of backward and forward linkages being established and the better the prospects for broader economic growth. In the Dominican Republic 48 per cent of zone investment is American (1996 figures) and 28 per cent Dominican, but 96 per cent of output is exported to the United States, leaving them very dependent on that market and highly vulnerable to changes in trade regime or trade flow. In Costa Rica the investment proportions are 60 per cent American and 21 per cent Costa Rican, but the country is less dependent on a single market, with only 58 per cent of EPZ exports going to the United States, 14 per cent to Europe and another 14 per cent to Central America and the Caribbean. In Mauritius two-thirds of the investment is local, and the exports are spread over a range of markets, with 29 per cent going to France, 21 per cent to the United States, 19 per cent to the United Kingdom, 8 per cent to Germany and 6 per cent to Italy.