Contribution of Export Processing Zones (EPZ) to the Economy

Export processing zones, EPZs are created as open market oases within an economy that is dominated by distortionary trade, macro, and exchange rate regulations, and other regulatory governmental controls. Traditionally, there are some important views on the role of EPZs in an economy.

Evaluate the contribution of Export Processing Zones (EPZ) to the Economy –

  • Foreign Exchange Earnings Potential –

Foreign exchange earnings are one of the main benefits expected from an export processing zone. It is argued that EPZs provide foreign exchange earnings that allow low-income economies to slacken the foreign exchange constraints regarding their import needs for the rest of the economy and provides the government with development funds.

  • Tax Revenue/Tax Loss Effect –

The establishment of EPZs seems to be synonymous with the country providing a multitude of tax breaks and tax holidays to attract foreign direct investment to their zones. All countries offer similar tariff-free imports and export, free repatriation of profit and market access. The length and extent of tax provisions vary across nations.

  • FDI Effect –

The foreign direct investment effect goes beyond that of receiving a needed infusion of capital (financial as well as machinery) from developed countries. Successful FDIs in a zone represents a showcase for domestic firms and potential entrepreneurs to learn from and copy. Rhee, et. al. (1990) refer to them as the “catalysts” for they initiate and nurse nontraditional export-oriented production into maturity by combining their technical, marketing and managerial know-how and their access to world markets with the domestic endowments.

  • Technology Transfer, Knowledge Spill-Over and Backward Linkages –

The countries implicitly hoped that the positive spill-overs of DI would extend beyond the demonstration effect discussed above to include technology and further knowledge transfer. Such a transfer would foster industrial development in nontraditional goods and efficiency gains in production processes of the traditional ones. Such a transfer would also foster a backward linkage to the country firms, which would allow them to step in as suppliers to the EPZ firms in the medium to long run. This process would integrate the zone into the regional and national economy and promote regional development beyond the immediate and limited servicing of the enclave structure. Eventually, it was hoped, these domestic supplier firms would mature to compete in the international market.

  • Employment Effect on Local or National Economy –

Job creation is considered one of the primary goals and one of the most important contributions of any EPZ to the economy. This goal is based on two assumptions. The first one is that the country has high unemployment or underemployment. This is a reasonable assumption and the argument would work only until the excess labor is absorbed.

  • Women and EPZ Employment –

Women, many young (16 to 25) and single are attractive as prospective employees for the following reasons:

  • They don’t stay on the job for a long time (most marry and leave after a few years) and therefore, do not tend to get involved with an organized labor union.
  • Plant managers prefer to hire women because they are diligent and dexterous.
  • Women are paid a lower average wage than their male co-workers.