EPZs – at best, second best options

Study shows that the results have been generally disappointing

DIIS’s Trade and Development Research Group has just completed a study for the Danish Ministry of Foreign Affairs looking at promotion of Export processing Zones (EPZs) as an economic development strategy for developing countries.
EPZs first became widely adopted in 1975-85. Currently there are over 3,500 in more than 130 countries. Although the evidence is sketchy due to the absence of large-scale surveys of EPZs, such zones did appear to play some role in establishing a successful export-oriented pattern of industrialisation in Asia during the 1970s. However, in later periods and in other regions, the results have been generally disappointing.

While export-oriented industrialisation remains a relevant and feasible economic development strategy for developing countries, there are two general reasons for not considering EPZs the optimal tool for implementing it. Firstly, the range of factors limiting export competitiveness in developing countries is recognised today to be both more complex and also more specific to particular groups of countries than is assumed by proponents of EPZs. The main obstacles to export growth are found typically not in the immediate incentive structure for exporters but in factors such as poor governance, macro-economic instability, high borrowing or other factor costs, macro-economic instability, over-valued exchange rates or inadequate human capital formation.

Secondly, the normal core features of EPZ regimes – remission of import duties on inputs, improved local infrastructure, fast track customs procedures – are less powerful as incentives for exporters today than they were 20-25 years ago. This is because of wider and deeper trade liberalisation, improvements in physical infrastructure and more efficient customs procedures in most developing countries. Furthermore, where given developing countries have not made these changes, it is better to tackle the root causes than wager on short-cut solutions such as EPZs. At best therefore, EPZs are second-best options.

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