45869 8002 SPECIAL ECONOMIC ZONES LIRPA PERFORMANCE, LESSONS LEARNED, AND IMPLICATIONS FOR ZONE DEVELOPMENT Copyright © 2008 The World Bank Group 1818 H Street, NW Washington, DC 20433 All rights reserved Manufactured in the United States of America April 2008 Available online at www.fias.net The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. 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Special economic ZoneS performance, leSSonS learned, and implicationS for Zone development April 2008 Acknowledgements This publication was produced by a team led by Gokhan Akinci and James Crittle of FIAS, the multi-donor investment climate advisory service of the World Bank Group. The draft report that formed the basis for this publication was developed by a team at BearingPoint led by Kishore Rao, and including Sheri Pitigala, Michael Hoverter, and Jean-Paul Gauthier. The report benefited from the valuable comments and support of Vincent Palmade, Suzanne Smith, Cecilia Sager, and Andrew Stone. Christopher Geurtsen, Samir Stewart, and Etienne Kechichian provided insightful research support and inputs. Nena Terrell and Patricia Steele provided key comments and editorial assistance in finalizing the report for publication. Contents Executive Summary .............................................................................1 Introduction .........................................................................................7 Study Objectives 7 Report Organization 8 Zone Definition and Development Trends .............................................9 The Challenge of Definition 9 Rationale for Zone Development 12 Major Trends in Zone Development 13 Zone Growth and Key Characteristics.................................................23 Overview 23 Zone Development Characteristics by Region 25 Economic Performance and Impacts ...................................................32 Defining Zone Benefits and Costs 32 Economic Impacts 34 Social and Environmental Impacts 39 Special Economic Zones and Countrywide Reforms 42 Lessons Learned: Common Obstacles to Zone Success 43 Are Private Zones Better Performers? 45 Lessons Learned and Implications for Zone Development ...................48 What Determines Zone Success? 48 Guidelines for Zone Development 51 Outlook for Zone Development 57 AnnExES 1. Acronyms and Abbreviations 60 2. Profiles of Zone Programs by Region 61 3. Bibliography 71 iii Tables Report Tables 1 Basic Policy Framework for SEZs.................................................................... 6 2 Types of Zones .......................................................................................... 10 3 Examples of Specialized Zones ................................................................... 11 4 Free Zones in Selected Industrialized Countries.............................................. 13 5 Traditional Zones Were Developed as Enclaves ............................................. 14 6 Zone Concepts in Selected Developing and Transition Economies .................... 15 7 Examples of Freeports/Specialized Zones..................................................... 17 8 Private and Public Sector Zones in Developing and Transition Economies.......... 18 9 Examples of Public-Private Partnership in Zone Development ........................... 19 10 Examples of Zone Administrative Models ..................................................... 19 11 Zone Administrative and Regulatory Bodies ................................................. 20 12 Dates of Establishment of Zone Programs...................................................... 24 13 Zones in Developing and Transition Countries ............................................... 26 14 Zone Development Rankings ....................................................................... 27 15 Direct Employment Impact of Special Economic Zones.................................... 34 16 Impact of Zones on Exports ......................................................................... 36 17 Zones as Catalysts and Enclaves.................................................................. 41 18 Obstructed Zone Examples.......................................................................... 44 19 Export Development Mechanisms................................................................. 51 20 SEZ Basic Policy Framework........................................................................ 53 Annex Tables 2­1 Profile of Zone Programs in the Americas............................................................ 61 2­2 Profile of Zone Programs in Asia and the Pacific.................................................. 64 2­3 Profile of Zone Programs in the Middle East and North Africa ............................... 66 2­4 Profile of Zone Programs in Western Europe ....................................................... 67 2­5 Profile of Zone Programs in Central and Eastern Europe and Central Asia .............. 68 2­6 Profile of Zone Programs in Sub-Saharan Africa................................................... 69 iv Boxes 1 Types of Zones .................................................................................................. 3 2 Special Economic Zone Facilities and Services .................................................... 21 3 ZonaAmerica Business and Technology Park, Uruguay ......................................... 28 4 Zones within Zones: The Unique Case of China................................................... 29 5 Shannon Free Zone, Ireland .............................................................................. 30 6 Pomeranian Special Economic Zone, Poland....................................................... 31 7 Both Sides of the Zone Debate........................................................................... 33 8 Government Revenues and Costs from Zone Development..................................... 39 9 Difficulties in Establishing Industrial Linkages: The Case of the .............................. 43 Dominican Republic 10 Obstacles Faced by the Dakar EPZ ................................................................... 45 11 Private Free Zone Development in the Dominican Republic.................................... 46 12 Private EPZ and Industrial Estate Designation Criteria in Thailand .......................... 47 13 Why Are Tax Holidays an Ineffective Incentive?................................................... 50 14 Prohibited and Actionable Subsidies under the Uruguay Round ........................... 55 15 Advantages of Using U.S. FTZs.......................................................................... 58 v eXecUtive SUmmarY For developing countries, special economic zones raised about the impact of zones on employment (SEZs) traditionally have had both a policy and an (in terms of gender, wage levels and benefits, worker infrastructure rationale. In terms of policy, the SEZ rights and work conditions), the environment, and can be a useful tool as part of an overall economic related social factors. growth strategy to enhance industry competitiveness and attract foreign direct investment (FDI). Through To a great extent, the fate of zone initiatives has SEZs, governments aim to develop and diversify been determined from the outset, by the choices exports while maintaining protective barriers, to made in the establishment of policy frameworks, create jobs, and to pilot new policies and approaches incentive packages, and various other provisions and (for example, in customs, legal, labor, and public- bureaucratic procedures. The experience suggests private partnership aspects). SEZs also allow for that maximizing the benefits of zones depends on more efficient government supervision of enterprises, the degree to which they are integrated with their provision of off-site infrastructure, and environmen- host economies and the overall trade and invest- tal controls. ment reform agenda. In particular, when zones are designed to pilot legal and regulatory reforms within This paper examines 30 years of experience in zones, a planned policy framework, they are more likely to reviewing development patterns and economic reach their objectives. impacts of zones worldwide. The experience shows that while zones have been effective in addressing Policymakers and practitioners in zone development economic growth and development objectives, they may find the key considerations and lessons pre- have not been uniformly successful; successes in sented in this paper useful in planning and evalu- East Asia and Latin America have been difficult to ating their zone initiatives. The end result of this replicate, particularly in Africa, and many zones have project is a general framework for zone development, failed. Moreover, since the onset of zone develop- which is intended to optimize future results for both ment in developing countries, concerns have been host countries and investing firms. Trends in Zone Development Ownership Arrangements and Development Approach While special economic zones are often treated as an innovative topic in development economics, Perhaps the most notable trend over the past 15 city-wide free zones with goals and methods not years has been the growing number of privately too different from those employed in modern zones owned, developed, and operated zones worldwide. were in place in Gibraltar and Singapore as early as According to the stocktaking exercise conducted for 1704 and 1819, respectively. This paper generically this study, 62 percent of the 2,301 zones in develop- uses the term special economic zone to encompass ing and transition countries are private sector devel- the range of modern free zone types worldwide1 oped and operated.2 This contrasts greatly with the (Box 1). SEZs are generally defined as geographi- 1980s, when less than 25 percent of zones worldwide cally delimited areas administered by a single body, were in private hands. The key factor behind the rise offering certain incentives (generally duty-free of private zones is the realization that such facilities importing and streamlined customs procedures, can be profitably operated on the part of developers, for instance) to businesses which physically locate and that the burden such SEZs place on government within the zone. resources can be reduced. Formal public-private partnerships have also become Zone Growth and Key Characteristics increasingly popular around the world, with a num- ber of different models evolving, including: Since the first privately developed and operated zones came on line in the 1980s, zone development n Public provision of off-site infrastructure and fa- has exploded, especially with the emergence of new cilities (utilities connections, roads) as an incen- programs in the countries of Eastern and Central tive for private funding of on-site infrastructure Europe, the Commonwealth of Independent States and facilities. (CIS), and the Middle East and North Africa. Widespread as this development may be, zone n Assembly of land parcels with secure title and activity is still relatively concentrated, with less development rights by the government for lease than a dozen countries accounting for the majority to private zone development groups, develop- of zone employment and exports generated. Zones ment of better land use/ownership laws and are concentrated in Asia and the Pacific (mainly regulations and adoption of enforceable zoning China), Latin America, and Central and Eastern and land use plans. Europe and Central Asia. n Build-operate-transfer and build-own-operate Despite recent diversification efforts, most zone approaches to on-site and off-site zone infra- enterprises worldwide are engaged in labor-intensive, structure and facilities, with government guaran- assembly-oriented activities such as apparel, textiles, tees and/or financial support. and electrical and electronic goods. The degree of product specialization tends to be linked to the n Contracting private management for govern- level of industrial development of the host country. ment-owned zones or lease of government Female workers account for 60­70 percent of the zone workforce worldwide, a number that has remained consistent since the inception of export processing zones (EPZs) with an explicit manufac- 1 In a few cases, the term "special economic zone" or "SEZ" is also turing orientation. However, as economic activity used in this report when it is part of the name of a specific zone. 2 Of the 135 countries in the FIAS database, those not considered diversifies away from simple assembly operations, transition or developing countries include 16 Western European the percentage of women in the workforce decreases. countries, Australia, Japan, Singapore, Canada, the United States, and Puerto Rico (included as a separate entity, but is counted as part of the United States). The entities of Macau, Hong Kong (China), and Taiwan (China) are included for separate consider- ation under the Asia and the Pacific region. Box 1 Types of Zones The first "modern zone" was established in Ireland in 1959. Since then, a variety of different zone setups have evolved that are subsumed under the SEZ concept in this paper, namely: n Free trade zones (FTZs; also known as commercial free zones) are fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations. n Export processing zones are industrial estates aimed primarily at foreign markets. Hybrid EPZs are typically sub-divided into a general zone open to all industries and a separate EPZ area reserved for export-oriented, EPZ-registered enterprises. n Enterprise zones are intended to revitalize distressed urban or rural areas through the provision of tax incentives and financial grants. n Freeports typically encompass much larger areas. They accommodate all types of activities, including tourism and retail sales, permit on-site residence, and provide a broader set of incentives and benefits. n Single factory EPZ schemes provide incentives to individual enterprises regardless of location; factories do not have to locate within a designated zone to receive incentives and privileges.* n Specialized zones include science/technology parks, petrochemical zones, logistics parks, airport-based zones, and so on. *Single factory EPZ programs are similar to bonded manufacturing warehouse schemes, although they typically offer a broader set of benefits and more flexible controls. zone assets by a private operator (beneficial cater to higher value-added industries and are able to ownership). charge premium rates. n Equity-shifting arrangements whereby a private contract manager of a government zone can exercise a purchase option once pre-defined Policy Considerations performance levels have been reached. The economic performance and impact of SEZ The entry of the private sector into zone develop- programs in developing countries has been evaluated ment has also changed the range of facilities, services, in numerous studies. Most of these, however, have and amenities available within zones. Recent trends focused on government-developed and -run zones tied to the increase in private zone development and largely neglected the economic impact of private include the development of SEZs and industrial zone development. estates on an integrated rather than stand-alone basis, increased specialization of facilities catering to the EPZs are viewed as highly effective tools for job unique needs of target industries (hi-tech, petro- generation, particularly for women entering the chem, software, among others) and the provision of a workforce. Evidence suggests that such zones are greater range of business support services and special- a much more significant source of employment in ized facilities. Many of these "next generation" zones smaller countries with populations of less than 5 million (examples include Mauritius, the Special Economic Zones and Seychelles, and Jamaica) than in larger countries. Countrywide Reforms SEZs are also capable of contributing to export de- At a public policy level, a debate continues to be velopment, not only in terms of accelerating export waged regarding whether special economic zones growth, but export diversification as well. This is promote countrywide economic policy reforms particularly important to poorer developing coun- by serving as "demonstration areas" or catalysts, tries reliant on the export of primary products. In or whether they act instead as "pressure valves" for addition, zones can play an important role in attract- unemployment, thereby reducing the incentive ing foreign direct investment, offsetting some aspects to reform and diverting reform energies. A 1992 of an adverse investment climate by offering world- World Bank study cautioned against the possibility class facilities and best practice policies. that SEZs could be used by developing countries to "muddle along without reforms," and stressed the The scope for increased development of supply need to use zones as a supplement to countrywide and other linkages through the use of free zones reform, as opposed to creating isolated free market appears to be significant, due to a greater incentive enclaves. Two integration methods that have met for local firms to sell goods and services to zone- with success have been "equal footing" policies for based enterprises because such sales are typically domestic suppliers of capital and intermediate goods "deemed" exports, eligible for duty drawback and and the extensive use of sub-contracting by zone- other export incentives. based firms to local producers. Achieving an appropriate budgetary balance can be Are Private Zones Preferable? tricky for host countries, and doing so can mean the difference between profits and losses. Zones Available data suggests that private zones are less can fall short of intended benefits for governments expensive to develop and operate than their public under three scenarios: if development entails mas- counterparts (from the perspective of the host coun- sive government capital outlays (for onsite or offsite try), and yield better economic results. Public expen- infrastructure development), are not operated on a diture cost savings through private zone development cost-recovery basis, and/or receive subsidized inputs depends significantly on where private zones are for electricity or other services. located and whether they are subject to any designa- tion criteria and development controls. Most modern There are continuing concerns regarding work zone programs have developed such measures, which conditions and social protections, including women's aim to ensure that new zone projects are located rights in some countries. However, wages and work close to existing public infrastructure and facilities, conditions tend to be better within zones than thereby reducing government outlays. On the whole, outside them, and adverse labor and social issues are privately operated zones tend to offer better facilities almost wholly associated with countries featuring and amenities, command higher prices from programs developed and run by the government, tenants and attract "higher end" types of activities. especially older zones catering to "low-end" apparel- As a result, private zones generally have been more assembly operations. profitable and have had better social and environ- mental track records than public zones throughout In evaluating environmental impacts, a distinction the world (with East Asian government-run zones needs to be drawn between countrywide single fac- the notable exception). tory EPZ programs and industrial park-style zones. It is much harder for governments to adequately enforce environmental standards for single factories, as they tend to be widely dispersed. Policy Implications ment reform efforts. They are one tool in a portfolio of mechanisms commonly employed to create jobs, Three decades of zone development experience generate exports and attract foreign investment, suggests that the failure or success of a zone is linked through the provision of incentives, streamlined to its policy and incentive framework, where it is procedures, and custom-built infrastructure. located, and how it is developed and managed. This experience shows that the use of generous incentives A critical determinant in configuring a zone develop- packages to offset other disadvantages (such as poor ment program is the type of zones to be promoted. location or insufficient facilities) is ineffective in International experience suggests that the recom- terms of overall zone performance, due in large part mended approach is to adopt a SEZ model that to the increasing commonality of zone investment incorporates these principles: incentives in recent years. n Allow SEZ enterprises as well as those licensed The most common obstacles to success for zones are: under other regimes to co-locate within the same area. The development of separately fenced-off n poor site locations, entailing heavy capital areas solely for SEZ enterprises is a less prefer- expenditures able, but acceptable approach. n uncompetitive policies--reliance on tax holi- n Ensure that the SEZ regime is flexible, allowing days, rigid performance requirements, poor a range of commercial as well as manufacturing labor policies and practices activities. If properly supervised, a separate com- mercial free zone regime is not required. n poor zone development practices--inappropri- ately designed or over-designed facilities, inad- n Promote private rather than public development equate maintenance and promotion practices of zones. n subsidized rent and other services n Develop an appropriate legal, regulatory, and institutional framework to ensure adequate regu- n cumbersome procedures and controls lation and facilitation, requiring greater adminis- trative facilities within host governments. n inadequate administrative structures or too many bodies involved in zone administration The key elements of a good-practice policy frame- work for SEZs are summarized in Table 1. A best- n weak coordination between private developers practice policy and incentive framework is stream- and governments in infrastructure provision. lined, encouraging zones to compete on the basis of facilitation, facilities, and services rather than on the The common mistake at the root of many of these provision of incentives. The importance of regulatory obstacles to optimal zone performance is a lack of relief to investors is a crucial, yet overlooked aspect effective coordination, both in terms of the parties of successful SEZ programs. The host government involved and various physical and procedural aspects should aim to simplify investment approvals and of the zone itself. expatriate work permits; remove required import and export licenses; and accelerate customs inspection Good Practice Guidelines for procedures and automatic foreign exchange access. Zone Development The institution charged with regulating zone opera- One of the clearest lessons learned from decades of tions is another major driver in the outcome of the free zone development--particularly EPZ develop- zone program. While a wide range of institutional ment--is that zones cannot and should not be viewed arrangements have been used, experience suggests as a substitute for a country's larger trade and invest- that success is dependent on the autonomy of the TaBlE 1 Basic Policy Framework for SEZs International Standard Concept of extra-territoriality outside domestic customs territory; eligible for national certificates of origin; eligible to participate in national trade agreements and arrangements. Eligibility for benefits No minimum export requirement; manufacturers and services; foreign and local firms; expansions of existing enterprises; private developers of zones. Foreign and local ownership No limitations; equal treatment. Private zone development Clearly defined in legislation; specific zone designation criteria; eligible for full benefits; competition from government-run zones on a level playing field. Sales to the domestic market liberalized, provided on a blanket basis rather than case by case; treated as import into domestic market; subject to payment of import duties and taxes. Purchases from domestic market Treated as exports from domestic market; enterprises eligible for indirect exporter benefits. labor policies Full consistency with International labour organization labor standards; specialized dispute settlement mechanism. body; adequate funding; customer orientation and Outlook for Zone Development ethos; powers over other government ministries; partnerships with private zone operators and enter- The dynamics of recent trade liberalization place prises; and maximizing the role of the private sector great importance on the continued development of in service provision. To help minimize situations focused investment and export promotion mecha- that present conflicts of interest, particularly in the nisms such as SEZs that can provide a simplified context of an increasing number of private zones, regulatory environment. The prevalence of zones it is critical that zone authorities remain engaged in industrialized countries with open economies in purely regulatory functions, and do not own, also underscores the importance of the concept for develop, or operate zones. competitiveness. Mechanisms that provide efficiency advantages are even more important with the advent Finally, the success of zones is critically linked to the of modern production and distribution concepts and way in which they are located, developed, and man- approaches, and the reduction of transaction costs. aged. Management of zones is enhanced when they There is also a continuing role for zones in many are operated on a cost-recovery rather than subsi- countries to incubate and accelerate policy reform. dized basis, and are market-oriented and customer- Given their potential flexibility and efficiency ad- focused enterprises. This is often accomplished when vantages, SEZs could continue in the future to serve zone development and operation are undertaken by as a viable tool for developing countries, especially private sector groups on a commercial basis. when reforms are ex ante integrated into the overall strategy. introdUction Study Objectives zones; the use of public-private partnerships for zone development; the implementation of World Trade The rapid proliferation and economic impacts Organization (WTO)-compliant policy and incen- of special economic zones (SEZs)--especially tive frameworks; and innovative regulatory frame- export processing zones--have been documented works. in numerous studies. By some estimates, there are approximately 3,000 zones in 135 countries today, These changes have important implications for the accounting for over 68 million direct jobs and over economic impacts of zones, and offer significant $500 billion of direct trade-related value added lessons to policymakers on how to maximize zone within zones.3 Other studies have evaluated the success. The number of zones and the number of economic impact of zone development, typically in countries hosting zones, particularly Organisation terms of cost/benefit calculations of zone programs for Economic Co-operation and Development (Warr, 1989, Jayanthakumaran, 2002, and Sinclair, (OECD) economies, continues to grow. This trend 2001). Still other studies have tried to examine the raises a number of questions: What is the continuing relationship between free zones and economic reform rationale for zones in the face of global trade liber- and trade liberalization efforts in developing coun- alization? And why do zones continue to expand in tries (Madani, 1999, Cling and Letilly, 2001, and industrialized countries that already offer low duty Schrank, 2001). 3 These figures were derived from a database developed by FIAS, Most of these studies, however, focus on govern- in close consultation with the World Economic Processing Zones ment-owned, -developed, and -operated zones. They Association (WEPZA), and International Labour Organization (ILO) data from an ILO document dated April 2007. Puerto Rico often miss the fact that there have been dramatic is mentioned as a separate entity in the database, since it has a changes in the ways in which zones have been con- zone program completely separate from the U.S. zone program; however, it is not counted as a separate country. Macau, Taiwan ceived, developed, managed, regulated and governed (China), and Hong Kong (China), while included as separate in the past two decades. These include the growing entities in the FIAS database, are considered by the international community under China, hence these territories do not count as prominence of private sector developed and run separate countries. and tax environments? Do zone programs promote Report Organization or detract from countrywide reform efforts? This paper is organized as follows: This study analyzes the major development trends in terms of zone configuration, ownership, devel- n The next section, Zone Definition and Devel- opment, management, and regulation approaches, opment Trends, documents growth patterns and identifies good practices. It evaluates the overall and key characteristics of zones internationally economic performance of zones in light of these and regionally. changes, and assesses the relationship of zones and economic reform efforts. The ultimate goal is to draw n The third section, Zone Growth and Key out lessons and implications that will enable poli- Characteristics, outlines recent changes in zone cymakers to design and facilitate zone development concepts, development approaches, and policy that maximizes benefits to their host economies. and institutional frameworks. The analysis is based on a review of recent studies n The fourth section, Economic Performance and assessments of EPZs and free zones, as well as a and Impacts, evaluates the overall economic stocktaking of zone programs worldwide, including performance of zone development and key ownership patterns, legal and regulatory frameworks, socio-economic impacts. institutional frameworks, ownership and manage- ment approaches, incentives, and economic impacts. n The last section, Lessons Learned and Impli- To evaluate the complex linkages and impacts of cations for Zone Development, assesses why zones and economy-wide policy reform efforts, a some zones have failed, identifies key success number of case studies of zone programs were under- factors, and delineates guidelines to maximize taken and previous cost/benefit assessments analyzed. the success of new zones. Zone definition and development trendS The Challenge of Definition The core definition of a free zone, as well as proposed guidelines and standards for them, are contained in Free zones have existed for centuries. They were the Revised Kyoto Convention of the World Cus- originally established to encourage entrepôt trade, toms Organization (WCO).4 Specifically, Annex D and mostly took the form of citywide zones located and the accompanying guidelines provide standards on international trade routes. Examples include and recommendations on the treatment of imports Gibraltar (1704), Singapore (1819), Hong Kong to and exports from free zones including territorial (China; 1848), Hamburg (1888), and Copenha- limits (free zones are defined as "outside the customs gen (1891). This paper focuses on modern special territory" for purposes of the assessment of import economic zones, a generic term that encompasses the duties and taxes); minimal documentation require- recent variants of the traditional commercial zones. ments; and issues to be covered by national legisla- The principles incorporated in the basic concept of a tion. Free zones typically allow for duty- and tax-free special economic zone include: imports of raw and intermediate materials and, in many cases, capital equipment. n Geographically delimited area, usually physically secured (fenced-in) This generic special economic zone concept has evolved over time, resulting in a large variety of zones n Single management/administration n Eligibility for benefits based upon physical location within the zone 4 Annex D of the International Convention on the Harmonization and Simplification of Customs (revised in 1999) defines a free zone as "part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties n Separate customs area (duty-free benefits) and and taxes are concerned, as being outside the Customs territory streamlined procedures. .....and not subject to the usual Customs control." TaBlE 2 Types of Zones Type of Zone Development Physical Typical Eligible Markets Examples Objective Configuration Location Activities Free Trade Zone Support trade Size < 50 Ports of entry Entrepôt and Domestic, Colon Free (Commercial Free Zone) hectares trade-related re-export Zone, Panama activities Traditional EPZ Export Size < 100 None Manufacturing, Mostly Karachi manufacturing hectares; other processing export EPZ, Pakistan total area is designated as an EPZ Hybrid EPZ Export Size < 100 None Manufacturing, Export and lat Krabang manufacturing hectares; only other processing domestic Industrial Estate, part of the area market Thailand is designated as an EPZ Freeport Integrated Size >100 km2 None Multi-use Domestic, aqaba development internal and Special Economic export markets Zone, Jordan Enterprise Zone, Urban Size < 50 Distressed Multi-use Domestic Empowerment Empowerment, revitalization hectares urban or Zone, Chicago Urban Free Zones rural areas Single Factory EPZ Export Designation Countrywide Manufacturing, Export market Mauritius manufacturing for individual other processing Mexico enterprises Madagascar (Table 2), with differing objectives, markets, and licensed under an EPZ regime. Hybrid EPZs, in activities, including: contrast, are typically sub-divided into a general zone open to all industries regardless of export n Free trade zones, also known as commercial orientation and a separate EPZ area reserved for free zones and free commercial zones, are export-oriented, EPZ-registered enterprises.5 small, fenced-in, duty-free areas, offering ware- housing, storage, and distribution facilities for n Freeports are generally a much broader concept trade, transshipment, and re-export operations, and typically encompass much larger areas. They located in most ports of entry around the world. accommodate all types of activities, including A leading example is the Colon Free Zone in tourism and retail sales, permit people to reside Panama. on site, and provide a much broader set of in- centives and benefits. The large-scale freeports in n Export processing zones, industrial estates of- China are a traditional example. fering special incentives and facilities for manu- facturing and related activities aimed mostly at 5 In most Asian countries, for instance Thailand and the Philip- export markets, typically take two forms. In the pines, EPZ areas within hybrid zones are required to be fenced-in. In contrast, many Latin American countries--such as Costa Rica traditional EPZ model, the entire area within the and Mexico--permit EPZ-registered enterprises to be located in zone is exclusively for export-oriented enterprises the same area as firms registered under other regimes. 0 TaBlE 3 Examples of Specialized Zones Type of Zone Development Objective Size Typical Location Activities Markets Example Technology or Promote high tech and < 50 adjacent to uni- High technology Domestic Singapore Science Science Parks science-based industries hectares versities, institutes activities and export Park, Singapore Petrochemical Promote energy 100­300 Petrochemical Petrochemicals Domestic laem Chabang Zones industries hectares hubs; efficient and other heavy and export Industrial Estate, energy sources industry Thailand Financial Development of off- < 50 None offshore financial Export labuan offshore Services shore financial services hectares and non-financial Financial Centre, services Malaysia Software Development of soft- < 20 adjacent to Software and Export Dubai Internet City, and Internet ware and IT services* hectares universities, other IT services* United arab urban areas Emirates airport-based air cargo trade and < 20 airports Warehousing, Re-export Kuala lumpur transshipment hectares transshipment and airport Free Zone, domestic Malaysia Tourism Integrated tourism 200­1,000 Tourism areas Resorts and Export and Baru Island, development hectares other tourism domestic Colombia logistics Support logistics < 50 airports, ports, Warehousing, Re-export D1 logistics Park, Parks or hectares transport hubs transshipment Czech Republic Cargo Villages *Note: IT abbreviates information technology. n Enterprise zones are intended to revitalize With the exception of the single factory zone scheme, distressed urban or rural areas through the provi- these developments share most of the fundamental sion of tax incentives and financial grants. Most principles underpinning the special economic zone zones are in developed countries, for example concept described earlier--a delimited, secure area the United States, France, and the United under single administration; a special incentive and Kingdom, although South Africa is developing a regulatory regime; and location-based incentive similar mechanism. eligibility. n Single factory EPZ schemes provide incentives It is frequently pointed out that special economic to individual enterprises regardless of location; zones have also evolved into highly specialized facili- factories do not have to locate within a desig- ties, configured to the needs of specific industries nated zone to receive incentives and privileges.6 and activities. Examples shown in Table 3 include Leading examples of countries relying exclusively special zones to promote high technology or science- on a single factory scheme include Mauritius, based industries; petrochemical and heavy industry Madagascar, Mexico and Fiji; other countries such as Costa Rica, the United States, and Sri Lanka allow both industrial estate-style zones 6 Single factory EPZ programs are similar to bonded manufacturing warehouse schemes, although typically offering a broader set of and single factory designations. benefits and more flexible controls. zones relying on cheap energy sources and specialized Madani (1999) and Cling and Letilly (2001) outline facilities; financial services zones to promote offshore four broad policy reasons for the development of financial and non-financial activities; software and zones, especially EPZs, in developing countries: information communications technology (ICT) zones accommodating software coding and other off- n In support of a wider economic reform shore ICT services operations; airport-based zones, strategy. In this view, EPZs are a simple tool specifically support aviation and air-based activi- permitting a country to develop and diversify ties; tourism zones to facilitate integrated resort and exports. Zones are a way of reducing anti-export leisure community development; logistics parks and bias while keeping protective barriers intact. The cargo villages/cities, providing specialized facilities EPZs of Taiwan (China) and the Republic of and support services to facilitate trade, supply chain Korea follow this pattern. management, and logistics; and others. n To serve as "pressure valves" to alleviate Do these types of projects qualify as special eco- growing unemployment. The EPZ programs nomic zones? The answer is not always clear-cut, of Tunisia and the Dominican Republic are fre- and is the reason why so many studies have dramati- quently cited as examples of robust, job-creating cally varying estimates of the number and types of programs that have remained enclaves with few zones worldwide. The key criteria in this study for linkages to their host economies. identifying eligible projects is whether they offer a special regulatory framework and incentive regime n As experimental laboratories for the applica- that is available only to enterprises locating within tion of new policies and approaches. China's the zone. In many cases this is not the case--enter- freeports are classic examples of this category. prises receive general investment incentives available Financial, legal, labor, and even pricing poli- to firms elsewhere. Applying this approach would cies were introduced and tested first within the omit single factory programs and general industrial freeports before being extended to the rest of the parks/estates/zones (which accommodate enterprises economy. operating under a diversity of incentives), as well as other developments that do not provide a specific n To attract foreign direct investment. Most new incentive regime. SEZ programs, particularly in the Middle East, are designed to attract foreign investment. Rationale for Zone Development The "hardware" of special economic zones--fully serviced sites with purpose-built facilities for sale The rationale for the development of special eco- or lease--is aimed at enhancing the competitive- nomic zones differs between developing and de- ness of manufacturers and service providers. It is veloped countries. For developing countries, these also intended to realize agglomeration benefits zones have traditionally had both a policy and an from concentrating industries in one geographical infrastructure rationale. The typical special economic area. These benefits include efficiencies in govern- zone policy package includes import and export ment supervision of enterprises, provision of off-site duty exemptions, streamlined customs and admin- infrastructure, improved environmental controls, and istrative controls and procedures, liberal foreign increased supply and sub-contracting relationships exchange policies, and income tax incentives--all among industries, among others. This "infrastructure meant to boost an investment's competitiveness and rationale" is one of the most important driving forces reduce business entry and operating costs. Export- behind zone development in infrastructure-poor oriented zones are intended to convey "free trade countries. status" to export manufacturers, enabling them to compete in global markets and counterbalance the The rationale for free zone development in indus- anti-export bias of trade policies. trialized countries is more varied. The new Free Economic Zone program in the Republic of Korea, and manufacturing competitiveness remains the TaBlE 4 principal rationale behind special economic zone pro- Free Zones in Selected grams in most industrialized countries. Many compa- nies choose a zone location based on the advantages Industrialized Countries of operating in a flexible, duty-free environment. Country Name No. of Zones The U.S. Foreign Trade Zone program is a typical example.7 Operating costs are lower in a zone as a australia 10 technology development zones result of reduced insurance, security, and overhead Canada 1 FTZ costs. Cash flow is enhanced by the ability to post- pone duty payments until and only upon entry into Denmark 10 FTZs the domestic customs territory. Foreign trade zones Finland 2 FTZs have been critical in enabling manufacturers to oper- ate "just-in-time" systems. The efficiency advantages France 2 FTZs, 85 enterprise zones provided by these zones are arguably more important Germany 8 FTZs for industrialized countries even with the advent of modern production concepts and approaches, Greece 3 FTZs and the reduction of tariff and non-tariff barriers Iceland 2 FTZs (NTBs). The fact that zones are expanding in OECD Ireland 1EPZ, 1 FTZ countries suggests that they may be much more than tools for developing countries with bad policy Italy 4 FTZs environments--they may be critical to firm-level Japan 22 foreign access zones competitiveness in a globalized economic environ- ment. (See also Table 4, which lists types of zones in Malta 1 FTZ, 10 industrial zones selected industrialized countries.) Portugal 2 FTZs Spain 4 FTZs, 1 freeport Major Trends in Zone Development Sweden 4 FTZs Switzerland 4 FTZs There have been profound changes in the free zone concept and development approach since the first United Kingdom 7 FTZs, 55 enterprise zones modern zone was established in Ireland in 1959. United States 266 foreign trade zones Even more fundamental changes are foreseen over the next decade, as the WTO agreement is imple- Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. mented in full. Free zones were traditionally developed as isolated enclaves, both in terms of the underlying policy which is a broader concept than a regular export framework and geographic location (Table 5). Access processing zone, and the 22 foreign access zones to a generous set of incentives and privileges was in Japan, for example, are explicitly intended to tightly controlled. Qualifying firms typically had promote foreign investment. The main rationale to be 80­100 percent export-oriented (for EPZs), for the Shannon Free Zone in Ireland, in contrast, engaged in recognized manufacturing activities, and was to establish a "growth pole" in the economically distressed southern part of the country. Revitalization of economically distressed urban and rural areas is 7 In Table 4, the United States is mentioned as having 266 FTZs. the motivation behind the many enterprise zone-style It should be noted that in addition, the United States has 173 programs in the United Kingdom, France, and the Federal Empowerment Zones, which do not provide zone-like benefits that are comparable to other zones, and are therefore not United States. But overall, enhancing trade efficiency included in the tables. TaBlE 5 Traditional Zones Were Developed as Enclaves Zone Location Comments Kandla EPZ, India Remote area away from all amenities Developed to aid refugees from partition Bataan EPZ, Philippines Remote area, four hours from Manila No support infrastructure existed Masan EPZ, Korea, Rep. of Next to urban area originally restricted to foreign investors Moin Free Zone, Costa Rica Remote area with no amenities Eventually privatized at times only foreign-owned. Zone location was omy. The new emphasis is on integrating zones into restricted to relatively remote areas or near transport the domestic economy. hubs, and zones were viewed primarily as growth poles for regional development. Zones were exclu- As detailed later, this integration is evident in many sively developed and operated by government bodies. aspects--special economic zone policy packages, physical development approaches, governance This rigid concept has changed quite fundamentally structures, and so on. Countries are facilitating the over the past two decades. One of the major changes development of zones to meet specific objectives and in thinking has been to permit zone development target markets. countrywide, rather than to restrict zones to remote areas. This change was in response to the failure of As depicted in Table 6, traditional EPZs are increas- many government-run zones and the growing inter- ingly being augmented and sometimes supplanted est of private property groups in zone development. by new, more flexible arrangements. Hybrid EPZs Applications for new zone development projects are the preferred model in most Central and Eastern are increasingly treated like any large scale property European countries and many Latin American developments; they are subject to all applicable land countries. Commercial free zones have been the use planning, zoning, building, and environmen- traditional development norm among most Middle tal clearance processes. Governments have had to Eastern and North African countries, but are a develop zone designation criteria and transparent relatively recent innovation in Asia, where zone processes to govern the designation of new zones development has emphasized export manufacturing. promoted by private groups. The extent to which traditional zones have evolved Another major development has been the re-think- is exemplified in the new generation of freeports, ing of the role of zones in economic development. which are often called SEZs. Traditionally, freeports Sinclair (2001) correctly points out that the develop- were city-states such as Hong Kong (China), Macau, ment objectives behind the first EPZs were viewed Singapore, or islands including Labuan (Malaysia) in relation to a trade-restricted or closed economy. and Batam (Indonesia), which were viewed as more EPZs were intended to promote exports, create easily secured. In the past decade, led by the Chinese jobs, and transfer technology through backward SEZs, zones established in the central territories linkages. The rapid pace of globalization and trade of countries have increased. This is part a result of liberalization is stimulating a much broader view of better customs and tax controls and technologies, zones, their development objectives and performance but also reflects efforts to integrate zones with host expectations. Increasingly, zones are viewed as a key economies and encourage balanced economic devel- mechanism to promote two-way trade and facilitate opment, rather than dependence on single industries liberalization and modernization of the host econ- such as apparel or electronics. TaBlE 6 Zone Concepts in Selected Developing and Transition Economies Traditional Hybrid Commercial Single Freeport EPZ Model EPZ Model Free Zone Factory asia and Taiwan (China) China China Fiji China the Pacific Korea, Rep. of Indonesia Japan Hong Kong (China) Indonesia lao PDR Malaysia India Vietnam Korea, Democratic Indonesia Philippines People's Republic of Korea, Rep. of Bangladesh Philippines Macau India Thailand Malaysia Malaysia Vietnam Philippines Pakistan Singapore Sri lanka americas argentina Bolivia argentina Jamaica Bahamas Bahamas Brazil Bahamas Mexico Chile Belize Colombia Belize Colombia Dominican Republic Costa Rica Brazil Panama Guatemala Cuba Canada Jamaica Ecuador Colombia Nicaragua El Salvador Curaçao Peru Haiti Panama Trinidad and Tobago Honduras Uruguay Venezuela, R.B. de Middle East algeria Bahrain Israel Iran, Islamic Rep. of and Iran, Islamic Rep. of Egypt, arab Rep. of Jordan Jordan North africa Sudan Syrian arab Rep. Kuwait Tunisia lebanon Turkey libya United arab Emirates Morocco oman Tunisia Turkey United arab Emirates Yemen, Republic of Central and Slovenia Belarus Czech Republic Russian Federation Eastern Europe albania Estonia and Central Bosnia and Herzegovina latvia asia Bulgaria Romania Croatia Serbia Hungary Montenegro Kazakhstan Slovak Republic Kyrgyz Republic Ukraine latvia Uzbekistan lithuania Macedonia, FYR Moldova Poland Ukraine (Continued) TaBlE 6 (Continued) Traditional Hybrid Commercial Single Freeport EPZ Model EPZ Model Free Zone Factory Sub-Saharan Cameroon Benin Burundi africa Cape Verde Djibouti Madagascar Equatorial Guinea Gabon Malawi Gambia, The liberia Mali Ghana Mauritius Mauritius Kenya Tanzania Senegal Mozambique Togo Seychelles Namibia Nigeria Senegal South africa Tanzania Togo Uganda Zambia Zimbabwe Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. Freeports are fundamentally different from tra- n Duty-free privileges. All types of merchandise ditional free zones. Instead of export drivers and can be introduced duty- and tax-free by regis- investment magnets, they are designed as liberalized tered enterprises or individual residents. platforms for diversified economic growth that not Enterprises can freely import any merchandise only could but should spill over into the national in any quantity, and are not restricted to direct economy. As summarized in Table 7, the freeport inputs for manufacturing (as is the case with concept represents a major expansion over traditional EPZs). Duty- and tax-free merchandise can be approaches, both physically and functionally: sold at the retail or wholesale level and some- times consumed within the zone area. This is n Larger size. Freeports tend to cover larger areas, in contrast to EPZs or even commercial free therefore offering firms greater flexibility in zones that do not permit retail sales or on-site terms of plant location and scope for inter-firm consumption of duty- and tax-free products. linkages. n Full access to the domestic market on a duty- n Broader range of permissible activities. paid basis. Unlike EPZ enterprises that are Firms can undertake any legal activity including usually required to export at least 80 percent of manufacturing, tourism, duty-free shopping, their production, most freeports allow unre- informatics, warehousing, transshipment, stricted sale to the local market or to consumers and re-packaging activities, among others. as long as all applicable import duties, taxes, and Individuals can reside within the zones, perma- other charges are fully paid. nently or temporarily. n Provision of incentives for private zone develop- TaBlE 7 ers to facilitate private entry into zone develop- Examples of Freeports/ ment. (Zone developers are treated as indirect exporters.) Specialized Zones n Relaxation of minimum export requirements in Size Date line with the WTO framework and to accom- Zone (km2) Established modate the globalization of production. City States Singapore 693 1819 n Allowing zone developers and others to supply Gibraltar 6.5 1830 utilities services (telecommunications, water/ Hong Kong (China) 1,042 1841 sewerage, power) to tenants of SEZ estates by Macau 25 1887 treating them as indirect exporters. Islands labuan, Malaysia 92 1990 n Treatment of sales of goods and services from Batam, Indonesia* 416 1978 the domestic sector to zones as "constructive ex- Cities/Provinces ports" eligible for all relevant export incentives. Iquique, Chile 2.4 1975 Shenzhen, China 327 1980 Subic Bay, Philippines 300 1992 n Shift towards a universal set of fiscal incentives Kaliningrad, Russian Federation 15,000 1995 for all promoted activities, rather than a sepa- aqaba, Jordan 375 2000 rate regime for zones. In Malaysia, for example, Howard, Panama 1,500 2004 special economic zone-based enterprises receive * The Indonesian government has announced plans to remove Batam's the same income tax incentives as promoted bonded zone status in favor of traditional EPZs on the island. industries located outside the zones. This elimi- nates the potential for unfair competition that arises when identical operations located within and outside a zone have different income tax treatment. Core Policies and Procedures Another important trend has been the expansion and Zone legislation increasingly incorporates features liberalization of the core set of policies and privileges to increase program transparency and automation. of most zone programs, especially EPZs. In general, Investment approvals have been transformed from these have taken the form of removing many of the a case-by-case evaluation process to a simple regis- distortions and restrictions previously associated with tration process, meeting explicit criteria. The use EPZs, in line with best practices. Typical provisions of negative lists, default mechanisms that confer now offered by many programs include: automatic approvals within a predetermined time- period, and other mechanisms have greatly simpli- fied investment approvals. Customs procedures have n Expansion of activities to include commercial and professional services (such as warehousing, been simplified by the use of single forms, automated transshipment, informatics) in addition to all systems, and other technologies. types of manufacturing and processing. Headway has also been made by many EPZ pro- grams to dismantle previous anti-labor provisions of n Equal treatment of investors and forms of invest- ment. Zone legislation accords the same benefits zone policies and management practices and move to foreign and local investors, and to various toward greater adherence to universal labor stan- legal forms of investment. This reduces distor- dards, as defined by the 1998 International Labour tions in terms of the impact of incentives. Organization (ILO) Declaration on Fundamental Principles and Rights at Work and various conven- tions. (See also the fourth section, Economic Perfor- mance and Impacts). TaBlE 8 Private and Public Sector Zones in Developing and Transition Economies Public Private Region Zones Zones Total americas 146 394 540 asia and the Pacific 435 556 991 Sub-Saharan africa 49 65 114 Middle East and North africa 173 40 213 Central and Eastern Europe and Central asia 69 374 443 Total 872 1,429 2,301 Note: Excludes single factory programs. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. Ownership Arrangements and ments to install external infrastructure and facilities. Development Approach In other countries, for example, the Philippines and Vietnam, private developers had to install external Perhaps the most notable trend over the past 15 years infrastructure (access roads and utility connections) has been the growing number of privately owned, in addition to financing on-site infrastructure and developed, and operated zones worldwide (Table 8). facilities (internal roads, utilities, common facilities, According to the stocktaking exercise conducted for factory buildings, and so on). this study, 62 percent of the 2,301 zones in develop- ing and transition countries are private sector devel- This is gradually changing with the advent of formal oped and operated. This contrasts greatly with the public-private partnership approaches to facilitate 1980s, when less than 25 percent of zones worldwide zone development. Examples include: were in private hands. The key factor behind the rise of private zones is the perception that private zones n Public provision of off-site infrastructure and are more successful than most public zones, as well as facilities (utility connections, roads) as an incen- a general lack of funding for new government zone tive for private funding of on-site infrastructure development. and facilities. The first wave of private zone development, in the n Assembly of land parcels with secure title and Caribbean and Central America in the 1980s, and development rights by the government for lease in Southeast Asia (the Philippines and Thailand) in to private zone development groups, develop- the 1990s, was undertaken without much forward ment of better land use/ownership laws and planning or government support. Governments regulations and adoption of enforceable zoning responded to private initiatives without systematic and land use plans. criteria for zone evaluation or designation. As a re- sult, and exemplified by the experience of industrial n Build-operate-transfer and build-own-operate free zones in the Dominican Republic, new zones approaches of on-site and off-site zone infra- placed significant demands on public infrastructure structure and facilities, with government guaran- and amenities, and outpaced the ability of govern- tees and/or financial support. TaBlE 9 Examples of Public-Private Partnership in Zone Development Country/Zone Role of Public Sector Role of Private Sector Gaza Industrial Estate, Financing of all external infrastructure as well Financing of all internal infrastructure West Bank and Gaza as factory shells; provision of land on long-term and management of zones lease basis aqaba Industrial Estate, Jordan Financing of all external infrastructure; provision Financing of all internal infrastructure of land on long-term lease basis and management of zones Subic Industrial Estate, Philippines Financing of all external infrastructure; provision Financing of all internal infrastructure of land on long-term lease basis; equity stake and management of zones in industrial estate Tan Thuan EPZ, Vietnam Provision of land on long-term lease basis; Financing of all internal and external right of way development rights on access roads infrastructure and management of zones n Contracting private management for govern- partnership approach that has been used in the ment-owned zones (management contracting), development of several zones. or lease of government zone assets by a private operator (beneficial ownership). Administrative Arrangements n Equity-shifting arrangements in which a private contract manager of a government zone can Another significant recent trend has been the evolu- exercise a purchase option once pre-defined tion of the types of bodies developing, administering, performance levels have been reached. planning, and promoting zones on the one hand, and regulating zone activity on the other. A variety of There are various options for private sector partici- institutional frameworks has been used for SEZ regu- pation in zone development, including concession lation, development, and management (Table 10). agreements, management contracts, and build-op- erate-transfer, build-own-operate, and build-own- These include autonomous government authori- operate-transfer arrangements. Table 9 profiles the ties or corporations, specialized departments within TaBlE 10 Examples of Zone administrative Models Government Authorities Ministries Zone-Specific Investment or Corporations Management Boards Promotion Agencies Jordan Cape Verde India Sri lanka Bangladesh Taiwan (China) Turkey Uganda Korea, Rep. of Senegal Ukraine Ireland Zambia Slovak Republic Poland Kenya El Salvador Vietnam TaBlE 11 Zone administrative and Regulatory Bodies (selected countries) Country, Body Type of Body Key Functions Relationship with Private Zones Traditional Structures Bangladesh Export Processing autonomous government nZone development and operation No private zones Zone authority authority nRegulation of zone activity Pakistan Export Processing autonomous government nZone development and operation No private zones Zone authority authority nRegulation of zone activity Jordan Free Zones autonomous government nZone development and operation No private industrial Corporation corporation nRegulation of zone activity estate-style free zones Shannon Development, autonomous government nZone development and operation No private zones Ireland corporation nRegulation of zone activity New Structures National Free Zones Council, autonomous government nZone regulation, planning Regulator Dominican Republic authority nZone promotion Philippine Economic Zone autonomous government nZone regulation, planning Regulator; operates authority corporation nZone promotion original, four public zones Industrial Estate authority autonomous government nZone regulation, planning Regulator; operates a of Thailand authority nZone promotion few public zones Free Zones Corporation, autonomous government nZone regulation, planning Regulator Costa Rica corporation nZone promotion Free Zones, Board, Ghana autonomous government nZone regulation, planning Regulator authority nZone promotion Kenya Export Processing autonomous government nZone regulation, planning Regulator; operates Zones authority authority nZone promotion two public zones a ministry, zone-specific management boards, and development function to the private sector, and rarely, arms of investment promotion agencies. transformed their zone authorities into purely regula- tory, planning, and promotional bodies (Table 11). Traditionally, zones were developed, operated, and regulated by the same body. This approach character- International experience has shown that countries izes most of the original zones developed through embarking on private SEZ development often find it the 1980s, particularly in Asia. But the focus of these difficult to reconcile the divergent functions of zone bodies has changed significantly in many countries. management, regulation, and investment promo- With the entry of the private sector into zone devel- tion. In many SEZ-sponsoring countries, conflicts opment, most countries have either set-up specialized of interest have arisen when regulatory bodies are public sector zone development and management also engaged in zone development activity, especially agencies, or increasingly divested the physical project when existing public zones would directly compete 0 substantial private sector participation at the board Box 2 of directors level. This approach is more commonly Special Economic Zone Facilities found among the industrial free zone programs in Latin America (notably, Costa Rica and the Domini- and Services can Republic), and it has been employed in Thailand as well. n Childcare facilities Physical Facilities and Services n Medical clinics The entry of the private sector into zone develop- n Conference centers ment has also changed the range of facilities, services, n Product exhibition areas and amenities available within zones (Box 2). In general, there has been a shift from price-based n Commercial centers competition (where zones competed on the basis of n Training facilities subsidized factory shell rentals) to product differenti- n Shelter plans ation and non-price-based competition. Noteworthy n Repair and maintenance centers trends include: n Common bonded warehouse facilities n Development of SEZs and industrial estates on n Incubator facilities an integrated rather than stand-alone basis, as n on-site banking facilities parts of commercial, tourism, residential, and recreational "townships." These integrated de- n on-site housing velopment projects allow developers to offset the n on-site customs clearance and trade logistics facilities relatively low profitability of industrial proper- ties with higher margin commercial and residen- n High-speed telecommunications and Internet tial facilities. services, networked buildings n Increasing specialization of facilities catering to the unique needs of target industries. High tech- nology SEZs have been established in Malaysia, against new private zones. Opportunities for per- Taiwan (China), Singapore, and elsewhere. The ceived and actual conflicts of interest are multiplied Laem Chabang industrial estate in the Thai when the entity charged with guiding and monitor- Eastern Seaboard is configured for petroleum ing SEZ performance is simultaneously one of the and chemical industries. SEZs catering to the SEZ operators being monitored. software and informatics services industries have been developed in India, Jamaica, the Domini- However, traditional structures continue to charac- can Republic, Mauritius, and elsewhere. terize most of the zone administrative bodies around the world, despite the advent of private zones. In n Provision of a greater range of business support countries such as Kenya, El Salvador, Honduras, services and specialized facilities. In well-run Uruguay, and elsewhere, government bodies continue private zones, as much as 50 percent of revenues to develop and operate zones, while regulating zone can be derived from these sources in addition to activity in all zones, public and private. Frequently, traditional rental and sales income. public zones are not operated on a cost-recovery basis and undercut the competitiveness of private zones. The development of these "next generation" zones has in many cases outclassed traditional EPZ estates. Some zone authorities are becoming more user-re- In countries such as the Dominican Republic, private sponsive by reorganizing themselves as corporate en- sector zones cater to higher value-added industries, tities (to escape civil service limitations) and ensuring and are able to charge premium rates. Public zones cater to low-margin, cost-sensitive industries like ap- electronics and ICT operations, leaving government parel assembly. This pattern is increasingly apparent zones to accommodate apparel, handicrafts, and in the Philippines, as private developers move "up- footwear assembly activities. market" in terms of facilities and services catering to Zone growth and keY characteriSticS Overview for about 19 percent of these zones. Just over half of them are privately owned and operated. Altogether, The number of zones--especially EPZs--has grown these zones account for approximately $200 billion dramatically, particularly over the last decade (Table in gross exports per annum and directly employ 12). Before the 1970s, most zones were clustered some 40 million workers, and perhaps some 60 mil- in industrialized countries, primarily in Western lion indirectly. In 1975, in contrast, there were only Europe. Inspired by the performance of the first 79 zones in 25 countries around the world, employ- modern industrial free zone in Shannon, Ireland in ing about 800,000 people (ILO, 2003). All were 1959, a number of developing countries, mainly in government-owned and -operated. East Asia and Latin America, initiated EPZ pro- grams. In the 1980s, the pace of zone development Numerous studies have pointed to certain key increased and expanded to new regions, including characteristics of zones in developing and transition South Asia (Bangladesh, Pakistan), South America, countries: and sub-Saharan Africa (Mauritius). The first pri- vately developed and operated zones came on line n Concentration in a few countries. A relatively in the Caribbean and Central America in the 1980s. small number of countries account for the ma- Since then, zone development has exploded with jority of worldwide zone activity. Zones are con- the emergence of new programs in the countries of centrated in Asia and the Pacific (mainly China), Eastern and Central Europe, the Commonwealth Latin America, and Central and Eastern Europe of Independent States, and Middle East and North and Central Asia. In general, less than a dozen Africa. countries account for most jobs created within zones and exports generated (Table 14). China Today, according to this assessment, there are cur- rently 2,301 zones in 119 developing and transition countries, clustered mainly in Asia and the Pacific 8 This figure excludes single factory zone programs and sponsoring and the Americas8 (Table 13). China alone accounts countries unless they also have a physically defined zone program. TaBlE 12 Dates of Establishment of Zone Programs Before 1970 1970s 1980s 1990s 2000­Present Industrialized Denmark australia* Canada Japan Countries Finland Malta France Germany Portugal Greece Iceland Ireland Italy Spain Sweden Switzerland United Kingdom United States americas Bahamas Chile Paraguay argentina Brazil Costa Rica Peru Belize Colombia El Salvador Trinidad and Tobago Cuba Dominican Republic Guatemala Uruguay Ecuador Mexico Honduras Nicaragua Panama Jamaica Venezuela, R.B. de asia and Hong Kong (China) Korea, Rep. of Bangladesh Korea, Democratic the Pacific India Malaysia China People's Republic of Macau Philippines Fiji* Mongolia Singapore Sri lanka Indonesia Vietnam Taiwan (China) Pakistan Thailand Middle East Cyprus Jordan algeria oman and Egypt, arab Morocco Bahrain North africa Rep. of Tunisia Iran, Islamic Rep. of Israel Dubai, United arab Kuwait Syrian arab Rep. Emirates lebanon libya Yemen, Republic of Central and Bulgaria Belarus albania Eastern Europe Hungary Croatia Bosnia and and Czech Republic Herzegovina Central asia Estonia Moldova Kazakhstan Kyrgyz Republic latvia lithuania Macedonia, FYR Poland Romania Russian Federation Serbia Montenegro Slovak Republic Slovenia Ukraine Uzbekistan (Continued) TaBlE 12 (Continued) Before 1970 1970s 1980s 1990s 2000­Present Sub-Saharan liberia Djibouti Burundi Gabon africa Senegal Mauritius Cameroon Gambia, The Cape Verde Mali Equatorial Guinea South africa Ghana Zambia Kenya Madagascar Malawi Mozambique Namibia Nigeria Rwanda Seychelles Tanzania Uganda Zimbabwe *Fiji and australia withdrew their free zone schemes in 2003­04. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. hosts a greater number of zones, zone workers, n Reliance on a female workforce. Female work- and exports than any other emerging market ers account for 60­70 percent of the zone work- except for Mexico, which employs a single fac- force worldwide, a number that has remained tory maquiladora scheme. consistent since the inception of EPZs. As economic activity diversifies away from simple n Concentration in a few product areas. The assembly operations, the percentage of women majority of zone enterprises worldwide are in the workforce decreases. In the Malaysian engaged in labor-intensive, assembly-oriented EPZs, for example, 40 percent of the workers are activities such as apparel, textiles, and electrical female, down from 60 percent two decades ago. and electronic goods. In 1999, it was estimated that these activities accounted for more than 80 percent of zone output worldwide (Madani, 1999). This is less the case today, given the re- Zone Development Characteristics cent increase in zones with a diversified output, by Region especially in the CIS. The degree of product specialization tends to be linked to the level Americas of industrial development of the host coun- The Americas are characterized by the widespread try. Apparel assembly operations, for example, use of zones to support export development and dominate activity in low-wage countries like facilitate trade. The U.S. Foreign Trade Zone (FTZ) Bangladesh, Sri Lanka, Madagascar, and the program, which permits both trading and manufac- Dominican Republic.9 Electronics, electrical and automotive components predominate in middle- income countries like Mexico, Malaysia, and 9 Exceptions include the cases of Tunisia and Mauritius, which tend to specialize in the apparel sector although they are middle- Thailand. income countries. This is due to the outward processing benefits granted to both countries by the EU (Cling and Letilly, 2001). Some of the key characteristics of these programs are TaBlE 13 presented in Table 2­1, Annex 2. In general, they Zones in Developing and can be grouped into the Mexican maquiladora program, comprised of a countrywide, single factory Transition Countries EPZ approach; the Central American industrial free zones, exemplified by the Dominican and Costa Number of countries with zones 119 Rican zones; zones in the English-speaking Carib- bean; and South American zones, typified by Colom- Number of zones 2,301 bia and Uruguay. While similar in many ways, these asia and the Pacific 991 zones face quite different competitive environments. China 187 n The Mexican maquiladora program consists Vietnam 185 of some 3,700 factories spread throughout the country, employs over 1 million, and exports americas 540 close to $80 billion per year. Unlike other zones Central and East Europe and Central asia 443 in the region, industrial activities are highly diversified and important sources of foreign Middle East and North africa 213 investment from Japan as well as the United Sub-Saharan africa 114 States. The key competitor for the Mexican Notes: Excludes single factory zone programs and sponsoring zones is China, rather than other zones in the countries. Zones in the entities of Macau, Hong Kong (China), region; since 2000, Chinese exports have been and Taiwan (China) are included in the asia and the Pacific region. able to displace a number of Mexican products, Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. and have become the second-most important supplier to the U.S. market in doing so. n Unlike the maquiladoras, zones in Central Amer- ica and the Dominican Republic are focused turing activities, was established in 1934. The U.S. on the United States, both as an export market FTZ program dominates zone activity in the Ameri- and the chief source of foreign investment. In cas, with 266 industrial estate-style zones at ports of fact, FDI inflows fund 80 percent of Domini- entry in the country. The region also hosts some of can zone enterprises, and 54 percent of those in the most dynamic zone programs in the world--in Costa Rica. Most of the zones in these countries Mexico, the Dominican Republic, and Costa Rica. are privately developed and operated, and focus almost exclusively on apparel, footwear, luggage, Over the past three decades, free trade zones and and other sewn good products. Even the phar- export processing zones have become ubiquitous maceutical industry in the Dominican Repub- in the region. Initially, most were developed and lic is comprised mostly of assembly activities. operated by public sector entities. This approach was Industrial diversification is taking place much quickly abandoned in favor of private zone develop- more rapidly in Costa Rica, where zone produc- ment in most countries, influenced by the experience tion is dominated by electronic semiconductors, of private zones in the Dominican Republic and due to the establishment of a large Intel plant. Costa Rica, and private industrial parks in Mexico. A number of countries in the region have fully or n Zones in the English-speaking countries of partially privatized government-owned zones; promi- the Caribbean and Central America--mainly nent examples include Costa Rica, Colombia, and Jamaica, Trinidad and Tobago, and Belize-- the Dominican Republic (with projects underway in remain mostly in public sector hands, and they El Salvador and Honduras). Still others, such as Uru- have not kept pace with their Latin counter- guay and Argentina, relied on private zone develop- parts. These zones depend almost exclusively on ment initiatives from the beginning. the United States as both investment source and export market. Apparel and sewn goods TaBlE 14 Zone Development Rankings Number of zones Employment (thousands) Exports (US$ millions) Regions asia and the Pacific/latin asia and the Pacific/latin asia and the Pacific/latin america/Central and Eastern america/Central and Eastern america/Central and Eastern Europe and Central asia/ Europe and Central asia/ Europe and Central asia/ Middle East and North africa Middle East and North africa Middle East and North africa Countries China 187 China 50,000 China $145,000 Vietnam 185 Indonesia 6,000 Malaysia 117,013 Hungary 160 Mexico 1,300 Hong Kong (China) 101,500 Costa Rica 139 Vietnam 950 Iran, Islamic Rep. of 87,289 Mexico 109 Pakistan 888 Ireland 82,500 Czech Republic 92 United arab Emirates 552 Czech Republic 68,626 Philippines 83 Philippines 545 India 49,000 Dominican Republic 58 South africa 535 algeria 39,423 Kenya 55 Thailand 452 argentina 36,478 Egypt, arab Rep. of 53 Ukraine 387 Philippines 32,030 Poland 48 Malaysia 369 Korea, Rep. of 30,610 Nicaragua 34 lithuania 369 Tunisia 20,544 Thailand 31 Honduras 354 Bangladesh 11,716 Jordan 27 Hong Kong (China) 336 lithuania 11,404 United arab Emirates 26 Tunisia 260 Mexico 10,678 Notes: Excludes zones in oECD countries. also, for India, the updated FIaS database using WEPZa data shows 341 zones having received final approval, but exact operational figures for India are not available. according to WEPZa, data on exports from zones is not easily available and makes it difficult to issue meaningful rankings. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. dominate, although zones in Jamaica, Barbados, development and management approaches (Table and elsewhere have been successful in diversify- 2­2 in Annex 2). Zones in East Asia and South Asia ing into data entry, call centers, software coding, continue to be mostly government-run, usually by and other information technology (IT) services. central government zone authorities (for example, the Republic of Korea, Singapore, and Bangladesh), n The majority of South American zones, with the state government corporations (Malaysia, India) or notable exception of Colombia, are relative late- ministerial departments [Taiwan, (China)]. comers to zone development. Most of these were in private hands from the start, or were later Traditional export processing zones have played a key privatized. Many--particularly in Colombia and role in the development of export sectors in a num- Uruguay--are "high-end" zones, offering cut- ber of Asian economies, including Sri Lanka, Taiwan ting-edge facilities and services (Box 3). (China), and Malaysia. However, only a few of these economies have been able to break away from low- skilled textiles and apparel manufacturing into higher Asia and the Pacific value-added manufacturing and services. Thailand, Malaysia, and Taiwan (China) are all often pointed The Asia and the Pacific region has been at the to as models in utilizing their zones to both promote forefront of zone development over the last three and diversify their export bases. Each of these econo- decades, led by the "Asian Tigers" in East and mies has succeeded in moving from low value-added Southeast Asia. The region displays a wide range of manufacturing to attracting investment and encour- private Tan Thuan EPZ in Ho Chi Minh City. Box 3 Indonesia's bonded zones are in government hands, ZonaAmerica Business and but its over 100 export-oriented industrial estates are almost wholly privately developed and run. Technology Park, Uruguay While most zones host traditional light manufactur- ZonaAmerica is one of the leading-edge special ing and assembly-style export processing activities, economic zones oriented to IT, software, regional Asia has taken the lead in promoting large-scale free- headquarters, and bio-technology and electronics ports. Following the phenomenal success of China's operations. freeports (Box 4), a number of other countries in the Tata Consulting Services (India) is among the region have sought similar results, including: leading companies engaged in software develop- ment for the Spanish-speaking market. n The Philippines, which converted a number of Examples of specialized facilities provided by former U.S. military bases into large-scale free- the zone include: ports--Subic Bay and Clark--with impressive results. n Fiber optic and Wifi network n Teleport and microwave links n Indonesia, which provided bonded zone status n Internet security and on-site help desk to Batam and Bintan islands, located 20 minutes away from Singapore. n Intelligent buildings n Wireless perimeter security n India, which has launched a major freeport n Research lab facilities development initiative--some 26 freeports have n Business services center been approved for development, 5 of which are underway, several by leading private sector n Medical and daycare facilities consortia. Source: www.zonamerica.com. n The Republic of Korea has initiated a major large-scale Free Economic Zone development program, with three large-scale zones being implemented by private property development aging exports in a wide range of industries, including consortia; it has also designated Cheju island as electronics assembly and component manufacturing a "Free International City" with special benefits. (Thailand, Malaysia, and Taiwan, China), automo- tive assembly (Thailand), and chemical processing A number of Asian countries have also implemented (Thailand). specialized zones for financial services, informa- tion technology, science-based industries, and other A trend towards private zone development in Asia industries requiring tailored infrastructure, facilities, has developed recently, particularly in the Southeast and business development services. Asian countries. In the early 1990s in Thailand and the Philippines, for example, the decision was taken to stimulate the development of private zones and Middle East and north Africa industrial parks rather than expand public ones; the Several countries in the Middle East were early Philippines has completely eschewed the develop- adopters of free zones. The Arab Republic of Egypt, ment of new public sector zones since new legislation the Syrian Arab Republic, Israel, and Jordan, for was passed in 1995. Vietnam has relied mostly on example, established government-run zones in the private zone developers from the very start of its 1960s and 1970s, at about the same time that zones program in 1991 with the establishment of the were first set up in the Philippines, the Dominican Box 4 Zones within Zones: The Unique Case of China Special economic zones were established by China to serve as "demonstration areas" for policy reforms and to encourage foreign investment. The economic impact of these zones has been far-reaching, transforming entire regions and economies. The Shenzhen Special Economic Zone provides a snapshot of the impact of the SEZs on China's economic development. Twenty-three years of growth has transformed Shenzhen from a small, sleepy fishing village into a thriving urban metropolis. Today, Shenzhen is an export-oriented economy with an export value in 2003 of $48 billion (14 percent of the national total), some $30 billion in FDI, and 3 million directly employed. What is less well known is the fact that the SEZs host hundreds of national level zones, all with special and differing incentive regimes, including: n 14 open coastal cities n 15 free trade zones n 17 export processing zones n 54 economic and technological development zones n 53 high technology development zones n 15 border economic cooperative areas Many other provincial- and city-level zones exist as well. Republic, the Republic of Korea, and Taiwan hub, has become an important development model (China). The majority of zones in the Middle East in the region. Its success has spawned an increasing and North Africa region are free trade zones (Table number of similar zone developments in the Gulf, 2­3 in Annex 2), aimed at facilitating trade with not just within the other Emirates, but also in Oman their host countries. Though many of these zones and Bahrain. Dubai has also taken the lead in devel- permit manufacturing, trading and associated activi- oping new, specialized zones, including both Internet ties (for instance, packaging and repackaging, break City and Media City, which promote exports in IT bulk) remain predominant. With a handful of excep- and media-related services. A $3.3 billion large-scale tions, the economic contribution of zones in the offshore financial services zone and commodities Middle East has been negligible compared to zone market is being developed on Saadiyat Island, Abu programs in the Far East and Latin America, largely Dhabi. due to their traditional focus on trading activities rather than manufacturing. The notable exceptions to this are zones in Egypt and Jordan, which have developed a manufacturing focus. Enterprises in the qualified industrial zones (QIZs)10 in Jordan, for 10 The QIZ framework was successfully implemented by extending the provisions of the Israel-United States Free Trade Area Agree- example, are engaged in apparel assembly operations ment. The key requirement is that a qualifying product must be for the U.S. market. a "substantially transformed" good, with at least 35 percent of its value added in Israel, a Jordanian QIZ, or the West Bank/ Gaza. Of that 35 percent, a minimum of 11.7 percent must be The government-developed Jebel Ali Free Zone in added in a Jordanian QIZ, 8 percent in Israel, and the remaining Dubai, a major regional distribution and logistics 15.3 percent can originate from a Jordanian QIZ, Israel, or the West Bank/Gaza. Box 5 Shannon Free Zone, Ireland The Shannon Free Zone is the world's oldest EPZ, established in 1958. located at Shannon International airport, the zone offered investors secure access to European markets, attractive tax benefits, and subsidized rent and facilities. Specialized training and manpower development facilities were integrated into zone design from inception. as a result, export manufacturing activities accelerated. There are presently 120 companies employing over 7,500 within the zone. as a large share of the zone's activities are in service sectors, the zone's contribution to overall merchandise exports is relatively small, accounting for less than 3 percent of the total. on a yearly basis, zone exports total $2.5 billion and imports $1.2 billion. over time, liberalization of the Irish economy outside the zone has reduced its relative importance. Never- theless, it remains an important catalyst for the region, leading the economy's diversification into new, value-added sectors. Western Europe have been designated in the country to promote the revitalization of distressed urban areas.12 The concept of special economic zones is not new to Western Europe (Table 2­4 in Annex 2). Many of these countries (the United Kingdom, Italy, Den- Central and Eastern Europe and mark) have used free trade zones for centuries. Most Central Asia Western European zones restrict manufacturing and other activities, only allowing packing/re-packing Following the break-up of the Soviet Union, many and warehousing. This is due in large part to EU countries of the former Soviet bloc turned to free regulations.11 As a result, processing operations are zones as a means of attracting foreign investment and only permitted in the Hamburg FTZ (Germany), integrating their economies with the global economy and in the FTZs of the Canary Islands (Spain), through export-led expansion (Table 2­5 in Annex Azores and Madeira (Portugal) and overseas depart- 2). In some cases in Central and Eastern Europe, free ments. All other zones in the EU must operate as free zones pre-dated the dissolution of the Soviet Union trade zones. Because most of these zones are located and were carried forward as export development in ports, they are controlled by port or customs tools. Early reformers in the region include Bulgaria, authorities, and are therefore publicly developed and Romania, the Kyrgyz Republic, and the former managed. Yugoslavia. The Shannon Free Zone in Ireland (Box 5) was Another interesting feature of several zone programs the world's first EPZ, inspiring the development of is the reliance on the re-use of existing infrastructure EPZs in emerging markets worldwide. Although less and facilities in addition to "greenfield" development important now as a catalyst for economic growth, (new facility construction by investors). Several the zone was critical to the growth of exports, attrac- Polish and Ukrainian SEZs, for example, cover tion of FDI, and outward orientation of the Irish parts of existing towns and specialized facilities (Box economy. 6). Likewise, the Klaipeda zone in Lithuania is the Another noteworthy program is the Urban Free Zone program of France. Modeled after the United 11 Countries must abide by Council Regulation (EEC) No. 2913/92, Kingdom's Enterprise Zones and Empowerment Title IV, Chapter Three, entitled "Free Zones and Free Ware- houses" (Articles 166 through 182). Zones in the United States, over 85 urban zones 12 France also hosts an additional 751 Zones Urbaines Sensibles. 0 conversion of a former Soviet air force base. This approach avoids the need for huge outlays of public Box 6 funding and improves the economic returns of zone development, as discussed in the next section. Pomeranian Special Economic Zone, Poland The accession to the European Union of a number of the countries in the region will require some adjust- Poland has 14 free zones established throughout ments to their zone programs. Each of the countries the country. Though identified as SEZs, the zones needs authorization from the EU to retain its free generally cover only a limited land area and focus zones and must negotiate the relevant terms. In some on traditional EPZ and FTZ activities. The program, cases, such as Hungary, it is expected that many established in 1995, has been designed as a zones will be eliminated, particularly those that do regional development tool. not serve any regional development purpose. The experience of the Pomeranian Special Economic Zone exemplifies the Polish approach to re-use Sub-Saharan Africa existing infrastructure for zone development. The Pomeranian SEZ was established in 2001 as a Several African countries were pioneers in using free result of the merger of two special economic zones . zones as economic development tools. Liberia and in Tczew and Zarnowiec. The Zone covers an area of 677 hectares and is located in the Pomorskie Senegal, for example, established EPZs in the early Province, Kwidzyn, Starogard Gdanski, Tczew, ´ ´ 1970s. In 1981, Mauritius started a single factory- . and Zarnowiec. The Zone will operate until the year based EPZ program whose prominence and success 2017. led to a wave of zone development throughout the By the end of June, 2007, the total number of continent in the late 1980s in East, Southern, and permits granted to conduct business activities in West Africa. the Pomeranian SEZ was 60, with a total invest- ment outlay of $870 million in projects employing As shown in Table 2­6 in Annex 2, most countries in 13,866 people. the region implemented both pure EPZ approaches one of the key aims of this zone is to make effective along with single factory models. With the notable use of existing buildings and infrastructure, and to exceptions of Ghana (which opted for private sector zones) and Kenya (where most zones are private), develop the grounds of the former site of. the discon- tinued nuclear power station project in Zarnowiec. most zones are developed and operated by govern- ment, typically by an EPZ authority. A number of countries--Madagascar, Mali, Mauritius, and the Seychelles--operate single factory EPZ programs although sales to the United States under provisions that have been quite successful in terms of job cre- of the African Growth and Opportunity Act frame- ation and exports. work are increasing. The dominant industries in African zones are ap- South Africa has two new industrial development parel/textiles and food processing. Traditionally, the zones in East London and Port Elizabeth, which are bulk of FDI to Africa has come from the EU, but attracting a diverse group of investments, including an increasing number of East Asian and South Asian automobile assembly, metalworking, and other fairly companies have located in African zones in recent capital-intensive operations. years. The key export market remains the EU, economic performance and impactS The economic performance and impact of zone pro- n Export growth and export diversification grams in developing countries have been evaluated n Foreign exchange earnings in numerous studies. Most of these, however, have n Foreign direct investment focused on government-developed and -run zones n Government revenues and largely neglected the economic impact of private zone development. Social critics of zone develop- The impact of these benefits is obviously amplified ment, on the other hand, have emphasized the social in poorer countries where jobs and foreign exchange and environmental impacts of zones and largely earnings and government resources are scarce. The dismissed economic contributions. And almost all dynamic benefits are much harder to measure, but studies have failed to evaluate the contributions of are far more important to the long-term contribu- zones relative to other duty-abatement mechanisms. tions from zone development. These include: How do zone-based enterprises compare to firms operating under other incentive regimes in terms of n Indirect employment creation their economic, social, and environmental impacts? n Skills upgrading This section outlines the major policy issues associ- n Female employment ated with zone development and documents their n Technology transfer overall socio-economic economic benefits and costs. n "Demonstration effect" arising from application of "best practices" n Regional development Defining Zone Benefits and Costs Zone development also entails a range of financial The economic benefits from zone development are and economic costs, including: salaries of government both static and dynamic. The static benefits are quite workers in the zone authority and other operating straightforward and include: expenses; infrastructure development outlays; import duties and charges lost from leakages of duty-free goods; and taxes foregone from firms relocating from n Direct employment creation and income generation the domestic customs territory to the zone. But it is Box 7 Both Sides of the Zone Debate Topic Critics Proponents Foreign exchange earnings Zones host import-dependent Countries can increase value- activities with low value-added. added through "equal footing" policies. Industrial activity Zones perpetuate low-skill Many zones have promoted assembly operations. industrial and skill upgrading. Policy reform Zones help avoid country-wide Zones are catalysts to broader reforms. reforms. FDI Zones attract the "wrong" FDI Zones are an effective tool to in low-tech, low-skill, and foot- attract FDI and most industries loose activities. are not footloose. Women Zone industries segregate Zones are an important source women and pay them lower of employment for women and wages. higher wages. labor rights Zones suppress basic labor Most zones comply with Ilo rights. standards. Working conditions Zones permit companies to get Better run zones offer much away with poor work place better working standards and health and safety conditions. conditions than elsewhere. Environment Zones have lax environmental Well-run zones have better controls to attract polluting environmental controls and industries. practices. important to note that a government's costs associ- unfairly compete with domestic products. Tax losses ated with zone development are those that are incre- can also result from the relocation (rather than mental--additional costs not otherwise entailed--and expansion) of existing, tax-paying enterprises in the not recovered through service charges and assessments. domestic customs territory to a tax-free zone. Many studies have made the mistake of focusing on total rather than incremental costs specifically linked SEZs in some countries have also been criticized to zone development. Public expenditures are clearly for negative socio-economic impacts, particularly in the highest in the cases where governments develop relation to the role of women, labor, and working zones, and even worse when they do not operate on a conditions in zones (ILO, 1998). These include: cost-recovery basis, providing the subsidies typical of most government-run zones. n Exploitation of women--lower wage levels, lack of training or skill upgrading, use of trainees to Adverse financial impacts may also arise from leak- lower wage costs ages of duty-free merchandise from zones, which n Suppression of labor standards and core labor not only have negative fiscal consequences but also rights including trade unionization n Poor employment conditions (work hours, Table 15, SEZs account for less than 1 percent of the health and safety) global workforce, and are above 1 percent only in the n Lax environmental standards Americas and the Middle East and North Africa. Another important issue is whether zone develop- While the direct employment impact of zones on ment diverts developing countries from implement- average is marginal, the indirect employment ef- ing broad-based economic reforms. Some analysts fects can be quite substantial. The ratio of indirect have proposed that zones may act as "pressure valves" to direct jobs created ranges from 0.25 percent in for countries with growing unemployment, and Mauritius (ILO, 2003) to 0.7 percent in Madagascar allow them to avoid implementing painful structural (Cling, Razafindrakoto and Roubaud, 2004), to 2.0 reforms (Madani, 1999). Proponents argue, on the in Honduras (ILO, 2003). This implies that the indi- other hand, that when implemented properly, zones rect employment effect of EPZ development globally can serve as catalysts for countrywide reform by al- could range from 9.6 million to 77 million jobs. lowing countries to pilot and test new reforms and approaches before extending them countrywide. Zones can and do play a major role in employment creation in certain countries. The rate of job creation Related to this is the opportunity cost of zone devel- in a number of programs, for example, has been opment. Does a focus on zone development divert remarkable. Employment in the Dominican Repub- scarce government resources from addressing other lic's industrial free zones rose from 500 in 1970 to pressing needs such as education, health, or infra- almost 200,000 today. Almost 1 million workers are structure? Does the establishment of zone authorities employed in the Philippine eco-zones. The share of draw away scarce human resources in government zone employment of national employment varies from other priorities, or does the implementation of best practices in governance enhance the capacity of government employees to benefit governments more broadly? TaBlE 15 Another consequence of zone development fre- Direct Employment Impact of quently raised by critics is the impact on industrial Special Economic Zones upgrading. Do zones stimulate and/or perpetuate a dependence on low-skill, low-technology, assem- Direct Percentage of bly-type operations and a dangerous dependence on Employment National one sector (such as apparel)? Or do zones actually (millions) Employment promote industrial upgrading and diversification? Global 68.441 0.21% (See also Box 7, which summarizes key issues in the zone debate.) asia and the Pacific 61.089 2.3% americas 3.084 1.15% Western Europe .179 Economic Impacts Central and East Europe Employment Generation and Central asia 1.590 0.001% Middle East and North africa 1.458 1.59% One of the key objectives for EPZ development is employment generation. EPZs are viewed as highly Sub-Saharan africa 1.040 0.20% effective tools for job generation, particularly for Note: Estimates from FIaS database were formulated on Ilo data. women first entering the workforce. Experience sug- In some cases where discrepancies arise due to inclusion of indirect employment figures (as identified by WEPZa), a revised direct employ- gests, however, that the direct employment impact ment figure was calculated using a standard ratio of 1:2; that is, for of zones is marginal. In most countries, zones are every one direct job created, two indirect jobs are in turn created. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. not a major source of employment. As shown in widely, with Honduras at 4.6 percent, the Domini- n Sub-Saharan Africa: Ghana (22.4 percent); can Republic at 6.2 percent, Tunisia at 8 percent, Fiji Madagascar (80 percent); Mauritius (34.4 at 10 percent, the Seychelles at 12 percent, Mauritius percent). at 24 percent, and the United Arab Emirates at 25 percent. The impact of these jobs in countries with EPZ programs also spearheaded export diversifica- high rates of unemployment and underemployment tion efforts in most countries, from an almost total are significant; as Madani (1999) points out, "for reliance on primary commodities to manufactured workers, the alternative to EPZ employment is often exports. For example, most of the countries of the unemployment, underemployment or return to vil- Caribbean and Central America exported mainly lage subsistence life." fruits and vegetables before the establishment of EPZs. In Costa Rica, the EPZ share of manufactured Evidence suggests that zones are a much more signifi- exports jumped from less than 10 percent in 1990 to cant source of employment in smaller countries with 55 percent in 2003. Ten years ago, the main exports populations of less than 5 million (examples include of the zones were apparel and textile products; today, Mauritius, the Seychelles, and Jamaica) than in larger over half of zone exports are modular circuits and countries. Even in Mexico, for example, the highly other electronic components, even excluding exports visible and successful maquiladora program accounts generated by the Intel plant opened in 1997. Many for only 3.2 percent of total jobs (Sadni-Jallab and other countries have had similar experiences. In Blanco de Armas, 2002). Tunisia, the EPZ share of manufactured exports has more than doubled since 1990; in Kenya the share increased from 3.5 percent in 1997 to 19.3 percent Export Development in 2003; and in the Philippines the eco-zones' share Another primary goal of zone development is the of national merchandise exports increased from 22 contribution to export development, not only in percent in 1995 to 76 percent in 2003. terms of accelerating export growth, but also export diversification, particularly important to poorer Foreign Direct Investment developing countries reliant on the export of primary products. In contrast to the relatively marginal role Zones can also play an important role in attracting that zones have played in terms of employment FDI. Supporters claim that by offering world-class creation, EPZs account for a significant share of facilities and best practice policies, zones can offset manufactured exports in most regions, particularly in some aspects of an adverse investment climate. the Middle East and North Africa and sub-Saharan Unfortunately, the impact of zones on FDI is hard Africa (Table 16). to gauge given the lack of data. Many zones do not track foreign investment flows separately, and data is In many countries, zone programs accounted for a uneven. major share of exports in 2005. Examples include: Available data suggests that SEZs are an important n Americas: Nicaragua (79.4 percent); the destination of FDI in some countries. In the Philip- Dominican Republic (77 percent); Panama pines, for example, the share of FDI flows going to (67 percent). the country's eco-zones increased from 30 percent in 1997 to over 81 percent in 2000 (UNCTAD, 2003). n Asia and the Pacific: Bangladesh (75.6 percent); In Bangladesh, $103 million of the $328 million of Sri Lanka (67.1 percent); the Philippines FDI inflows were registered in EPZs. In Mexico, the (78.2 percent); Pakistan (50.3 percent). share of annual FDI accounted for by maquiladora operations increased from 6 percent in 1994 to 23 n Middle East and North Africa: Lebanon percent in 2000 (Sadni-Jallab and Blanco de Armas, (36.3 percent); Bahrain (68.9 percent); 2002). And in China, SEZs account for over 80 Morocco (61 percent). percent of cumulative FDI. However in many other countries, as reviewed later below, zones have played for example, increased only slightly from 6.6 to 7.2 percent in 1988­1998. Even worse, skill levels in TaBlE 16 the non-maquila workforce were much higher at Impact of Zones on Exports about 30 percent (Sadni-Jallab and Blanco de Armas, 2002). The high import composition of exports and Zone Exports Percentage the low skill levels may suggest that technology diffu- (US$ millions) of Exports sion from the maquila sector is lower than expected. Global 851,032 40.8% Other analyses have suggested just the opposite. asia and the Pacific 510,666 41.0% There is clearly substantial evidence of the catalytic americas 72,636 39.0% role played by EPZs in the industrial upgrading and technology transfer in the East Asian newly indus- Central and East Europe and trialized economies, especially the Republic of Korea Central asia 89,666 38.7% and Taiwan (China). In Malaysia and the Philippines, Middle East and North africa 169,459 36.4% there has been significant industrial upgrading in the electronics sector located mainly within zones (Lall, Sub-Saharan africa 8,605 48.7% 2000). The Philippine Economic Zone Authority has Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. documented the substantial rise in skill levels in the Philippine eco-zones, with decreases in the propor- tion of the production workforce in electronics industries in favor of more skill-intensive design and research activities. The software technology parks in a marginal role in FDI attraction and most invest- India, for example, were critical to the expansion and ment is of domestic origin. upgrading of ICT activities, not just in terms of rou- tine data entry and software coding operations, but Industrial Upgrading and Technology also in much more complex software development, Transfer content development, and multimedia operations. The fact that zones have played a major role in di- But as with many issues concerned with zones, the versification of export bases would suggest that they key issue is whether enterprises located in EPZs or have contributed to upgrading the "skill content" of other special economic zones are any different from their output. Critics claim that the opposite is true-- those located in the domestic customs territory of a that while zone production diversifies from apparel country, registered under a different regime. While to electronics, skill requirements and production it could be argued that the technology transfer and processes remain static and thus zones perpetuate product upgrading is suppressed because special eco- "dead end" simple assembly operations. They suggest nomic zone-based enterprises are provided duty-free that firms engaged in EPZs tend to be low-quality status, this is a common benefit given to export- FDI, compete more on the basis of price, and invest oriented FDI generally. Surveys indicate no signifi- little in advanced technologies or enhancing produc- cant differences between EPZ and non-EPZ-based tivity and skills development. export-oriented firms in terms of technology transfer and linkages, suggesting that EPZ enterprises may be Unfortunately, the lack of zone- and firm-level data wrongly singled out (UNCTAD, 2002). precludes any systematic analysis of the issue. An indication of the skill content of zone exports is the share of skilled labor in the total zone workforce. Foreign Exchange Earnings Certain assessments have suggested that skill levels in zone workforces have remained steady over time An increase in foreign exchange earnings is one of and have not increased as would be expected. The the main benefits expected of zone development. The share of skilled labor in the maquila work force, foreign exchange contribution of zone programs is hard to establish directly since most do not collect through the mid 1990s (Jayanthakumaran, 2002). foreign exchange earning statistics. Earnings can be In the apparel industry, nearly 90 percent of fabrics approximated by tracking net exports (gross exports are imported. In most under-performing zones, minus imports) as an indicator of the local value- the value-added consists mainly of the wage bill. In added from zone activity. The net economic impact Mexico, it has been estimated that domestic inputs of zones is increased as local value addition is raised. comprise only 3 percent of inputs of maquila en- terprises (Sadni-Jallab and Blanco de Armas, 2002). The success that some zones have had in increasing In most Central American EPZs, wages constitute local purchases of zone-based goods and services is 55­65 percent of total domestic expenditures, and exemplified by the East Asian newly industrialized rent, utilities, and transportation services account for countries. In the Republic of Korea, for example, an additional 25­30 percent (Jenkins, Esquivel and net EPZ exports were over 60 percent in 2000 Larrain, 1998). (Schrank, 2001). Korean zones were successful in developing significant backward supply linkages What accounts for this discrepancy in performance, and sub-contracting relationships with domestic especially in countries with similar cost structures, firms, particularly in footwear operations (Healey locations, and resource endowments? There are a and Lutkenhorst, 1989). In Indonesia, net exports number of reasons, including exchange rate devalu- of firms located in bonded zones reached 62 percent ations that raise import prices, distorting the value in 1990. The net export ratio among the Philippine of net exports. Another important factor appears to eco-zone firms was 45 percent in 2003, according to relate to the degree of success countries have had in the Philippine Export Zone Authority. fostering backward linkages with suppliers in host economies, in particular, the extent to which domes- The experience of other zone-sponsoring countries tic inputs are used in the production process. Several in other regions has been similar. In Mauritius, for theories have been put forward to explain the relative example, net EPZ exports increased from 23 percent paucity of backward and forward linkages formed in 1980 to 41 percent in 1995 and nearly 50 percent by zone-based enterprises and the tendency for some in 2002. The net export ratio of Costa Rican zones EPZs to remain enclaves: rose from 18 percent in 1996 to 40 percent in 2000. Free zones in Honduras increased net exports from n High import dependence of most EPZ activi- 3.3 percent in 1990 to 24.5 percent in 1995; in El ties. Apparel, footwear, and electronics opera- Salvador, the increase was from 3.8 percent in 1990 tions in particular have import ratios of 60­85 to 20.4 percent in 1996. percent. There are numerous examples where local value n Impact of certain export market access added of zone operations is low or has not changed arrangements. "Outward processing relief" over the years. It is notable that even in a relatively schemes--such as United States' Section dynamic economy like Mexico, for example, the net 806/807 of the U.S. Tariff Code (now 9802.0) export ratio of the maquiladoras has remained steady in which duty-free access to the U.S. market is at about 30 percent between 1991 and 2000 (Sadni- linked proportionally to the use of U.S.-made Jallab and Blanco de Armas, 2002). Similarly, in the components--effectively discriminate against Dominican Republic, the share of domestic value- the use of domestic inputs favoring imported added in total output actually fell from 40­45 per- inputs. cent in the early 1980s to 25­30 percent by the end of the decade (Jenkins, Esquivel and Larrain, 1998). n Ban against local sales by EPZ enterprises in Net zone exports were negligible in Nicaragua and some zone programs which preclude the devel- Guatemala, at 8 percent and 9 percent, respectively, opment of forward linkages. in 1996. The proportion of raw material purchases that were of domestic origin among Sri Lankan n Lack of competitiveness of local firms. zones remained static at 5 percent from start up Domestic enterprises in many developing and transition countries are unprepared, unable, and governments. Income tax holidays in particular are at times uninterested in servicing EPZ firms regarded as "giveaways" because they are not useful with completely different quality, scale, price to foreign affiliates in reducing their home country and delivery requirements.13 tax burden. Still, the issue with EPZ incentives, as with all fiscal incentives, is whether investors would n Preference by global firms to rely on their have located in the zone without the provision of international suppliers for raw materials and incentives in the first place. intermediate goods as part of their global sourc- ing strategies. Zone development results in complex revenue impacts for governments (Box 8). The main revenue n Lack of awareness and information about gains are from personal income taxes (wage bill) and prospective domestic suppliers on the part of income from import duties and charges on zone EPZ-based firms, and potential market opportu- output sold into the domestic customs territory.14 nities on the part of local enterprises. Corporate income taxes, even where they are as- sessed, are a marginal part of the revenue stream. From a policy perspective, the precise relation- In the case of government-run zones, revenue is also ship between limited backward linkages and EPZs derived from fees and service charges and land and and other special economic zones remains unclear. building rentals and sales. Export-oriented companies located outside zones and benefiting from a special incentive regime (under Set against these are the incremental costs of regulat- an investment code, manufacturing under bond, ing a zone program, and in some countries, develop- bonded manufacturing warehouse, duty drawback, ment and management. These are both one-time and or other scheme) seem particularly averse to forming recurrent expenditures. Zones can become financial backward linkages. These firms are generally import- failures for governments under three scenarios: if dependent operations that take part in segmented, zone development entails massive government capital global production chains, frequently exporting under outlays (for onsite or offsite infrastructure develop- outward processing relief types of mechanisms. ment); if the zones are not operated on a cost-recov- ery basis; and/or, if they receive subsidized inputs It can, in fact, be argued that the scope for supply such as electricity or other services. and other linkages to develop is greater with special economic zones. There is a greater incentive for The earliest EPZs [in the Republic of Korea, Taiwan local firms to sell goods and services to zone-based (China), India, the Philippines, for instance] were enterprises because such sales are (typically) developed and run by governments on a subsidized "deemed" exports and therefore are eligible for duty basis. In most cases, land and building rates were drawback and other export incentives. The imple- set below cost-recovery levels and zones were not mentation of these types of "equal footing" policies expected to recover operating, let alone development, aimed at domestic enterprises is one reason that costs. In a few other cases, zone-based enterprises linkages are more prevalent in some zone programs. benefited from subsidized energy, water, and other inputs. And in still other cases, zones were developed Budgetary Impacts The budgetary impact of special economic zones 13 "In most developing countries a modern, high volume, produc- tive sector, producing essentially for export is superimposed on a depends in part on the tax policies and fiscal incen- small-scale, non-specialized sector, with low productivity, produc- tives offered to qualifying enterprises. The typical ing for the domestic market." (Cling and Letailly, 2002). This makes the development of supply linkages difficult. package of fiscal incentives offered by EPZs almost 14 The contribution of taxes on EPZ wages can be considerable. In universally includes corporate income tax holidays or Madagascar, over 20 percent of employers' social contributions are derived from free zone companies, and the program contributed reduced tax rates, import duty exemptions, indirect to 2 percent of GDP in 1998. If spillover effects are taken into ac- tax abatements, and so on. Some analysts claim that count, the free zones contribution to GDP increases to 7 percent these incentives represent revenue forgone by host and an additional 5 percent in tax revenues (Razafindrakoto and Rabaud, 2002). Box 8 Government Revenues and Costs from Zone Development Revenues n Corporate income tax (if no tax holiday) n Personal income tax on direct and indirect employment n Permit fees and service charges n Rental or sales fees (from sale or rental of public land to developers) n Import duties and taxes on zone products sold to the domestic customs territory n Concession fees for other facilities (port, power plant, and so on), linked to zone development Costs n Wage bill of government workers needed to regulate zone activity or operate the zone and other operating expenditures n Public sector capital outlays for external infrastructure (and internal infrastructure and facilities in the case of a publicly developed zone) n Import duties and charges lost from smuggling n Taxes forgone from enterprises relocating from the domestic customs territory to the zone n Subsidies in remote areas requiring massive public sector and work conditions, environmental impacts, and outlays. A much cited example is the Bataan EPZ in related factors. In recent years, the advocacy efforts the Philippines, which required the construction of of trade unions and non-governmental organizations a $25 million dam to provide water to zone enter- and improved enforcement by the International prises (Warr, 1989). In recent years, however, public Labor Organization have had a positive impact in infrastructure development costs have been reduced improving labor policies and practices within zones. through better location and planning of zones and In many important respects, significant headway associated infrastructure, and a greater reliance on has been made in dismantling the anti-union and the private sector to develop and operate zones. labor-suppressing aspects of several EPZ laws. Most zone-sponsoring countries have ratified relevant ILO conventions, and national labor legislation applies to Social and Environmental Impacts EPZs in most countries. There is a general realization that a zone's competitiveness in attracting quality Labor Standards, Pay, and Working investors is largely based on the productivity of its Conditions workforce and labor-management practices. Since the onset of zone development in develop- Nevertheless, significant issues remain with some ing countries, concerns have been raised about countries, as documented by the ILO (2003) and the impact of zones on labor, particularly in terms International Confederation of Free Trade Unions of gender, wage levels and benefits, worker rights (ICFTU, 2004): n Restrictions on the freedom of association according to the size of firms, nationality, industry, and collective bargaining (in Bangladesh, the and labor market conditions (Madani, 1999). Dominican Republic,15 Nigeria, Pakistan, Occupational health and safety practices are bet- Panama, Sri Lanka, Egypt) ter with foreign multinationals inside zones than domestic enterprises outside. What is more telling n Bans on the right to strike (in Bangladesh, Na- is that the adverse labor and social issues are almost mibia, Zimbabwe, Nigeria,16 Panama, Turkey17) wholly associated with countries featuring programs developed and run by the government, especially n Non-observance of national labor legislation older zones catering to "low-end," apparel-assembly within zones (in Islamic Republic of Iran, operations. Sudan). Even where policies are ILO-consistent, there are Human Resource Development discrepancies in the implementation of those policies One of the positive impacts expected of EPZ in some zones. These include weak labor inspection development is workforce upgrading and skills practices, intimidation of workers, limited access development, both through formal training and to zones by organizers, formation of company- apprenticeship programs, and "learning by doing." controlled unions, and other anti-union practices However, some claim that anticipated benefits have (ICFTU, 2004). Several countries have instituted fallen short in many zones because EPZ produc- special mechanisms for dialogue and dispute resolu- tion processes typically involve basic skills and low tion of labor issues. Zone authorities in the Philip- technology (ILO, 2003). There is little incentive for pines, Singapore, and Trinidad and Tobago have firms with short time horizons to invest in productiv- trade union representatives on their boards (ILO, ity enhancement and skills development. The learn- 2003). ing that does take place may be limited to industrial discipline, work habits, and routine. Labor is often There are continuing concerns regarding work seen more as a cost to be contained than as a resource conditions and social protections, including women's to develop (UNCTAD, 2002). rights in some countries. Some headway has been made in respect to gender discrimination and gen- Other assessments, however, are quite positive about der-related barriers in zones, including equal pay, the knowledge spillover effects of EPZs, especially pregnancy, and childcare. Mexican legislation, for those catering to higher value-added or knowledge- example, now explicitly prohibits discrimination intensive industries (Madani, 1999). The Penang on the basis of pregnancy. But gender discrimina- Skills Development Centre in Malaysia, for example, tion continues in some zones, especially in terms of is widely recognized as a very successful model of unequal pay, inadequate rights during pregnancy, EPZ company-sponsored skills development. Rhee suitable working hours, and forced dismissals when (1990) notes the sharp productivity improvements women reach the fourth month of pregnancy. The among workers in Dominican zones in the first few ILO (2003) indicates there are difficulties in Ban- years of employment. An emphasis on developing gladesh, Honduras, Indonesia, Madagascar, Mexico, human resources is especially evident in zones in Senegal, and Sri Lanka with working conditions, tight labor markets, as seen among the Thai Board of hours of work, occupational health and safety, and Investment enterprises in the mid-1990s. In addition related issues. to the benefits of industrial work discipline for new Despite the seriousness of these issues, the prepon- derance of evidence suggests that they may not be 15 The Dominican Republic government has since reasserted the as widespread as noted by the ICFTU, and concern freedom of workers to join trade unions and engage in collec- tive bargaining. There are 148 trade unions operating within the only a fraction of the more than 100 zone programs industrial free zones in the country. around the world. Evidence also suggests that average 16 Nigeria bans strikes or lockouts for a period of 10 years following wages are higher at EPZ enterprises than outside set up of a company in a zone (ICTFTU, 2004). 17 Turkey has evidently removed the ban against strikes within its (Kusago, and Tzannatos, 1998). But wage rates vary free zones, but further information is not available. 0 TaBlE 17 Zones as Catalysts and Enclaves Zones as Catalysts Zones as Enclaves Republic of Korea Dominican Republic n Equal footing policies extended to firms in domestic n Zones purchase only 0.001% of material inputs from customs area enhancing competitiveness domestic customs area n almost $200 million of local capital and intermediate n Efforts to stimulate backward linkages are unsuccessful goods purchased by zone firms per month n Domestic economy remains protected by high average n liberal FDI policies tested in free zones before tariffs, lack of competition, NTBs extended countrywide Jordan Tunisia n automated customs systems piloted and implemented in n Single factories, import-dependent with limited backward the aqaba SEZ prior to countrywide roll-out linkages n aqaba SEZ implements on-line, simple business registration n Domestic producers protected by high average tariffs n aqaba SEZ customs forces merged with national customs (34%), NTBs, lack of competition to upgrade latter's capabilities Kuwait n FTZ pilot for private infrastructure provision outside utilities n FTZ law liberalizes foreign ownership restrictions; later extended to countrywide FDI law entrants to the workforce, typical of EPZ labor, skills "priority sector" status (Williams, 1995). Adverse development of local middle managers has been an environmental impacts have also been raised with enormous catalyst for technology diffusion. In the respect to older EPZs in Sri Lanka, the Dominican Philippines and Mauritius, for example, local owner- Republic, and some EPZ factories in Mauritius. ship of EPZ and other export enterprises increased significantly as managers left foreign companies to In evaluating environmental impacts, however, a start their own firms. distinction needs to be drawn between countrywide single factory EPZ programs, as in Mexico and Mau- Environmental Impacts ritius, and industrial park-style zones elsewhere. It is much harder for governments to adequately enforce The experiences of the Mexican maquiladora plants environmental standards for EPZ plants dispersed are probably the most cited examples of the environ- around a country, as exemplified by the Mexican mental degradation linked to EPZ development. As experience. Industrial park-style zones, especially growth of the maquiladora plants far outpaced the private zones and more modern zones, on the other ability of border cities such as Tijuana and Juarez hand, offer purpose-built facilities that are specifi- to provide necessary waste treatment infrastructure cally tailored to the needs of target industries. These and facilities, air and solid waste pollution quickly projects have a much better environmental record became a health hazard for nearby populations. This due to zone-specific environmental regulations with was compounded by weak monitoring and enforce- more effective implementation, planned facilities for ment capabilities of national and local environmental waste treatment, and a realization that effective man- authorities and a perception that environmental laws agement of the environment is a key selling point to could be weakened in the maquilas because of their investors. Special Economic Zones and Ireland, and Malaysia, deliberate efforts were made Countrywide Reforms to integrate zones into national economies at some point in their development process. Zones were used, Some economists suggest that special economic variously, to facilitate a broader export orientation, zones are a "second-best solution" to compensate for transfer technology, and improve the overall business the anti-export bias of trade policies and other policy environment by extending best practice policy. distortions typical of many developing countries. Using different hypotheses and parameters, econo- The process of integration has typically been mists have concluded that zones lead to economic undertaken by extending "equal footing" policies distortions (Hamada, 1974) and, conversely, that to domestic suppliers of capital and intermediate the establishment of a zone improves a country's goods. In Taiwan (China) and the Republic of Korea, well-being (Young and Miyagiwa, 1997). At a governments provided local producers with efficient public policy level, the fundamental debate has been duty-free access to inputs that they supplied to whether special economic zones promote country- zone-based firms. Local producers, including smaller wide economic policy reforms by serving as "demon- businesses, received tax credits and rebates on duties stration areas" or catalysts, or whether instead they paid on imported materials used in products sold act as "pressure valves" for unemployment, reducing to zone-based firms. In the Republic of Korea, local the incentive to reform and, thereby, diverting re- suppliers were able to import components on the form energies (Table 17). A 1992 World Bank study basis of the original letters of credit of the zone-based cautioned against the possibility that EPZs could be firms. Another important "transmission and integra- used by developing countries to "muddle along with- tion mechanism" in these and other countries was out reforms," and stressed the need to use zones as the extensive use of sub-contracting by zone-based a supplement to countrywide reform, as opposed to firms to local producers. Zone-based firms provided creating isolated free market enclaves (World Bank, materials, technical assistance, and financing as part 1992). of the sub-contracting arrangement. These were supported by broader trade and investment reforms In this context, the experiences of the Republic of that exposed domestic firms to competition and Korea and the Dominican Republic offer an in- enhanced competitiveness, and focused programs on formative contrast. The Republic of Korea is an establishing backward and forward linkages between example of a country where establishment of the zone-based firms and domestic enterprises.18 EPZ program in 1970 spearheaded broad reform and structural transformation of the overall economy. By China, Malaysia, Jamaica, Kuwait, and Jordan have the 1980s, almost 35 percent of total consumption used zones as demonstration areas to test the impact of equipment and components of EPZ firms was of new policies and approaches designed to improve bought locally. The Korean EPZs purchased almost the business environment. The Chinese SEZs, for $200 million of locally manufactured capital and example, experimented with market-oriented FDI, intermediate goods per month (UNCTC, 1991). In land, and tax policies before extending them to all contrast, 30 years after the establishment of the first enterprises. Costa Rica used zones as efficient mecha- industrial free zone in the Dominican Republic, the nisms to attract foreign investment prior to more 500 zone firms purchase no more than 0.01 percent broadly extending these approaches to enterprises. of their material inputs from the domestic customs territory. Very few zones coexist successfully with a highly protected domestic economy (Schrank, 2001). 18 In Taiwan (China), the Republic of Korea, and Ireland, local authorities promoted personnel exchanges, supported training Why are some countries able to use special economic efforts, and provided technical assistance to potential suppliers. The Irish program to increase linkages included the technical zones as demonstrators of best practice and catalysts departments of local universities. The program also encouraged of reform and others are not? Perhaps some coun- purchasing managers of export-oriented firms to work with local suppliers to help them achieve the required quality standards tries have consciously viewed zones as mechanisms and delivery times (Jenkins, Esquivel and Larrain, 2002). In to change their economies and others have not. Singapore, the Local Industry Upgrading Program created in 1986 had 30 multinational corporations, 11 large local firms and 670 In countries as diverse as the Republic of Korea, domestic suppliers by 1999 (Sanchez-Ancochea, 2004). Box 9 Difficulties in Establishing Industrial linkages: The Case of the Dominican Republic a backward linkages program in the Dominican Republic sponsored by the United States agency for Interna- tional Development illustrates the challenge some countries have experienced in developing linkages with EPZs. While feasibility studies revealed abundant EPZ demand for textiles, precision plastic parts, metal stamping, machine shops, and tool, mould and die making, backward linkages failed to develop. among the most important reasons: n The relevant sectors frequently did not exist as the Dominican Republic never made significant inroads into the manufacture of capital and intermediate goods. n local producers generally failed to meet world market standards for price, quality, and delivery terms. n local manufacturers frequently had no interest in supplying EPZs because they were satisfied with current operations and profitability levels. Source: Schrank (2001). In Jamaica, high-speed telecommunications services industry." The Dominican Republic is a case in point were de-monopolized within the Montego Bay Free (Box 9). In larger markets, where a solid industrial Zone prior to telecommunications deregulation foundation has already been established, backward countrywide. The new SEZ regimes in Panama and linkages are more successful. In general, backward India are being used to test ILO-consistent labor linkages (as measured by net exports) are stronger in policies that are more flexible and market-oriented larger economies than in smaller ones. than current approaches. Special economic zones in a number of Middle East- ern countries are being used to pilot dramatic liber- Lessons Learned: Common alization in foreign investment ownership policies. Obstacles to Zone Success In Kuwait, such policies were originally restricted to the Kuwait FTZ and are being extended generally The economic and financial impacts of special eco- to FDI in the country. New legislation in India and nomic zones, especially EPZs, have been extensively Panama aims to use SEZs to remove labor market documented. A recent review of cost-benefit analy- rigidities and promote ILO-consistent approaches. In ses of selected Asian EPZ programs applying the the Aqaba SEZ, automated business registration and "enclave model approach" showed that EPZs in the customs systems first fast-tracked and proven in the Republic of Korea, Malaysia, Sri Lanka, China, and zone are now more broadly applied in Jordan. Indonesia are "economically efficient and generate returns well above the estimated opportunity costs of Schrank (2001) suggests that EPZs fail to become the respective countries" (Jayanthakumaran, 2003). "bridges to structural reform" in small markets Only in the case of the Philippines were the results or where an import-substituting industrialization negative due to the high government infrastructure approach has resulted in inefficiency and lack of costs and subsidized utilities entailed in developing competitiveness. In these cases, EPZs remain iso- the Bataan EPZ (Warr, 1990). Other assessments lated enclaves and "grow at the expense of national measuring the dynamic impacts of EPZs (in addition to static effects) find that the benefits of Asian zone development were even greater. Sinclair (2001), TaBlE 18 for example, concluded that zones act as "a conduit for transition to a stable and open economy." He obstructed Zone Examples found that on average, a zone contributes about 0.52 of a percentage point towards the per capita Partial Performers Severely Obstructed GDP growth rate of a given country. Africa Africa Dakar, Senegal Senegal These analyses fail to capture the whole picture for Walvis Bay, Namibia Namibia two reasons: they cover only Asian zones, arguably Monrovia, liberia liberia athi River, Kenya Côte d'Ivoire the most successful in the world, and they include Congo, Dem. Rep. of only government-owned and operated zones. Systematic assessments of zones in other regions Asia Asia Kandla, India Pakistan are scarce; evaluations of the economic performance Bataan, Philippines of privately owned and run zones relative to public ones have yet to be undertaken. Other Other Zolic, Guatemala Ukraine Moin, Costa Rica Moldova Zone development initiatives around the world have Puerto Cortes, Honduras faced a wide array of difficulties, hampering zone Cartagena, Colombia San Bartolo, El Salvador performance to the degree that they are described aden, Yemen, Republic of as "obstructed zones." These can be divided into two categories: "partial performers," in which some but not all zones within a development program were beset by serious difficulties, and "severely competitive pressures from new private zones and obstructed," in which performance has suffered forced to operate on a cost-recovery basis. The same program-wide (Table 18). approach was also implemented in India and the Philippines; in the latter case, government-run zones The original wave of government-developed and were replaced mostly by private ones and the Philip- -operated industrial free zones in Central America pine Economic Zone Authority has ruled out the faced a host of severe obstacles as they pioneered development of new government zones. the application of SEZs in developing economies. As a result, both the Zolic Free Zone in Guatemala The impediments faced by EPZs in sub-Saharan and the Moin Free Zone in Costa Rica were partial Africa have been more program-wide in nature, with performers, with the latter attracting only three firms some notable exceptions. The Dakar Free Zone in in its first eight years. Another partial performer, Senegal was beset by an assortment of constraints, the Bataan EPZ in the Philippines, was kept from which ultimately resulted in "severe obstruction" maximizing its potential by the need for massive in- (Box 10). Successful zone activity in Africa is very frastructure investments, including the construction possible, however, as programs in Mauritius, Mada- of a $25 million dam. gascar, and Kenya have all performed extremely well. The mixed results of early Latin American and East The majority of economic zone programs in the Asian EPZ programs prompted adjustment and re- Europe and Central Asia region have enjoyed at least structuring in the projects that followed. Many pub- moderate success, with Poland, Bulgaria, and Roma- lic sector free zones in Latin America--Costa Rica, nia leading the way. Other programs (particularly in Colombia, the Dominican Republic--were divested the CIS) have faced more substantial performance to private investors; in Costa Rica and Colombia, the barriers, however. In Ukraine, problems with both government has avoided public zone development location and facilities investments and public sector altogether. In El Salvador, Honduras, Nicaragua, and management capacity have undermined operations, Guatemala, government-run zones were opened to and a significant proportion of zone investment Box 10 obstacles Faced by the Dakar EPZ Senegal was a pioneer in the creation of free zones, establishing its EPZ in 1974. The project generated sig- nificant hopes, as Senegal expected to profit from the de-localization of enterprises from industrialized countries, in the same manner as countries of the Maghreb, the Caribbean, or Southeast asia had earlier. The scheme's promoters sought to exploit Senegal's geographical position as well as the port and airport facilities offered by Dakar. In 1999, 25 years after its creation, Senegal's authorities closed the Dakar EPZ, which at the time was home to just 14 active enterprises. The principal obstacles to success for this program included: n Excessive bureaucracy involving different institutions in the country, especially customs; n Unnecessarily long delays in obtaining necessary permits (often more than one year); n Unrealistic goals imposed on potential investors, both with regard to jobs to be created (each company was required to employ at least 150 people) and to initial investment; n Poor reputation of the local workforce, which was labeled unproductive and overly expensive; n Elevated cost of other factors of production (energy, water, communications); n Rigid and constraining labor regulations; employment contracts were permanent and employers did not have complete freedom to recruit the people they wanted. Source: Cling and letilly, 2001. seems to be the result of relocation rather than new maximum of 25 percent of onsite costs). In addi- endeavors. tion, most private zones (the Dominican Republic and the Philippines are good examples) are required by law to provide offices and other facilities for Are Private Zones Better Performers? government authorities to be based onsite. Govern- ment costs of administering zone programs are also Are privately owned and operated zones better eco- reduced in a number of countries. Most private zones nomic performers than public ones? Unfortunately, in Latin America and the Philippines, for example, pay overtime and other special benefits for customs this is difficult to establish given the lack of analysis officers and other officials to remain onsite on a 24- of this issue. But available data suggests that--from hour basis. In other programs (Kuwait, Costa Rica, the perspective of a host country--private zones are Uruguay, Colombia), zone operators assume specific both less expensive to develop and operate and yield "regulatory functions" such as inventory counts on better economic results. behalf of customs authorities, thereby further reduc- ing administrative costs of governments. Private zones usually require less public funding to establish and operate, mainly because private Public expenditure cost savings through private zone developers finance onsite infrastructure and facili- development depends critically on where private ties; governments are required only to provide offsite zones are located and whether they are subject to (external) infrastructure and facilities, which are only any designation criteria and development controls. a small part of total development costs (usually a When private EPZs were first developed in Mexico and Central America in the 1980s, they were largely uncontrolled developments with no specific zoning Box 11 controls and land use plans. As a result, rapid growth of private zones strained public infrastructure, facili- Private Free Zone Development in ties, and services. In the Dominican Republic (Box the Dominican Republic 11), for example, the proliferation of private zones in the early 1990s resulted in growing calls to ban new private zones. The Dominican Republic's 22 public zones were established primarily as a means to encourage re- Most modern zone programs, in contrast, have gional development outside the capital city of Santo developed zone designation criteria and development Domingo. The private sector zones, which today controls whose main aim is to ensure that new zone number 31 (including joint public-private ownership), projects are located close to existing public infra- are, instead, heavily concentrated around the capi- structure and facilities, thereby reducing government tal area, which is the country's largest population outlays. Box 12 outlines designation criteria applied center and is situated near critical port and airport to private industrial estates and EPZs in Thailand as infrastructure. There are currently 194 companies an example. operating in the public zones and 326 in private or joint ownership zones. On the whole, privately operated zones tend to offer Surveys of zone enterprises highlight the role of the better facilities and amenities, command higher private sector in upgrading the facilities and services prices from tenants, and attract "higher end" types of required of export enterprises, particularly those in activities. Because private zones are run on a cost- manufacturing (Rhee, 1990). The private zones, driven by market forces, are located primarily in the recovery basis, they are generally more responsive to vicinity of Santo Domingo, providing access to the tenant needs, and therefore provide a wider range of country's highly qualified and productive labor force, property management services and amenities, includ- as well as access to high quality transportation ing specialized on-site telecommunications facilities, infrastructure. health clinics, day care centers, and business support Most important, zone enterprises have demonstrated services. a willingness to pay higher prices for their space (in some cases, up to three times higher) in return Private zones are generally able to command higher for high-quality services and infrastructure facilities. rates. For example, standard factory building lease The private zones boast quality telecommunications rates in the private industrial free zones in the Do- services, business support services, and manufactur- minican Republic are up to three times higher than ing and office space. in government-run zones. The preference for the market to locate in better configured and run private zones is common to many other countries where pines, for example, private zones accounted for over such a choice exists, including Vietnam, Thailand, 70 percent of the $7.18 billion in total zone exports the Philippines, Lithuania, El Salvador, Kenya, and registered in the first quarter of 2004. In El Salvador elsewhere. Most private zones also tend to have a better package of social and environmental facilities and Honduras, over 90 percent of exports and than government-owned zones. Due to physical, employment take place in private zones. In Thailand budgetary, and operational constraints--as discussed and Vietnam, most foreign direct investment is in further in the next section--many public sector private, rather than public, industrial estates/indus- zones have crowded, poorly designed, and inad- trial zones and EPZs; private zones also account for equately maintained facilities. the majority of exports. Outside East Asia, govern- ment-developed and -run zones are generally less Many private zones appear to be better economic profitable than their private counterparts, and have performers than government zones. In the Philip- a worse track record in terms of negative social and Box 12 Private EPZ and Industrial Estate Designation Criteria in Thailand Qualifying areas Minimum area of 80 hectares. Zones must be located close to infrastructure facilities and minimize public infrastructure requirements. Projects located in Bangkok and Samut Prakan (considered over- industrialized) will not be promoted. Factory Space Not less than 60 percent and not more than 75 percent of the zone area must be used for factories. Minimum Road Two-way main roads: minimum 18 meters wide, of which not less than Standards 12 meters is for traffic, with a shoulder of 3 meters on each side. One-way main roads: minimum 13 meters wide, of which not less than 7 meters is for traffic, with a shoulder of 3 meters on each side. Secondary roads: minimum 8.5 meters for traffic, with a shoulder of 2 meters on each side. Sewage and Waste a wastewater treatment plant must be set up as approved by the Water Disposal Board of Investment. Refuse Disposal Refuse storage and incineration areas must be sufficient with suitable refuse collection methods. Estate Usage Factories must be kept apart from residential and other business areas. Environmental Protection To prevent factories which generate smoke and foul odors from being located in the industrial zones, factories in the industrial zones must be approved by the Board of Investment. Public Utilities The supply of water, electricity, telephones, and post offices must be adequate. Time Constraints Within two years of the date of issue of the promotion certificate, 25 percent of the land area must be developed with full public services and utilities. environmental impacts as well. These examples However, more systematic analysis at the individual provide anecdotal data suggesting that private zones zone level needs to be undertaken to validate these are not only less costly to develop and operate than premises. public zones, but yield better economic impacts, too. leSSonS learned and implicationS for Zone development The previous discussions reviewed development Policy, Incentive, and Administrative patterns and economic impacts of zones worldwide. Frameworks That review suggests that SEZs have not been uni- formly successful, and the most successful zones tend To a great extent, zone initiatives determine their to be concentrated in East Asia and Latin America. own destiny from the start, with the establishment of The majority of African zones have found it difficult policy frameworks, incentive packages, and various to replicate this success, despite significant technical other provisions and bureaucratic procedures. Several assistance and funding from donors. What accounts main policy issues commonly related to sub-optimal for the remarkable variance in zone performance zone performance include: between and within regions? The discussion below identifies the major "lessons learned" from zone n Uncompetitive fiscal incentives development, sets out key guidelines to maximize the success of a zone development strategy, and evaluates n Restrictive controls on zone activity and cum- the current and future rationale for zones. bersome regulations n Exclusion of merchandise processed in zones from entry under bilateral and regional trade What Determines Zone Success? agreements. Three decades of zone development experience sug- Uncompetitive fiscal incentives. The package of fis- gest that the failure or success of a zone is linked to cal incentives offered by EPZs is increasingly similar its policy and incentive framework and the way in around the world. Over the years, this package has which it is located, developed, and managed. expanded from simple import duty exemptions to a combination of corporate income tax reductions or holidays, exemptions from most indirect and local taxes, unrestricted repatriation of capital and profits, Other weaknesses are found in terms of elabo- and unrestricted management of foreign exchange rate procedures and excessive documentation. For earnings. Zones in the Middle East and North Africa example, until recently, the investment application region often go further, offering personal income tax for zone status in Egypt was 40 pages long, and exemptions for expatriate workers19 and zero corpo- investment approvals took anywhere from 12 to 24 rate income taxation in perpetuity. months. Experience shows that the use of generous incentives n Weak administrative bodies. The lackluster packages to offset other disadvantages (such as poor performance of some programs can also be location and facilities) is ineffective in terms of over- traced to weak government bodies established to all zone performance, due in large part to the increas- develop and operate zones, and to regulate zone ing commonality of zone investment incentives in activity. In many countries, zone authorities lack recent years. Moreover, the reliance of zone programs necessary powers and autonomy and are under- on incentives with limited effectiveness (such as funded or poorly managed. Decision-making income tax holidays) imposes significant costs on in older zone authorities in Jordan, Syria, and government budgets with little benefit (Box 13). Egypt, for example, is excessively centralized; alteration of a land lease rate usually requires The negative impact of restrictive policies and approval of the country's cabinet. Some are practices embedded in many zone programs has subject to political influences and are chronically been proven even greater than that of uncompetitive overstaffed. At one point in Egypt, for example, incentives schemes. Examples include: the Egyptian General Authority for Investment and Free Zone had over 4,000 employees. Still n Restrictive treatment of real assets. For ex- others lack control over their budgets and have ample, Jordanian zone-based firms are unable to restrictive civil service limitations on remunera- own land within zones, hold title to leasehold tion and employment conditions. improvements, or dispose of real assets after lease expiration. As a result, firms cannot use real as- n Trade exclusions on zone merchandise. Some sets for collateral financing and must hand over bilateral and multilateral free trade agreements such property to the Free Zones Corporation (FTAs), such as the Arab FTA and MER- after lease expiration. COSUR in Latin America, exclude products produced in free zones. Products processed in n Inappropriate application of extraterritorial- these zones cannot qualify for entry under these ity principles. Many Arab special economic agreements. Products produced in Arab zones zones have an extreme concept of extraterritori- are not granted national certificates of origin;21 ality. As a result, zone products are not granted preferential access through the MERCOSUR national certificates of origin. agreements is denied to products produced in zones in qualifying countries. n Performance requirements. Senegalese zone- based firms were subjected to severe employment creation and minimum investment require- 19 Free zone companies in the United Arab Emirates zones are able ments. In Liberia, foreign investors faced inordi- to import expatriate labor and pay them wages and other benefits below that mandated by law for the country's citizens. This has nately high initial investment requirements. created artificial competitive advantages and increased dependence on foreign labor. 20 This refers to free zones in Jordan, not private industrial estates, n Prevention of private sector development of most of whom have QIZ status. In Egypt, private free zones refer zones. Jordanian and Egyptian laws provide a to single factory zones. 21 Some free zones--such as the Jebel Ali Free Zone in Dubai--rou- total government monopoly for zone develop- tinely ignore these provisions and provide national certificates ment, financing, operation, and regulation.20 of origin to products processed in the zone destined to regional markets. The Katunayake EPZ in Sri Lanka was poorly de- Box 13 signed, resulting in congestion, over-crowding, and Why are Tax Holidays an social unrest. The design of the Kingston Free Zone in Jamaica did not provide enough open space and Ineffective Incentive? social amenities, resulting in over-crowding and con- tinuing labor problems. Other zones were over-devel- a tax exemption is of little benefit if the company is oped, much ahead of investor demand. For example, not making profits, which is usually the case in the in its first two years of operations the Zolic Free initial years of operation. Firms that are profitable Zone in Guatemala constructed over 24,000 square from the outset might not have needed incentives in meters of factory space, which sat empty without the first place. adequate marketing support (TSG, 1991). Tax holidays encourage income shifting from non-tax-exempt enterprises to tax-exempt companies Inadequate coordination and the lack of effective through transfer pricing of inter-company tran- partnerships between private zone developers and sactions. governments in terms of external infrastructure pro- Tax holidays reduce the appeal of debt financing visions have also caused problems in the past. Most of capital investment by removing the benefits of private EPZs and industrial zones in Vietnam, for ex- interest deductibility. This equity funding bias is ample, sat vacant because local and national authori- accentuated if dividends of tax-exempt firms are ties could not provide road and other infrastructure also exempt from personal income tax. connections to the site. Tax exemptions tend to benefit investments with a short-term time horizon. longer-term projects that One of the most significant factors accounting generate profits beyond the tax holiday period do for the financial and economic underperformance not benefit, unless firms are permitted to accrue and of some zones is the once-common practice of defer asset depreciation deductions beyond the tax subsidizing land and building lease and sale rates. holiday period. Many government zones do not operate on a Tax exemptions do not benefit investors from many cost-recovery basis, leading to drains on national oECD countries that tax income on a global basis, treasuries. This is exacerbated if water, power, and unless a "tax sparing" agreement is in place. other utility services are also subsidized. The lack of adequate funding has meant that many public zones are inadequately maintained (as exemplified by zones in the Dominican Republic), and/or do not have robust promotional efforts. Physical Design, Development, and Management Practices In summary, the most common obstacles to success for zones are: Difficulties in harnessing the full potential of zones are often linked to poor site location, design, and n Poor site locations, entailing heavy capital development practices. Most government-developed expenditures zones, for example, were located in remote areas to act as growth poles. The location of many others n Uncompetitive policies--reliance on tax reflected political rather than economic and technical holidays, rigid performance requirements, poor factors. While the Philippines Bataan EPZ is prob- labor policies and practices ably the most common example of this, it is certainly not alone. The Cartagena Free Zone in Colombia n Poor zone development practices--inappropri- was located on a swamp resulting in extremely high ately designed or over-designed facilities, inad- capital development costs. The San Bartolo Free equate maintenance and promotion practices Zone in El Salvador had to be subsidized to offset high development costs due to poor site conditions. n Subsidized rent and other services 0 structural reforms that enhance the competitiveness TaBlE 19 of domestic enterprises and facilitate the develop- ment of backward and forward linkages. Export Development Mechanisms Mostly Export-Oriented Enterprises Zone Concepts EPZs Bonded manufacturing warehouses A critical issue that needs to be addressed in the con- figuration of a zone development program is the type Partial Exporters Inward processing relief (duty suspension) of zone to be promoted (Table 19). Duty drawback/rebate International experience suggests that the recom- Indirect Exporters Common bonded warehouses mended approach is to adopt a SEZ model with the Duty drawback following features: Mechanisms for Infrastructure Provision EPZs n Permit industrial estates to host SEZ enterprises Industrial estates/industrial parks as well as those licensed under other regimes. Industrial zones The preferred approach is to allow all enterprises to co-locate within the same area, although the development of separately fenced-off areas solely for zone enterprises (as in Philippine and Thai zones) is an acceptable approach. n Cumbersome procedures and controls n Ensure that the SEZ regime is flexible, allowing n Inadequate administrative structures or too a range of commercial as well as manufactur- many bodies involved in zone administration ing activities. If properly supervised, a separate commercial zone regime, as in Malaysia and n Weak coordination between private developers Thailand, is not required. and governments in infrastructure provision. n Promote private rather than public development of zones. International experience suggests that Guidelines for Zone Development private rather than public development of zones increases the chances of success. Outside East One of the clearest lessons learned from decades Asia and Dubai (United Arab Emirates), the of zone development--particularly EPZ develop- vast majority of government-developed and -run ment--is that zones cannot and should not be viewed zones have been consistently less effective than as a substitute for a country's larger trade and invest- their private counterparts. ment reform efforts. They are one tool in a portfolio of mechanisms commonly employed to create jobs, gen- However, the implementation of this approach erate exports, and attract foreign investment, through requires greater administrative capabilities within the provision of incentives, streamlined procedures, host governments to ensure adequate regulation and and custom-built infrastructure. facilitation. In particular, facilitating private zones requires the development of an appropriate legal, But maximizing the benefits of zones depends on the regulatory, and institutional framework, including: extent to which they are integrated with their host economies. The static and economic impacts of zone n A legal framework that outlines private zone development are suppressed when zones are oper- designation criteria, incentives and privileges of ated as enclaves. They are multiplied when they are private zone developers and operators, and rights accompanied by countrywide economic policy and and obligations of zone developers/operators and the government with respect to zone develop- developed to regulate economic activities within the ment and operation; zone. The Authority has its own revenue officials (tax and customs) that are better qualified, trained, and n A public-private partnership framework for equipped than their national government counter- zone development, outlining rights, responsi- parts. Staff capabilities have had to be upgraded to bilities, obligations, and commitments of all adequately control duty-free retail sales and a special parties with respect to all aspects of zone devel- income tax and VAT regime. Several SEZ authori- opment, financing and operation, regulation, ties have contracted with private master developers and promotion. to manage SEZ assets and facilities, mobilize private investment, and reduce demands on government Some countries have tried to encourage private services. In the final analysis, SEZ development ef- zones without first developing an appropriate legal forts should be undertaken only rarely, and only by and regulatory framework, instead relying on a those countries that have the requisite institutional zone development agreement. The risk with this capabilities, expertise, and commitment to make approach is that the terms and conditions of each them succeed. zone concession may vary greatly, as in the case of Vietnamese zones, and the zones may lack a firm legal foundation. Core Policy Framework The earlier discussion showed how the policy envi- Should the development of other types of zones-- ronment in a typical EPZ program has evolved over including technology parks, research parks, and the years from simple customs duties abatement. software development zones--be pursued? Best International experience suggests that a best-practice practice suggests that there is a difference between policy and incentive framework needs to be stream- the "hardware" and services offered by a zone and lined, encouraging zones to compete on the basis of the "software" of incentives and privileges. Certainly, facilitation, facilities, and services, rather than on the all types of zones should be permitted, offering provision of incentives (Table 20). customized infrastructure, facilities, and services tailored to the specific needs of target industries. The key elements of a best-practice policy framework But as far as possible, all zones should have a com- include the following: mon set of incentives and privileges, rather than duplicating and overlapping regimes which can n Concept of extra-territoriality--As defined result in revenue loss.22 in the Revised Kyoto Convention, free zones should be treated as outside the domestic cus- There is the final and unique case of the so-called toms territory, but should be eligible for national "large format" SEZs. Should these be encouraged as certificates of origin and participate in trade and a zone development mechanism? Certainly, large- market access agreements. scale zones can have significant economic impacts, particularly in terms of exports and foreign invest- n Private zone development--Private zones, ment. The Subic and Clark freeports in the Philip- benefits, obligations, rights and public-private pines, for example, together account for almost 10 partnerships for zone development are clearly percent of national merchandise exports. The Shen- defined. Where government-run zones exist, the zhen SEZ in China has attracted almost $30 billion legal framework should ensure that competition in FDI and generates 14 percent of Chinese exports. among private and public zones is on a "level SEZs can also be very effective in promoting the dif- playing field" and that public zones do not have fusion of new policies, procedures, and governance unfair advantages (such as subsidies) which structures. But administering and regulating an SEZ regime is extremely demanding on governments. In the case of the Aqaba SEZ in Jordan, for example, 22 Both China and Vietnam have run into difficulties with tax regu- a new, 800-person regulatory authority had to be lation due to the existence of numerous zone regimes featuring varied incentive packages. TaBlE 20 SEZ Basic Policy Framework International Standard Concept of Extra-territoriality outside domestic customs territory Eligible for national certificates of origin Eligible to participate in national trade agreements/arrangements Eligibility for Benefits No minimum export requirement Manufacturers and services Foreign and local firms Expansions of existing enterprises Private developers of zones Foreign and local ownership No limitations Equal treatment Private Zone Development Clearly defined in legislation; specific zone designation criteria Eligible for full benefits Competition from government-run zones on a level playing field Sales to the Domestic Market liberalized Provided on a blanket basis rather than case by case Treated as import into domestic market, subject to payment of import duties and taxes Purchases from Domestic Market Treated as exports from domestic market; enterprises eligible for indirect exporter benefits labor Policies Full consistency with Ilo labor standards Specialized dispute settlement mechanism undercut private projects. The respective rights, ownership forms permitted. The best approach responsibilities, and obligations of government is to maximize the flexibility of the regime by and the private sector need to be defined to en- removing minimum export obligations (in line able partnerships for zone development. with WTO requirements, analyzed below); broadening the range of eligible activities n Zone designation criteria--Physical devel- (subject to restricted or prohibited activities opment standards and clear criteria for the enumerated on a "negative list"); removing any designation of new zones are put in place. ownership restrictions; ensuring equal treatment Generally, basic criteria include zone design and of foreign and domestic investments; and ensur- environmental standards, financial and techni- ing that indirect exporter benefits and privileges cal track record of the zone development group, are given to firms in the domestic customs and minimum equity requirements by the zone territory that supply goods and services to zone- developer. The objective is to guide, but pre- based enterprises. serve, the flexibility of individual zone develop- ment proposals, while optimizing the impact on n Labor regime--International experience government funding for off-site infrastructure strongly suggests that the long-term competi- connections. tiveness of a zone depends on the quality and productivity of its workers. To achieve this, it is n Eligibility criteria--The openness of an EPZ important that labor regimes are fully consistent regime is defined in terms of minimum export with ILO standards and obligations, includ- requirements and the types of activities and ing core rights of assembly, organization, and collective bargaining. At the same time, there The general consensus is that SEZ regimes are should be the opportunity for freely negotiated consistent with the WTO so long as benefits are labor productivity packages within zones and a not contingent on export performance, use of local generally flexible and liberal labor market regula- content, or maintenance of a foreign exchange tory framework. Additionally, the foreign worker balance; or primarily benefit a specific firm, indus- employment regime should be transparent, yet try, or other interest. Zone regimes that have specific discourage excessive dependence on foreign incentives linked to export performance--such as workers at the expense of domestic ones. minimum export requirements, subsidized rent or utilities, or a lower tax on export income--are not Incentive Framework compatible with WTO mandates and need to be altered. In addition, some analysts conclude that There has been a great deal of debate regarding the the broad exemptions of import duties and charges types of fiscal incentives and other privileges at the granted to EPZ enterprises may constitute a pro- heart of an SEZ regime. Countries are under pressure hibited export subsidy since firms operating under to offer a generous package of tax and duty exemp- other regimes are permitted duty-free importation of tions in order to keep pace with their competitors. only those inputs used in the production of goods. The package of fiscal incentives has become almost This "excess" may be incompatible with the WTO standardized among zones internationally--corporate (Granados, 2003). tax reductions or exemption; duty-free importation of raw material, capital goods, and intermediate in- The original deadline of January 1, 2003 in the Uru- puts; no restrictions or taxes on capital and profits re- guay Round for the elimination of export subsidies patriation; exemption from foreign exchange controls in developing countries has been extended to 2010. (where applicable); no charges on exports; exemption The Doha Round established a set of procedures for from most local and indirect taxes; and so on. developing countries to submit requests to extend the original eight-year deadline in the SCM. Eligible There is considerable evidence to suggest that some countries are those whose share of total world exports of these are ineffective and a drain on public re- was below 0.10 percent in 1998­2000, and whose sources. In particular, the use of income tax holi- gross national income was below $20 billion in days and other differentiated corporate income tax 2000. To date, most of the thirty eligible developing regimes has been widely abused. Some policies also countries have submitted requests to the WTO for create explicit and implicit export subsidies, increas- extension of the deadline. While a few non-qualify- ingly at odds in today's rules-based trading system. ing countries such as Thailand have amended their zone legislations (by removing mandatory export Although SEZs do not appear in the WTO agree- requirements), most are attempting to delay confor- ments, some of their provisions affect the zone mance with the SCM deadline on export subsidies. incentive regime. In particular, the Agreement on Subsidies and Countervailing Measures (SCM) poses The following are guidelines for design of a special potential compliance problems for zones. Prohibited economic zone incentive framework: subsidies are those conditional on export, or the use of national rather than imported inputs (Box 14). n Leverage the introduction or reform of zone Actionable subsidies, by contrast, may give rise to regimes as an opportunity to rationalize consultations if they injure another WTO member's income tax incentives. Ideally, this would result domestic industry, nullify tariff concessions, or seri- in harmonization of zone corporate income taxa- ously prejudice another WTO member's interests. tion policies with national policies, or at least These subsidies are, however, permitted under the make zone enterprise taxation comparable to WTO, and are actionable only in that the affected that of "promoted industries." The best-practice parties have legal recourse under the WTO dispute approach for income tax incentives is to have resolution mechanism. performance-based incentives within a country's Box 14 Prohibited and actionable Subsidies under the Uruguay Round Prohibited Subsidies are non-agricultural subsidies that are contingent on export performance, and subsidies that are contingent on the use of domestic goods in place of imported goods. Examples of prohibited export subsidies are: n Currency retention schemes which involve a bonus to exporters n Internal transport and freight charges on export shipments that are more favorable than for domestic shipments n Provision of goods and services for export manufacturing more favorable than domestically consumed goods n Exemptions or allowances for direct taxes or other charges to exports or for export performance n Exemption or remission of export taxes or indirect taxes in excess of those levied on products when sold for domestic consumption n Export credit guarantees or insurance at premium rates which are inadequate to cover the long-term operating costs and losses of the insurer n Export credit rates below the cost of funds. Actionable Subsidies are those that are granted by a WTo member country that have "adverse effects" on international trade, because they either cause injury to the domestic industry of another member country; nullify or impair WTo benefits; or cause "serious prejudice" to the interests of another member country. tax code rather than through special legislation of investment approvals, expatriate work permits, re- such as EPZ regimes. moval of required import and export licenses, and so forth, as well as accelerated on-site customs inspection n Use zone regimes to advance de-monopoliza- procedures and automatic foreign exchange access. tion and deregulation of telecommunications and other utilities where applicable. Jamaica Special economic zone legislation is increasingly and other countries have used their zone regimes incorporating features to increase the transparency to accomplish this. and "automaticity" of programs. Default mechanisms that confer automatic approvals within a pre-deter- n Design an incentive framework that is WTO- mined time period have greatly accelerated the evalu- compliant. This is best done by removing any ation and approval of EPZ applications. In many export obligation and allowing zone enterprises countries, the investment approval examination full access to the domestic market on a duty- process has been transformed from one of case-by- paid basis. case evaluation of applications to a process of simple registration of investment, meeting clearly defined criteria. Applications are automatically approved by Regulatory Framework utilizing a "negative" list of ineligible activities. A key In contrast to the attention given to incentives, the global trend is the movement toward the establish- importance of regulatory relief to investors is fre- ment of one-stop shops to consolidate and expedite quently overlooked. Yet a crucial aspect of successful government approvals. EPZ programs is the simplification and streamlining There is also enormous scope to streamline customs and fast-track implementation of automated procedures within special economic zones. In fact, customs systems, with proper inventory controls many zones are used to fast-track customs automa- and audit systems, within the special economic tion systems and the application of new policies. zones. Because the imports of EPZ enterprises are physically secured and do not enter the domestic customs ter- ritory (unless subsequently sold to the local market), Institutional Framework customs functions are simplified. They do not have Another major factor contributing to the outcome of to assess and collect duties and taxes and focus on the zone program is the autonomy and effectiveness ensuring that merchandise has not been improperly of the body charged with regulating zone operations. diverted to the domestic customs territory. The While a wide range of institutional arrangements main customs principles for zone operations are: have been used, international experience suggests the rapid physical transfer of merchandise, reduced that success is dependent on the autonomy of the documentation, and flexible physical controls during body (particularly over staff hiring/firing and control processing. Generally, these are achieved by develop- over budgets); adequate funding; customer orienta- ing a single declaration form to be administered by tion and ethos; powers over other government min- customs; providing single, on-site inspection of zone istries; partnerships with private zone operators and imports and exports to avoid redundant inspections; enterprises; and maximizing the role of the private and developing enhanced enforcement techniques. sector in service provision. The tools for a simplified customs regime are con- tained in the Revised Kyoto Convention and various One element is particularly important, especially WTO rules.23 in the context of the increasing number of private zones: it is critical that zone authorities remain The following are key guidelines for the development engaged in purely regulatory functions, and do not of a best-practice zone regulatory framework: own, develop, or operate zones. As the experience in many zone-sponsoring countries has shown, n Install streamlined procedures for business conflicts of interest arise when regulatory bodies are registration that embody a simple declarative in- also engaged in zone development activity, especially vestment registration system rather than any sort when existing zones compete directly with new of investment approval regime. Key elements private zones. Opportunities for perceived and actual include: application to a single government of- conflicts of interest are multiplied when the entity fice that provides the license; promulgation of charged with guiding and monitoring zone perfor- a negative list of ineligible activities and other mance is simultaneously one of the zone operators. explicit criteria for approval or denial; and a default clause authorizing automatic approval Good-practice guidelines for the development of of the application if no ruling has been issued an effective institutional framework ensure the within the review period. following: n Facilitate provision of secondary permits and n Sufficient autonomy of the zone authority, authorizations. Additional permits--land, build- particularly over staffing, budgets, spending, ings, labor, health and safety, and so on--can be and policymaking; facilitated by vesting all such authorizations with the zone authority rather than with other min- n Adequate authority by constituting an indepen- istries and agencies. The zone authority should dent board comprised of key government minis- have offices within each zone to perform these ters and private sector representatives reporting services. n Develop special customs rules and regulations 23 For example, customs valuation, harmonized system, and rule of drawing upon WCO and WTO provisions, origin. to the highest level of government. Ideally, allow adequate planning and support of offsite infra- private sector representatives to constitute the structure provision. majority of board membership to ensure flex- ibility, results-orientation, and customer-focus; Outlook for Zone Development n A one-stop shop approach through legislation that provides the body with single-point author- What is the outlook for special economic zones in ity over other government agencies in core areas; the context of global integration and trade liberaliza- tion? Some analysts argue that the rationale for zones n The zone entity delegates, outsources, and priva- is diminishing as average tariff rates fall around the tizes as many non-core functions and services as world. Others foresee a diminished role for zones possible to focus on core activities. now that the Multi-Fibre Arrangement has been dismantled, given the dependence of many zones on Physical Development and Management the apparel and textiles industry. The success of zones is critically linked to the way Nevertheless, the case for zones may actually be in which they are located, developed, and managed. stronger in the context of trade liberalization. First, Management of zones is enhanced when they are even with full implementation of the Uruguay operated on a cost-recovery rather than a subsidized Round, tariff and non-tariff barriers will remain basis, and are market-oriented and customer-fo- in most countries. Developing country exporters cused. This is best accomplished when zone devel- will still need to compete with exporters in other opment and operation are undertaken by private countries who are operating in a duty- and tax-free sector groups on a commercial basis, rather than by environment. Second, even with lowered tariffs, anti- government organizations that frequently are subject export biases will not be removed. Various policy dis- to political pressures and funding constraints. At the tortions, procedural inefficiencies, and infrastructural same time, the rapid proliferation of private zones inadequacies--many that can be directly addressed can place significant, unanticipated costs on govern- only over the long term--will deter exporters. This ments, especially in terms of offsite infrastructure places great importance on the continued develop- and facilities, as exemplified by the Dominican ment of focused investment promotion and export Republic, and more recently the Philippines and competitiveness mechanisms such as SEZs that can Vietnam. provide a simplified regulatory environment. The following are best-practice guidelines for the The prevalence of zones in industrialized countries physical development of zones: with open economies also underscores the impor- tance of the concept to competitiveness. The United n Implement land use planning and zoning efforts States, with 266 foreign trade zones, is a particularly in defined areas for industrial and commercial prominent example (Box 15). Many companies development to guide the actions of private choose an FTZ location based on the advantages of developers. operating in a flexible, duty-free environment. Oper- ating costs are lower as a result of reduced insurance, n Develop zone designation criteria in the zone security, and overhead costs. Cash flow is enhanced law and implementing regulations to ensure by the ability to postpone duty payments until and that private zones are conveniently located (near only upon entry into the domestic customs terri- population centers and transportation hubs) tory. FTZs in the United States have been critical and minimize offsite infrastructure development in enabling manufacturers to operate "just-in-time" expenditures of government. systems. In fact, most vehicles manufactured in the United States are located in FTZs or have facto- n Establish a land use planning and infrastructure ries provided with FTZ status. Mechanisms such development unit in the government to ensure as special economic zones that provide efficiency Box 15 advantages of Using U.S. FTZs n Improved cash flow through payment of duties upon shipment out of the warehouse/factory instead of receipt into the facility; n No customs duties on scrap, waste, or obsolete materials; n option of paying customs duties on the imported materials or the final product shipped from the zones, whichever is less; n No customs duties owed on the value to labor/overhead/profit incurred in zone processing in the United States; n No customs duties owed on exported merchandise; n ability to hold all goods in a duty-free environment until needed; n FTZ may be used for quality control inspections to ensure that only merchandise that meets U.S. specifications is imported and that duty is paid; n ability to consolidate all outbound shipments per week into one entry for customs purposes. Source: National association of Foreign-Trade Zones. advantages are even more important with the advent reconfiguring themselves into efficient distribution, of modern production and distribution concepts and production, and trade facilitation hubs to reduce approaches, and the reduction of transaction costs. logistics costs in order to meet this demand from international operations. There is little doubt that zones must continue to evolve in response to global integration, international There is also a continuing role for zones in many trading rules, and the rise of regional FTAs. Zones countries to incubate and accelerate policy reform. cannot and should not compete on the basis of fiscal In most developing country settings, the greatest incentives, but rather differentiate themselves in scope may lie in introducing new customs control terms of facilities, services, and most importantly, concepts. In others, zones might be used to side-step streamlined procedures, and purpose-built technol- public or private monopolies in telecommunications. ogy. International manufacturers have realized that In still others, such as the Korean SEZs which are there is much greater scope to reduce logistics costs "English language-only," zones may provide a better than production costs. This can be accelerated within environment to attract foreign investment. This a zone setting by reducing transaction processing demonstration effect is magnified through forward times and paperwork requirements. Many zones, planning and participation of the private sector. especially those that are privately run, are rapidly anneXeS 1. Acronyms and Abbreviations 2. Profiles of Zone Programs by Region 3. Bibliography anneX acronYmS and abbreviationS CIS Commonwealth of Independent States MIGA Multilateral Investment Guarantee EPZ export processing zone Agency FDI foreign direct investment NTBs non-tariff barriers FIAS Foreign Investment Advisory Service OECD Organisation for Economic FTA free trade agreement Co-operation and Development FTZ free trade zone QIZ qualified industrial zone IBRD International Bank for Reconstruction SCM subsidies and countervailing measures and Development SEZ special economic zone ICFTU International Confederation of UNCTAD United Nations Conference on Free Trade Unions Trade and Development ICT information communications WCO World Customs Organization technology WEPZA World Economic Processing Zones IFC International Finance Corporation Association ILO International Labour Organization WTO World Trade Organization IT information technology Note: All dollar amounts are U.S. dollars unless otherwise indicated. 0 anneX profileS of Zone programS bY region This annex includes six tables that summarize zone The regions profiled in the tables include: the Ameri- activity in selected countries of the world's major cas; Asia and the Pacific; the Middle East and North regions.24 Africa; Western Europe; Central and Eastern Europe and Central Asia; and Sub-Saharan Africa. TaBlE 2­1 Profile of Zone Programs in the americas (selected countries) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets United States 1934 20 246a FTZ Japan, United automobiles, petroleum, United States, Kingdom electronics domestic Panama 1948 2 8 FTZ, EPZ, United States, Transshipment/logistics, South america Freeport Japan warehousing Brazilb 1957 1 8 FTZ, EPZ, Japan, Warehousing and Brazil, MERCoSUR Freeport Korea, Rep. of, assembly of electrical, United States electronics Colombia 1958 1 14 EPZ, Hybrid Japan, Petrochemicals, apparel, United States, EPZ, Freeport Korea, Rep. of, electronics, services MERCoSUR United States, local, regional (Continued) 24 The regional groupings of countries depicted in the tables are not always the same as those used for World Bank Group regional classifications. TaBlE 2­1 (Continued) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Chile 1958 2 8 FTZ, EPZ, United States, Warehousing, duty MERCoSUR, Freeport Brazil, Germany, free shopping United States, EU, Canada Canada Mexicoc 1965 2 107 Industrial United States, automotive components, United States Parks Japan electrical Dominican 1969 20 38 EPZ United States, apparel, health care United States Republic Taiwan (China), products Korea, Rep. of Guatemala 1973 1 15 EPZ, Hybrid United States, apparel United States EPZ Taiwan (China), Korea, Rep. of Jamaica 1976 2 3 EPZ United States, apparel, United States Taiwan (China), call centers Korea, Rep. of Honduras 1977 2 22 EPZ, Hybrid United States, apparel United States EPZ Taiwan (China), Korea, Rep. of El Salvador 1976 1 15 EPZ, Hybrid United States, apparel United States EPZ Taiwan (China), Korea, Rep. of Costa Ricad 1978 0 139 Hybrid EPZ United States Semiconductors, United States electronics, medical supplies Uruguay 1987 2 7 Hybrid EPZ Japan, United logistics, trade, MERCoSUR, States, regional electronics, call centers United States Trinidad and 1988 17e 0 EPZ United States Warehousing, break United States Tobago bulk, petrochemicals Belize 1990 0 3 EPZ, FTZ local Trading, apparel, food United States Cuba 1997 5 0 EPZ local agro-processing MERCoSUR, Venezuela, R.B. de Puerto Ricof 1942 142 0 FTZ United States Pharmaceuticals United States argentina 1995 5 0 FTZ, Freeport France, Spain, Forestry, food EU, Brazil, United Italy, Germany, processing, metals, States, Canada, Chile, other EU, chemicals, petro- Mexico United States, chemicals, fisheries Canada, Mexico (Continued) TaBlE 2­1 (Continued) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Peru 1991 4 0 FTZ Brazil, Chile, Textile, automotive, Brazil, Chile, Uruguay, Bolivia, agribusiness Japan, China, Japan, China, United States, United States EU, Canada St. Kitts 1978 1 0 EPZ United States, apparel United States and Nevis United Kingdom St. lucia 1979 2 0 EPZ United States, apparel, sporting United States United Kingdom goods Bahamas 1955 3 0 Specialized United States, Financial United States zones EU, Japan Cayman 1967 0 1 Specialized United States, Financial United States Islands zone United Kingdom a. Foreign trade zones in the United States, although they are sponsored by a town, county, or a state government, are counted as "private" if they have private investors. b. Export processing zones in Brazil, other than the public Zona Franca de Manaus, were established in 1989. c. In Mexico, the maquiladoras have been organized into industrial estates, and are therefore counted as private zones. d. Source: Ilo database. according to WEPZa and Ilo, Costa Rica has 127 empresas de perfeccionamiento activo, and 12 EPZs. e. Source: Ilo database. These are designated free zone areas. f. Puerto Rico developed the first modern export processing zones as industrial parks beginning in 1942, although they finally put the first tax exemption laws in place in 1951. Source: Journal of Flagstaff Institute, august 2007. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. TaBlE 2­2 Profile of Zone Programs in asia and the Pacific (selected countries) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Indiaa 1965 87 254 Freeport, EU Textiles, electronics, United States, Software jewelry, leather, textiles, EU Technology food processing, Park, Export- software oriented Unit Taiwan (China)b 1965 14 0 EPZ, Science Japan Electronics, semicon- Japan, United Park, Soft- ductors, electrical, high States ware Park technology Korea, Rep. of 1970 9 1 EPZ, Science Japan Electronics, Japan, United Park, Freeport, high technology States Foreign Invest- ment Zone Malaysiac 1971 10 3 EPZ, Science Japan, Electronics, semicon- Japan, United Park United States ductors, electrical, States, aSEaN automotive parts Philippines 1972 7 76 Hybrid EPZ, Japan, Electronics, semicon Japan, United Freeport, Philippines, ductors, electrical, States, aSEaN Software United States, automotive parts Technology EU, Park Korea, Rep. of, Malaysia Thailand 1972 5 27 Hybrid EPZ, Japan Electronics, metalwork- Japan, United Science Park ing, semiconductors, States, aSEaN automotive parts Sri lankad 1978 15 1 EPZ, Science Hong Kong apparel, gems and EU, United States Park (China), EU, jewelry, luggage, Korea, Rep. of, gloves, food processing Japan, Sri lanka Chinae 1979 164 23 EPZ, FTZ, Taiwan (China), apparel, electronics, United States, ETDZ, oCC, Hong Kong electrical Japan, EU HTDZ, (China), Japan, BECa* United States Bangladeshf 1980 8 1g EPZ Korea, Rep. of, apparel, textiles, leather United States Bangladesh, China, Japan Indonesia 1986 22 5 Hybrid EPZ, Japan apparel, footwear, elec- aSEaN, Japan, Freeport tronics, food processing United States Mongolia 1999 13 0 EPZ, FTZ China, Russian apparel United States Federation (Continued) TaBlE 2­2 (Continued) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Nepal 2006 1 0 EPZ India, EU, apparel India, EU, Japan, Japan, United United States, States, China China Cambodia 2001 3 0 EPZ China, United apparel United States States, Thailand, Japan, Taiwan (China) Hong Kongh 1974 7 0 Industrial Global Printing, food process- Global (China) Estate, ing, jet engine repair, Science biotechnology, informa- Park tion technology Singapore 1960 42 0 EPZ, Industrial Global Software, financial Global Park services Pakistan 1989 26 0 EPZ United arab apparel, chemicals, United States, EU, Emirates, pharmaceuticals, Gulf countries United Kingdom, electrical machinery United States Vietnam 1991 20 165 EPZ, Indus- Japan, apparel, footwear, Japan, aSEaN, trial Zone, Korea, Rep. of, luggage, electrical, Taiwan (China) HTDZ,* Taiwan (China), metal working Software Park Hong Kong (China), China Korea, 1992 4 0 Freeport Korea, Rep. of N/a N/a Democratic People's Republic ofi Japan 1995 2 0 Foreign N/a N/a N/a access Zone *Notes: oCC abbreviates open coastal city; ETDZ is economic and technological development zone; HTDZ is high technology development zone; BECa is border economic cooperative area. a. The data obtained is for zones that have received final approval, according to WEPZa data received directly from the government of India. available data for operational zones in India (134 in total), and for zones that have received approval in principle (171 in total) has not been received in a format that indicates public or private ownership, and therefore has not been included. b. There are ten EPZs, three science parks, and one software park in Taiwan (China), according to WEPZa data received from the Ministry of Economic affairs in Taiwan (China). c. Ilo data indicates there are over 200 industrial and hi-tech parks in Malaysia, but the ownership of these parks is not specified. d. Sri lanka has an export factory program, which includes single factories that have not been counted as zones. e. WEPZa data shows that for China, there are 23 private zones not owned and managed by a Chinese government entity. These are authorized by individual decree, and are not normally included in officially published data. f. While Ilo mentions that there are 5,341 other zones under the Bangladesh Garment Manufacturers Exports association and Bangladesh Knitware and Manufacturers association, this figure essentially represents members of the associations that may or may not operate as single factories, or may operate within existing zones. They have, therefore, not been included in the data table above. g. Youngone Corporation of the Republic of Korea has begun development of a private zone in Chittagong in Bangladesh. h. Industrial estates and science and technology parks are considered zones within the freeport of Hong Kong (China). i. In the Democratic People's Republic of Korea, one zone has been established by the Republic of Korea; the other three zones are entities of the Democratic People's Republic of Korea. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. TaBlE 2­3 Profile of Zone Programs in the Middle East and North africa (selected countries) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Jordan 1984 10 17 FTZ, EPZ, Hong Kong (China), apparel, trading United States, Freeport, Pakistan, India, Israel, Middle East QIZa China, Korea, Rep. of, Taiwan (China), United States Turkeyb 1985 0 21 FTZ, Science Turkey Food processing, Turkey, EU Park apparel, trading United arab 1985 26c 0 FTZ, Middle East, Trading, electrical, Middle East, Emirates Specialized EU, Japan, pharmaceuticals, africa, EU Zone Korea, Rep. of food, apparel Tunisia 1994 6 0 Hybrid EPZ, France, Italy, Spain, Electrical industries, France and Technology Germany, Belgium, apparel, mining, other EU Park United States, United leather, textiles, Kingdom, Japan services, tourism Morocco 1994 2 0 Hybrid EPZ France, United Manufacturing, France and Kingdom, agricultural, services other EU Switzerland, United States Kuwaitd 1995 1 0 FTZ N/a Trading, logistics, food Middle East algeria 1997 4 0 FTZ N/a agriculture, France and manufacturing, fishing, other EU glass industry Gaza and N/a 0 1 Industrial Park N/a N/a N/a West Bank Bahrain 1999 1 0 FTZ N/a Textiles, footwear, N/a leather packing Iran, Islamic 1999 22 0 Freeport, FTZ N/a Textiles, shoes, leather, Rep. of commercial N/a Egypt, arab 1974 53 0 FTZ, Freeport, EU, Middle East apparel, petrochemicals EU, Rep. of Industrial Park, Middle East QIZ Saudi arabia 1975 24 0 Specialized Middle East, EU, Petrochemicals, logistics, Middle East, Zone, United States finance, tourism EU, United Freeport, States Technology Zone a. Jordan's zones include qualified industrial zones, which under a special program with the United States, allow for duty-free entry of all products, including garments. b. Turkey has 40 organized industrial zones, and 358 small-scale industrial estates that have not been included in the breakdown of public and private zones since they do not offer trade benefits such as reduced customs duty. other public zones are also not included in the table. Source: Robert Haywood, World Economic Processing Zones association. c. a number of the United arab Emirates zones are owned by Dubai Port World and/or its subsidiaries. d. The Kuwait Ministry of Commerce has revoked the license of the original private operator of the Shuwaikh Port Free Trade Zone, and is now directly controlling the project. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. TaBlE 2­4 Profile of Zone Programs in Western Europe (selected countries) Number of zones Country Name Year established Public Private Type of zones Cyprus 1973 1 0 FTZ Denmark 1891 10 0 FTZ Finland 1970 2 0 FTZ France 1992 87 0 EZ,* FTZ Germany 1888 8 0 FTZ Greece 1914 3 0 FTZ Iceland N/a 2 0 FTZ Ireland 1958 2 0 EPZ, FTZ Italy 1719 24 0 FTZ Malta 1988 11 0 FTZ Portugal 1980 2 0 FTZ Spain 1998 5 0 FTZ, SEZ Sweden 1785 4 0 FTZ Switzerland 1854 4 0 FTZ United Kingdom 1988 62 0 EZ,* FTZ *Note: EZ abbreviates enterpise zone. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. TaBlE 2­5 Profile of Zone Programs in Central and Eastern Europe and Central asia (selected countries) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Bulgaria 1987 4 16 Hybrid EPZ, EU, Turkey, Trading, transshipment, EU, Central Specialized Bulgaria food processing, Europe, Russian Zone apparel Federation Kyrgyz Republic 1991 4 0 Hybrid, Turkey, Russian Food processing, EPZ, Single Federation, EU, garments, construction Factory United States materials Romania 1992 5 2 Hybrid, EU, Romania, Warehousing, re-export, EU, Central EPZ, FTZ Turkey, Greece, food processing, apparel, Europe, Russian Japan automotive Federation Serbia 1994 0 3 FTZ N/a Trading, electrical N/a machinery, food processing Poland 1995 0 48 Hybrid Germany, automobiles, parts, EU, United States FTZ/EPZ, other EU, furniture, machinery Freeport, Japan, Technology United States Park latvia 1996 2 2 FTZ, Freeport EU, United Trading, transshipment, EU, United States, States electrical machinery, Russian Federation oil products Croatia 1996 2 12 Hybrid EPZ EU, United apparel, textiles, paper, EU, United States States metal-working, glass Russian 1996 6 0 Freeport Sweden, automobiles, furniture, Russian Federation Federation Germany, metal working, tourism other EU Ukraine 1997 5 11 FTZ EU, Ukraine, Food processing, metal- N/a Russian working, coal, chemicals Federation, Korea, Rep. of, United States lithuania 2000 10a 0 Hybrid EPZ, Denmark, Electrical, automotive EU, Russia Freeport Norway, Russian components, food Federation, EU, processing United States a. The industrial parks in lithuania are currently all owned by municipalities, and are therefore public. Sources: BearingPoint; Ilo database; WEPZa (2007); FIaS research. TaBlE 2­6 Profile of Zone Programs in Sub-Saharan africa (selected countries) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Senegal 1974 1 0 EPZ, Single France, United Food processing, call France, United Factory States, other EU center, pharmaceuticals States, other EU Mauritius 1970 1 0 Single-Factory Mauritius, apparel, textiles EU EPZ, FTZ France, Hong Kong (China) Togo 1989 1 0 EPZ, Single France, Italy, Wigs, agro-processing, France, United (mixed Factory Korea, Rep. of, metal products, apparel States, other EU, ownership) lebanon Ethiopia Cameroon 1990 1 0 EPZ, Single Cameroon, agro-processing, chemi- Cameroon, Spain, Factory Spain, France cals, leather, wood France, other EU Madagascar 1991 0 2 Single China, France, apparel, textiles EU Factory, India, Hong Industrial Kong (China), Park Mauritius Nigeria 1991 5 1 EPZ, Single Taiwan (China), Wood processing, West africa, Factory China, food processing, Taiwan (China), United Kingdom, apparel, textiles, oil EU, United United States and gas Kingdom, United States, Korea, Rep. of, India Kenya 1993 2 53 EPZ United States, apparel, textiles United States, EU, India, EU Sri lanka Namibia 1995 2 0 EPZ Germany, China, automotive parts, South africa, Japan, Hong apparel, textiles angola, United Kong (China), Kingdom, South africa, Germany, United Korea, Rep. of, States, other EU India, lebanon, France Seychelles 1995 1 0 EPZ, Single Hong Kong apparel, textiles, food EU, Japan, Factory (China), EU, processing Korea, Rep. of Mauritius Ghanaa 1995 0 4 EPZ United Kingdom, apparel, textiles, printing, EU, United United States, agro-processing Kingdom, India, United States Korea, Rep. of, China, Nigeria Zimbabwe 1995 3 4 EPZ, Single China, Hong apparel, leather, metal- China, Japan, Factory Kong (China), working, agro-processing India, Canada Korea, Rep. of, Japan (Continued) TaBlE 2­6 (Continued) Year Number of zones Country established Public Private Type of zones FDI sources Key sectors Key markets Malawi 1995 1 0 Single-Factory United Kingdom, apparel, textiles, agro- EU, South africa, EPZ Korea, Rep. of, processing United Kingdom, South africa Norway, Denmark Mozambique 1999 1 0 EPZ United Kingdom, aluminum smelting United Kingdom, (mixed Portugal, other Portugal, other EU, ownership) EU, South africa, South africa China, Brazil South africa 2000 6 0 Hybrid EPZ Germany, automotive, Germany, France, France, other agroprocessing, other EU, United EU, United aluminum Kingdom, United Kingdom, United States, Canada States, Canada a. 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