A Review of the Role and Impact of Export Processing Zones

Traditional export processing zones are fenced-in industrial estates specializing in manufacturing for exports. Modern ones have more flexible rules, such as permitting more liberal domestic sales. They provide a free-trade and liberal regulatory environment for the firms involved. Their primary goals: to provide foreignexchange earnings by promoting non-traditional exports, to provide jobs and create income, and to attract foreign direct investment and attendant technology transfer and knowledge spillover. Domestic, international, or joint venture firms operating in export processing zones typically benefit from reduced red tape, flexible labor laws, generous long-term tax holidays and concessions, above-average communications services and infrastructure (and often subsidized utilities and rental rates), and unlimited duty-free imports of raw and intermediate inputs and capital goods needed for production. In this review of experience, the author concludes that export processing zones have limited applications; the better policy choice is to liberalize a country's entire economy. Under certain conditions - including appropriate setup and good management - export processing zones can play a dynamic role in a country's development, but only as a transitional step in an integrated movement toward general liberalization of the economy (with revisions as national economic conditions change). The world Bank, writes the author, should be cautious about supporting export processing zone projects, doing so only on a case-by-case basis, only with expert guidance, and only as part of a general reform package. It should not support isolated export processing zone projects in unreformed or post-reform economies (in the last case they might encourage backsliding on trade policy). In general, if a policy is good for the economy as a whole, it is likely to be good for an export processing zone. Sound policy will encourage: 1) Sound, stable monetary and fiscal policies, clear private property and investment laws, and a business-friendly economic environment. 2) Moderate, simplified (but not"over-friendly") corporate tax schedules, and generally liberal tariffs and other trade taxes. 3) Private development and management of export processing zones and their infrastructure and unsubsidized utilities. 4) Labor laws that are business-friendly but do not abuse workers'safety and labor rights. 5) A better understanding of the impact of industrial refuse on the quality of air, soil, water, and human health.