Many developing nations are trying to transform their economies by integrating themselves into the global supply chain. This means moving away from an import-centric economy to one based on exports. Countries in Asia, Africa, and Latin America are creating export development programs that encourage investments from multinational companies.
One tool which is used by many nations is Export Processing Zones (EPZ). These are selected areas in a country that are designed to do the following:
- Attract foreign investment to create jobs
- Expand the industrial base
- Introduce technology
- Create backward linkages between the zones and the domestic economy
The EPZ will have some resources that can attract investment such as natural resources, cheap skilled labor, or logistical advantages.
Nations can also encourage investment in the EPZ by offering expedited licensing or building permits, minimal customs regulations, duty-free tax incentives, such as a ten year tax holiday, and developing infrastructure to investor's requirements.
History of the Export Processing Zone
The notion of the EPZ may have originated from free trade zones established in major ports such as Hong Kong, Gibraltar, and Singapore during the nineteenth century. Some of the first free trade zones allowed imports and exports free from custom formalities so that goods could be re-exported quickly.
The EPZ has been used by developing nations since the 1930's to encourage foreign investment. The mechanism is called EPZ is some countries, while it can also be called Free Trade Zone (FTZ), Special Economic Zone (SEZ) and maquiladora, such as found in Mexico.
Some of the first EPZ's were found in Latin America, while in the US, the first free trade zone was created in 1934.
Since the 1970s, developing nations have seen EPZ's as a way of stimulating their economies by encouraging investment from the developed world.
In 2006, 130 countries had established over 3500 EPZ's within their borders, with an estimated 66 million workers employed in those EPZ's. Some EPZ's are single factory locations, whereas some, such as the Chinese Special Economic Zones, are so large that they have a resident population.
Advantages of the Export Processing Zone
With over 130 nations providing EPZ's within their borders, the advantages of creating EPZ's appear to be very clear for developing countries.
The obvious benefits include:
- The increase in foreign exchange through increased exports
- Job creation
- Foreign direct investment (FDI) to the host country
- The introduction of technology into the country
- And generating backward linkages from the EPZ to the domestic economy
The overall benefits to the host country are not clearly measurable as there are the initial development costs of creating the infrastructure for the EPZ, as well as the tax incentives offered to foreign investment.
Where studies have been performed on EPZ's throughout the world, some nations appear to have benefited significantly from the introduction of EPZ's such as China, South Korea, and Indonesia. While it is surmised that some have not performed as well, such as the Philippines, where the high cost of infrastructure outweighed the benefits.
Studies have concluded that countries with a surplus of cheap labor can use EPZ's to increase employment and generate foreign investment.
Disadvantages of the Export Processing Zone
Groups such as the International Labor Rights Forum (ILRF) have found that in some developing nations the majority of the workers in the EPZ's are female and comprise as much as ninety percent of the cheap labor pool.
Many economists have concluded that employment in EPZ's means low wages, high work intensity, unsafe working conditions and suppression of labor rights. It is often true that the wages in EPZ' s are higher than those available in rural areas of the same country, especially for women, it is not always the case that wages in EPZ's are higher than those for comparable work outside the EPZ's.
Many families in rural areas depend on the wages sent back by female workers within the EPZ.
Many governments that have created EPZ's have acted against labor movement activities within EPZ's. The various restrictions on labor movements that governments have taken include a total or partial ban on trade union activities, restriction of the scope of collective bargaining, and banning trade union organizers.
Most recently in Bangladesh, the government's policy of banning unions has only softened after the building collapse that killed over 1100 workers.
Unsafe working conditions are a negative factor that is often associated with EPZ's. Workers are expected to work long hours in physically dangerous conditions, including excessive noise and heat, unsafe manufacturing equipment, and uninspected buildings. With no access to union representation, there is little that is done to change the situation in some factories.
As more and more EPZ's are created, there is an incentive to keep costs as low as possible to be competitive against other developing nations. This means that the workers continue to suffer the consequences of unsafe working conditions.
Updated by Gary Marion, Logistics and Supply Chain Expert at The Balance.