6:30 AM Jun 11, 1993


Geneva 11 June (TWN) -- Export Processing Zones (EPZs) which have expanded rapidly in the developing countries have been successful in promoting exports of manufactures and generating foreign exchange earnings, but in terms of establishing linkages in the domestic economy, transfer of technology and upgrading of skills their effitiveness have fallen far short of expectations.

This assessment is in a report of the secretariat of the UN Conference on Trade and Development for the second session of the Ad Hoc working group on Investment and Financial flows. The mandate of the Ad Hoc working group which begins on 28 June also addresses questions on non-debt-creating finance for development and new mechanisms for increasing ivnestment and financial flows.

The week-long meeting will address the broad issues of foreign direct investment in developing countries and recent trends and policy issues and in this context consider global trends and issues including foregn investors' motivations. It will be based on a secretariat report on FDI trends and views of invited experts (from two TN Corporations) as well as some country reports and experiences.

Another issue to be discussed is the question of host and home country policies and measures to promote fdi, including export processing zones and special economic zones.

In a report on this, the secretariat notes that the EPZ concept is still a subject of controversy, but thqt its proliferation would seem to indicate that they had mewt some of the expectations of host countries.

There were (as of 1990), a total of 195 EPZs in 27 countries of Africa, Asia and the Pacific and Latin America and Caribbean countries, with a total employment of 2.438 million persons.

A principal factor behind establishment of EPZs is attracting of FDI and there was undeniable evidence that this sector had been most dynamic in attracting FDI, with foreign investors accounting for most of investment and employment in EPZs.

But while they have created productive employment, it has been mainly of cheap low-skilled labour, but providing large scale employment of young women, providing them with new opportunities and values to those who otherwise would never have entered salaried work.

But the EPZs' effectiveness as isntrument for achievement of long-term development largely depends on degre of linkages created with domestic economy and extent to which they provide an avenue for technology transfer and upgrading of skills -- areas where the EPZs have fallen far short of expectations.

"There is an inherent bias in the EPZ setup which hinders creation of linkages," the report comments.

Import intensive operations, it points out, are encourged by special concessions on imports although the principal difficulty to domestic sourcing seems to be inability of local suppliers to deliver high-quality goods and services at internationally competitive prices.

The export orientation of EPZs and strict regulation of domestic sales inhibits development of forward linkages and in the large majority of cases backward linkages have not developed in any significant degree either.

As for backward linkages with domestic economy, this is influenced by the level of industrial development of the host country and also on overall corporate strategy where close links between subsidiary and parent companies limit possibilities of relations with local firms.

The intra-firm trade favoured by TNCs not only assures them of acquiring within their own network high qulaity standardized products but also opportunity of transfer pricing.

The trade policies of the developed countries, encouraging use of their own raw materials and intermediate goods, is also seen as limiting use of domestic supplies.

The very low domestic content in the Mexican maquiladoras is due to the tariff rules of the US, which allows duty-free re-iumports of goods except for value added geenrated abroad. The proposed NAFTA could reduce this disadvantage for Mexican suppliers.

While technology transfers and skills are limited by nature of EPZ operations -- which typically involve low technology and or simple skills -- they have not been negligible though only within the zone through joint ventures between TNCs and local firms.

In some EPZs progressive automation and moe sophisticated processes and a growing number of local manages and technicians are also observable.

In terms of cost-benefit analyses, the results in respect of a few Asian APZs have shown that incentives, subsidies and infrastructure expenditures (used to attract EPZs use) entail considerable costs.

"These costs," UNCTAD notes, "are sometimes difficult to justify, from both financial and economic viewpoints. However, stiff competition among EPZs of developing countries to attract ivnestors has exerted pressure to offer increasingly generous incentives, thus eroding their net benefits.

"The harmonization of incentives is, therefore, an issue that deserves attention," it adds.

One study of cost benefit analyses of EPZs in Indonesia, South Korea, Malaysia and Philippines, shows that the main source of gain is from employment and foreign exchange conversion.

In Indonesia, taxes and revenues are of major importance. But the expenditure on drawback schemes and the subsidy granted for use of domestic raw materials amounted to seven million dolars which was greater than the estimated net gain of five million dollars from use of such materials.

In Malaysia, the subsidy on electricity outweighed the combined benefits from use of local raw materials and capital equipment plus tax revenues raised.

In Philippines, there is a negative net present value at Bataan EPZ, largely due to the enormous infrastructure costs and cost of granting EPZ firms subsidized access to Philippines capital markets. Each of these are large enough to outweigh the other benefits.

While employment, foreign exchange conversion and domestic raw materials generated (at 1982 prices) 145 million dollars, it was outweighed by a loss of 147 million dollars on (subsidized) domestic borrowings, 196 million dollars on (subsidies) for infrastructure, 23 milllion dollars on administrative coss and four million on electricity use, resulting in a total net value of -225 million dollars.

The long-run growth and development of EPZs, UNCTAD notes, will depend on whether they are well-equipped to meet the challenges emerging from the structural chagnes in both the domestic and the international economy including changing patterns and more exigent requirements of FDI.

The current worldwide industrial restructuring demands additional locational assets, such as highly skilled labour force and availability of a comprehensive support network and crucial industrial services. Host countries therefore had to upgrade not only skills and educational levels of labour force but also the technological infrastructure of the EPZs.

The long-term viability of EPZs also requires their operations to be properly integrated in the overall economic and industrial development strategy of the country.