LDC EXPORT PROCESSING ZONES: A STIMULUS FOR WESTERN INVESTMENT

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• Publication Date: August 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Western Investment
LDC Export Processing
Zones: A Stimulus for
GI 84-10141
August 1984
Copy 550
Approved For Release 2008/12/01 : CIA-RDP85SO0315R000200030003-5
 LDC Export Processing
Zones: A Stimulus for
Western Investment
Office of Global Issues. Comments and queries are
welcome and may be direct d to the Chmef. Third
World Issues Branch, OGI,
Confidential
G184-10141
August 1984
 LDC Export Processing
Zones: A Stimulus for
Western Investment fl
Summary
Information available
as of 27 July 1984
was used in this report.
During the last 15 years, export processing zones (EPZs) have become an
important mechanism for attracting export-oriented foreign investment to
developing countries. These enclaves, which provide industrial infrastruc-
ture and special tariff, fiscal, and regulatory incentives, are attracting over
$1 billion per year in export-oriented foreign investment. This foreign
capital, in turn, has generated about $7.5 billion annually in foreign
exchange. We also found that the zones have generated almost I million di-
rect jobs and added another 350;000 jobs in related activities. The
developmental impact outside the enclaves, however, is not as significant,
mainly because investments are concentrated in labor-intensive assembly
industries that do little to enhance the labor skills or technological
capabilities of the host country. Moreover, the zones rarely develop
linkages to domestic enterprises because they usually rely on foreign
suppliers.
Despite their current limitations, we believe the zones could attract more
private-sector resources and contribute more to the pace of LDC economic
development if:
? Host countries offer simple incentives, provide a well-maintained indus-
trial infrastructure, utilize market-sensitive zone managers, and promote
resource-supply linkages between EPZ firms and domestic enterprises.
? International and regional development organizations expand their tech-
nical assistance services on zone planning, implementation, and
operation.
? Developed country governments continue trade concessions that benefit
EPZ exports.
A confluence of events make the next one to three years highly favorable
for establishing or expanding EPZ operations in developing countries. The
recent Caribbean Basin Initiative (CBI) has created a duty-free window to
the US market that probably will prompt a surge of EPZ growth in most
Caribbean and Central American countries. A further stimulus to zone
.development is the recent flight of investment capital from Hong Kong, a
result of investor uncertainty over the Colony's future. Given the out-
growth of new technologies that are automating the routine, labor-intensive
assembly operations of traditional zones, we believe the focus of EPZ
operations will probably gravitate toward data entry, computer software
development, and other labor-intensive service industries.
 Figure 1
Third World Export Processing Zones, 1982
Number of Zones
M 10-20
? 4-9
O 1-3
 This paper is part of ongoing Directorate of Intelligence research concern-
ing Third World economic development prospects. Taken as a whole, this .
research concentrates on how the pressures and options facing LDCs can 25X1
affect the East-West strategic balance in the Third World. This report
focuses on export processing zones, which have become one innovative way
 LDC Export Processing
Zones: A Stimulus for
Export processing zones (EPZs) have flourished in
developing countries. In 1970 only eight zones were
operating in eight countries. By 1983, 109 EPZs were
established in 38 developing countries (figure 1).
Moreover, at least 13 additional zones are in the
planning or developmental phase in such countries as
Peru, Bolivia, Ecuador, and Grenada. The rapid
growth in EPZs is occurring throughout the Third
World, although South America has been slow to get
involved (figure 2). Of the active zones, 47 are in
Central America and the Caribbean, 33 in Asia, 24 in
Africa, and five in South America. The Asian zones
are larger and account for most of the investment,
employment, and output of Third World EPZ proj-
EPZs are enclaves in which the host country provides
industrial infrastructure-including buildings, power,
and roads-and special tariff, fiscal, and regulatory
concessions to investors in export-oriented manufac-
turing industries. The growth in EPZ activity derives
from the zones' purported ability to attract foreign
investment and promote LDC economic development.
Proponents contend the special incentives and infra-
structure offered by the zones will attract foreign
export-oriented industries that, through their invest-
ments and operations, generate foreign exchange,
provide employment opportunities, transfer new tech-
nologies, upgrade labor and management skills, create
Although large numbers of developing countries are
turning to EPZs, there is no consensus on the impact
of EPZs on host-country economic and development
progress. This study examines how the EPZs' theoret-
ical advantages have worked by addressing three
questions:
? Have EPZs attracted private-sector resources from
developed to developing countries?
? To what extent do the export-oriented industries
contribute to host-country economic development?
Figure 2
Growth in Third World Export
Processing Zones
? 1975
1982
Central America/
Caribbean
Africa/
Middle East
? Can the zones'role in transferring private-sector
resources to developing countries be enhanced? 25X1
Past Performance
The zones have become a significant mechanism for
attracting additional export-oriented foreign invest-
ment. EPZ administrators indicate that by creating
Confidential
G/ 84-10141
August 1984
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.,uIIIIueIItI4I
The first EPZ was established in 1959 at Ireland's
Shannon International Airport. During the 1940s and
1950s, Shannon was a major international refueling
center for propeller airplanes on transatlantic flights.
The introduction of longer range jets left Ireland with
a large, fully developed but little-used airport. In
response, the Irish Government introduced several
innovations, including a 25-year tax holiday on ex-
port sales and duty-free privileges for export-oriented
manufacturing industries, to develop an airport-based
This action fundamentally changed the airport's ori-
entation from transshipment and warehousing to
export-oriented manufacturing. Within eight years,
the Shannon EPZ was contributing 20 percent of
Ireland's manufactures exports and employing 8,000
people. It proved to be an important testing ground
for policies that might have been resisted when
proposed nationally. It pioneered the development of
Ireland's export-based industrial sector throughout
The success of the Shannon EPZ coupled with UN
and World Bank promotion of export-led industrial-
ization stimulated the developing world's interest. In
1966 an EPZ was. established in Kaohsiung, Taiwan.
Within three years the site was fully occupied, and
two other zones were opened by 1971. The Shannon
and Kaohsiung EPZs quickly became models for the
development of export-oriented manufacturing sec-
tors in developing countries, and the number of EPZs
climates favorable to small- and medium-sized multi-
national enterprises, the zones attract many firms that
normally avoid unfamiliar political and regulatory
environments. According to the United Nations In-
dustrial Development Organization (UNIDO), the
zones' net addition to foreign investment in EPZ host
countries over the past decade totals between $10
Most EPZ investments have been concentrated in
labor-intensive assembly industries. Electrical and
electronics industries account for 53 percent of EPZ
sales, textiles and garment industries for 14 percent,
and food products and tobacco industries for 6 per-
cent. The average capital investment for machinery,
equipment, and working capital in EPZ industries is
about $800,000. This ranges between $250,000 and
$600,000 for garment and footwear industries and $1
million and $4 million for pharmaceutical, transport
equipment, and machinery industries. Electrical and
electronic industries are generally in the midrange,
with an average fixed investment of $500,000 to $1
The largest foreign investment inflows to EPZs tradi-
tionally have occurred as countries shift from import-
substitution strategies to export-led growth. South
Korea, Singapore, and Taiwan are the best examples
of this foreign investment pattern. Once a viable
manufacturing base is established, however, the
EPZs' importance as a source of foreign investment
diminishes. These newly industrializing countries
(NICs) were able to sustain their industrial expansion
by including the EPZs in comprehensive national
strategies promoting outward-looking growth poli-
cies.' Each of the EPZs functioned as a stimulant to
Factors Affecting Capital Inflows
Our analysis indicates that the volume of private
investment in an EPZ depends on both the trade
preferences extended by developed countries and the
political-economic conditions in the host country. No
EPZ, for example, has prospered amid nonpreferen-
tial access to developed country markets, political
instability, or regulatory harassment. A few zones,
however, have overcome one or more of these handi-
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Developed-country trade preferences providing a ma-
jor stimulus to private-sector resource flows to devel-
oping country EPZs over the past decade include:
The Caribbean Basin Initiative (CBI) has opened a
duty-free window to the US market for most Carib-
bean and Central American export industries. Zone
administrators throughout the region report a sig-
nificant rise in investor interest by American and
Asian firms since its enactment in 1983.
? US Tariff Concessions 806.3 and 807 permit US
products to be assembled and processed overseas
and returned to the United States free of duty for
the value added by operations performed abroad.
Garments from the border zones of Mexico have
especially benefited from these provisions, as have
electronics exports from Malaysia;
? The Generalized System of Preferences (GSP) calls
for preferential tariff reductions by most developed
countries on most manufactured and semimanufac-
tured products from developing countries. In 1981,
Hong Kong, Singapore, Taiwan, and South Korea
accounted for almost 40 percent of all eligible items.
Impending changes in the GSP, which graduate
these Asian NICs out of duty-free access to devel-
oped-country markets, have accelerated the flow of
investment from the NICs to EPZs of developing
countries maintaining GSP privileges.
? The Multifiber Arrangement, which sets export
quotas on developing country garment and textile
industries, has also been a major stimulus to EPZ
growth. As traditional centers of wearing apparel
and textile manufactures reached their export quota
limits for the US market, firms have diversified into
EPZs located in such nonquota-bound countries as
Mauritius.
? The Lome Convention enabled more than 40 devel-
oping countries to export manufactured products
into the European Community at low or no duty for
the past eight years. It has been a primary stimulant
to EPZ activity in former African, Caribbean, and
Political-economic conditions in the host country af-
fecting EPZ capital inflows include:
? A stable investment climate. We know of no suc-
cessful zones in countries suffering from endemic
civil unrest or military strife. The political unrest in
Sri Lanka and the Philippines over the past year, for
example, has reduced the inflow of EPZ investment
capital. Moreover, El Salvador, Honduras, and Ja-
maica have experienced disinvestment in EPZs be-
cause of the perceived risks from turbulent political
conditions. The recent capital flight from Hong
Kong suggests that even exceptionally attractive
basic factors of production will not hold entrepre-
neurs when a country's stabilityiis seriously
questioned.
The availability of competitive factors of produc-
tion. A major attraction to foreign investors is the
cost and productivity of the local work force. The
frequent employment of youths from rural areas
demonstrates that the EPZ labor force need not
have industrial experience. The productivity of un-
skilled workers in Mauritius, Dominican Republic,
Taiwan, Malaysia, and Mexico account for much of
the attraction of those EPZs. A zone's success also
depends on its access, either domestically or through
foreign suppliers, to competitively priced raw mate-
rials and intermediate goods. When linkages are
established with domestic suppliers, such as in
Taiwan, Malaysia, and South Korea, foreign invest-
ment is substantially higher.
? Simple, blanket incentive programs. Although the
extent and duration of the incentives are important,
most foreign investors are more sensitive to the
regulatory and paperwork requirements for invest-
ment applications and operating permits. Respond-
ing to investor preferences, several EPZs in Malay-
sia, the Philippines, Taiwan, and South Korea have
installed one-stop investment service centers. Zones
in India and Honduras have lost several investment
opportunities because of the difficulties and delays
in securing necessary approvals.
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wnuuenuaI
? Well-maintained industrial infrastructure. Success-
ful EPZs have a dependable power and water
supply, low transportation costs, nearby housing,
and adequate building facilities. Frequent power
outages or brownouts, as in Jamaica and Dominican
Republic, greatly diminish a zone's attractiveness.
Although freight services and costs are also impor-
tant to many firms, distance from supplies and
markets does not appear to be an overriding concern
of foreign investors. Products shipped from EPZs in
Brazil and Mauritius must travel unusually long
distances to reach final markets. In both cases,
however, the volume of air traffic has made air
freight rates less expensive than other transporta-
tion. The cost and quality of zone buildings are also
important to zone performance. In most cases,
private EPZ developers have been more successful
in ensuring basic amenities and services than their
public-sector counterparts.
A market-sensitive marketing, planning, and man-
agement staff. Marketing and promotion are essen-
tial in the initial stages of zone development to
trigger the requisite foreign investment. The failure
of zone planners to phase zone development with
demand is the main reason for the disappointing
performance of several EPZs. For example, in Gua-
temala a $12 million investment in an extensive
EPZ at Santo Towas de Castillo attracted only one
factory after two years. Zone management is also
responsible for responding to tenant problems con-
cerning services and building maintenance. Al-
though these positions have been effectively handled
by both the private and public sectors, the financial-
ly successful zones are invariably privately man-
aged. Public-sector zones in Mexico and Mauritius,
for example, have lost a number of potential tenants
because foreign investors found nearby privately
operated zones to be more responsive to the mainte-
nance-and service needs of companies operating
Our analysis indicates that the export-oriented indus-
tries' most significant contributions to EPZ host
countries include additional foreign exchange earn-
ings and employment opportunities. The EPZs' suc-
cess in using the foreign capital to enhance techno-
logical capabilities, upgrade labor and management
skills, or create linkages with the domestic economy,
however, has fallen short of theoretical expectations.
Moreover, the zones' contributions are not shared
equally by all developing countries. The most success-
ful EPZs are in Malaysia, Mexico, Singapore, South
Korea, and Taiwan. In other developing countries, the
EPZs have served only as a marginal instrument in
promoting economic growth and development (table
Creates Employment Opportunities
The high concentration of foreign investment in labor-
intensive industries has significantly affected job cre-
ation in EPZ host countries. Data indicate that the
net gain in direct employment totals almost I million
jobs for EPZs in developing countries. The zones in
China, Taiwan, Malaysia, Singapore, and South Ko-
rea provide most employment opportunities, account-
ing for 50 percent of the total. Next in importance,
largely because of the employment generated in the
border zones of Mexico, are the Caribbean and
Central America, which account for some 28 percent
of the jobs. The jobs created in several EPZs represent
a significant share of total manufacturing employ-
ment, ranging between 35 to 55 percent for Barbados
and Mauritius; 10 to 20 percent for Malaysia and
Dominican Republic; and less than 10 percent for
South Korea, Sri Lanka, Hong Kong, Brazil, and
India. Zones in Colombia, Panama, Senegal, and
Guatemala are not significant sources of jobs. Most of
the job opportunities have been for women, except in25X1
the Middle East.l
The indirect employment generated by EPZ indus-
tries is also significant. Estimated to total 350,000
the indirect jobs are concentrated in service and
feeder industries. Employment in the service indus-
tries includes transportation, housing, food prepara-
tion, warehousing, general construction, and training
staffs. The indirect employment effects are greatest in
countries such as Malaysia and Taiwan, where link-
ages with local feeder industries through the purchase
of domestic raw materials and intermediate goods are
 Table 1
Characteristics of Third World Export
Processing Zones, 1982
Country
Number of
Projects
First EPZ
Ownership
Direct Number
Employment of Firms
Exports
(million US $)
Major Industrial Sectors
Industry Share of
Exports
(percent)
Bahamas, The
1
1960
Private
1,500
8
NA
Pharmaceuticals .100
and petroleum
refining
Barbados
10
1965
Public
15,000
NA
140
Electrical parts
Garments
47
22
Costa Rica
2
1972
Public
12,000 a
60 a
57 a
Garments
Footwear
82
6
Dominican
Republic
4
1970
1 public
l private
2 mixed
18,921
93
150
Garments
Tobacco and
cigars
46
34
El Salvador
2
1976
Public
3,000
NA
77
Electronics
Garments
75
20
Mexico
17
1965
Private and
public
130,049 a
605+
1,622 a
Electronics
Garments
93
7 a
Eastern
Caribbean b
5
1978
Public
8,500
20
30
Garments
Electronics
65
25
Haiti
1
1965
Public
48,000 a
200-
180 a
Garments and
footwear
Sporting goods
Electronics
39
31
8
Colombia
3
1971
Public
2,800 d
25
NA
Furniture and
garments
100
Brazil
1
1967
Public
49,213
194
75
Agricultural
goods
45
NA
Food and
beverages,
chemicals,
and metal parts
NA
Mauritius
5
1970
2 public
3 private
23,470 a
118 a
112 a
Garments
71
Senegal
I
1974
Public
250
1
0
Construction
materials
NA
Syria
6
1976
Public
1,500
60
NA
Perfumes and
cosmetics
NA
Tunisia
6
1972
Public
16,000 d
NA
NA
Textiles and
garments
NA
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Table 1
Characteristics of Third World Export
Processing Zones, 1982 (continued)
Country
Number of
Projects
First EPZ
Ownership
Direct Number
Employment of Firms
Exports
(million US $)
Major Industrial Sectors
Industry
Share of
Exports
(percent)
China
4
1979
Public
100,000
NA
NA
Garments and
footwear,
electronics
NA
Hong Kong'
2
1977
Mixed
4,000
26
NA
Garments,
textiles, and
electronics
NA
58
156
Food
manufactures
Garments
Electronics
23
20
17
Singapore'
1
1972
Public
88,000
2,000
1,320
Petroleum
products
Electronics
37
18
South Korea
2
1971
Public
120,000d
89
679
Electronics
Machinery
60
10
Thailand
1
1981
Public
15,500
25
NA
Garments
Crafts
Metal products
NA
Designates countrywide data for entire EPZ sector (including
single factories with EPZ status).
b The Eastern Caribbean includes Antigua, St. Christopher and
Nevis, Dominica, St. Lucia, and St. Vincent and The Grenadines.
For 1979.
For 1978.
' Hong Kong and Singapore represent employment and exports
from industrial estates and EPZs only.
r Major industrial sectors refer only to SEEPZ.
Boosts Foreign Exchange Earnings The net foreign exchange earnings retained by EPZ
The LDCs' experience with EPZs indicates that the host countries after the foreign exchange outlays on
zones contribute to the foreign exchange earnings of imported inputs, expatriated profits, and other capital
EPZ host countries. This results from the direct outflows are subtracted, however, has been mixed.
foreign investment in zone infrastructure and the Countries realizing substantial net foreign exchange
export sales by zone-based manufacturers. In 1982
EPZ exports totaled $7.5 billion, roughly 6 percent of
the export earnings generated by the developing coun-
tries' manufactures exports.!
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earnings from their EPZs include Taiwan, Malaysia,
Mauritius, Dominican Republic, and Mexico. The
exports from Taiwan's three EPZs, for example, earn
more net foreign exchange than all other export
industries in the country. In other cases-notably
Senegal, Costa Rica, Guatemala, and Colombia-
EPZs have contributed little or nothing to export
earnings, and have resulted in government losses of
foreign exchange for zone infrastructure development.
In most cases, EPZs generating large net foreign
exchange earnings have a high local value-added
content. In the more developed zones, such as those in
Taiwan and Malaysia where domestic raw materials
and intermediate goods are a major input in the
manufacturing process, EPZ firms created value add-
ed at an average rate of 30 to 50 percent of export
sales. This compares with the typical added value of
about 25 percent of export sales for newly established
EPZs. The complexity of the assembly or manufac-
turing operations undertaken by zone firms also affect
foreign exchange earnings. Countries with higher
skilled labor and capital-intensive production earn
Provides Few Spinoffs to the Indigenous Economy
Biases implicit in the EPZ device limit the linkages
between EPZ firms and domestic enterprises. For-
ward linkages, the processing of zone products in the
host country, are rarely established because of restric-
tions on EPZ sales to the domestic market. Backward
linkages, the processing in the zone of raw materials
and intermediate goods from the host country, are
limited by the vertical integration of most EPZ
multinational firms, which requires EPZ firms to
import most of their materials. Where EPZ enter-
prises are not vertically integrated, they choose host-
country materials only when they are supplied at or
below world market prices. However, few host coun-
tries have efficient, internationally competitive do-
mestic industrial sectors to supply EPZ manafactur-
Export processing zones have not proved to be an
important mechanism for transferring technology to
most host countries. The production processes in the
zones generally are not technically sophisticated. Be-
cause of the labor-cost differentials between devel-
oped and developing countries, foreign firms move
only the labor-intensive stages of their production
processes to the EPZs. The preassembly stages and
stages requiring advanced technology usually remain
in the developed countries. The NICs are the few 25X1
countries to successfully use EPZs to upgrade the
technological sophistication of their production proc-
esses. This is in part because their ambitious industri-
al strategies seek to replace a large share of the labor-
Export processing zones have not traditionally been
an important mechanism for upgrading labor and
management skills. Industries established in EPZs
offer employment opportunities mainly for unskilled
and semiskilled labor. Where worker skills are up-
graded, they differ little with the jobs skills outside
the EPZ. Although the transfer of technical skills to
technicians and midlevel managers in EPZ industries
can be significant, most of these workers remain with
EPZ industries, and the skills are slow to diffuse into
the domestic economy. The exceptions are Taiwan, 25X1
Singapore, South Korea, and Malaysia where the 25X1
absorption capabilities of domestic labor is high be-
cause of the training programs offered to individuals
working in higher technology industries (table 2)F__1
Other External Benefits
The developing countries' experience with EPZs indi-
cates that the benefits to an EPZ host country can
extend beyond foreign exchange earnings and employ-
ment benefits. Sometimes EPZs are used to disperse
industry away from urban centers or to increase the
use of domestic raw materials and intermediate goods.
The Kandla zone in India and the Bataan zones in the
Philippines were established mainly as alternates to
the countries' congested major seaports. In the
Manaus EPZ in Brazil, more than 1,500 miles west of.
the coast in the jungle, foreign manufacturers must
purchase a portion of their raw material and interme-
diate goods from domestic producers. In each in-
.stance, the zones have at least partially dispersed
 Table 2
Comparison of Export Processing
Zone Performances
Panama's Colon Free Zone:
A Low Achiever
Profile The Colon Free Zone was established as a center for
international commerce, storage, and reshipping. Ac-
tivity concentrated on warehousing and distribution.
In 1980 a joint World Bank and Panamanian Gov-
ernment revitalization program expanded the zone to
include 478 acres for export-oriented manufacturing
firms, making it the largest as well as oldest free
trade zone in the Western Hemisphere. The existing
manufacturing industries include two apparel manu-
facturers, one bicycle assembly plant, and one phar-
maceutical company.
Contributions to Direct investment in the manufacturing enterprises
Development has been negligible. Foreign investment in the appar-
el industry of less than $300,000 is far below the
average for apparel manufacturers in other EPZs.
Manufactures exports are less than $1 million per
year. The net foreign exchange earnings generated
from these exports are minimal.
Manufacturing is limited to finishing and labeling
and involves a minimum of technology transfer and
Little or no linkages to domestic industry have
resulted in either the commercial or industrial activi-
ties. For the firms engaged in manufacturing, 100
percent of the raw materials are imported. Domestic
value added is less than 30 percent.
Factors Affecting Panama's strategic location in international com-
Performance merce is the most important factor influencing the
success of the Colon Free Zone. The regional eco-
nomic downturn, caused by conflicts and political
instability in neighboring countries, has been the
leading factor hurting the reexport business. The
paucity of investment in manufacturing is primarily
the result of relatively high wage rates, poor labor
productivity, government bureaucracy and redtape,
weak institutional support for export businesses,
shortages of semiskilled and skilled laborers, and
labor laws that are very protective and applied in an
unfair and inconsistent manner.
Taiwan's Nantze EPZ:
An Impressive Performer
The Nantze export processing zone (NEPZ)-was estab-
lished in 1970 to attract foreign investment, improve the
balance of payments, create job opportunities, and trans-
fer technology and skills. Occupying 218 acres, NEPZ is
the largest of Taiwan's three EPZs. Over 50 percent of
the total investment in NEPZ is concentrated in elec-
tronics industries.
In 1983 the actual investment in the NEPZ amounted to
$106.6 million. On average, firms have a capital invest-
ment of $1.1 million, ranging from $327,000 for knit-
wear to a high of $3.4 million for machinery
manufacturers.
NEPZ exports totaled $364 million in 1983. Since 1965,
NEPZ has generated over $1 billion in net foreign
exchange earnings.
NEPZ has generated 21,351 jobs.
NEPZ has proved to be of significant value in transfer-
ring "know-how" in quality control and in export-
product marketing. It has also been effective in introduc-
ing technical experience in color TVs, optical products,
integrated circuits, and printed circuit boards.
Taiwan's export manufacturers have developed strong
linkages with local suppliers of raw materials and inter-
mediate goods, which satisfy over 30 percent of input
requirements. Over 40 percent of NEPZ export value is
added domestically. For goods produced under 806 and
807 provisions, 82 percent of the exports to the United
States represents value added in Taiwan.
NEPZ performance has benefited from Taiwan's favor-
able economic climate. Foreign investors are attracted by
the competitively priced, prebuilt, standard factory
buildings; the growing supply of highly productive mid-
dle management and technically skilled personnel; the
increasing strength of Taiwan's capital markets; the
extensive and well-maintained roads, ports, and airports;
and the indigenous private sector that has become skilled
at supplying components and business services. More-
over, Taiwan's free market, free trade policies also
attract export-oriented manufactures.
 In our judgment, EPZs can also serve as a "proving
ground" for basic policy reforms. Taiwan and South
Korea, for example, used their EPZs as demonstration
areas for market-oriented policies before their intro-
duction nationwide. The EPZs' success later enabled
advocates to press for a shift from import-substitution
to export-led development strategies. Reducing tar-
iffs, taxes, and regulations in targeted areas can have
powerful demonstration effects, at far less political
costs than by attempts to overhaul economic policies
We believe a confluence of factors will lead to an
increase in EPZ use by developing countries during
the next one to three years. A recent stimulus to zone
development is the Caribbean Basin Initiative, which
opens a duty-free window to the US market for most
Caribbean and Central American export industries.
According to zone administrators, the CBI created a
surge in investor interest that already has contributed
to the leasing of all available prebuilt factory space in
Jamaica and Dominican Republic: They expect this
trend to begin in other established zones as investors
in the NICs, which are losing many of the cost
advantages previously inherent in their domestic econ-
omies, become increasingly attracted to the Caribbe-
A further stimulus to zone development is the recent
surge in capital flight from Hong Kong, caused by
investor uncertainty over the Colony's future. Zone
managers report that the long-idle inventory of pre-
built standard factory buildings in the Coromandel
nontariff barriers to selected manufactures exports,
the opportunities for many of the LDCs' traditional
labor-intensive, zone-based, assembly industries will
be reduced. A more difficult problem for traditional
export processing zones, however, is the outgrowth of
changing production technologies and investment pat-
terns. Routine labor-intensive assembly operations are
increasingly automated. As automation accelerates,
we believe the zones' ability to attract their historical
shares of routine assembly and manufacturing opera-
tions will suffer. Already,leading,US firms are
automating the manufacture of textiles and electronic
components and relocating their plants in or near final
markets. 25X1
Although automation will weaken the comparative
advantages of traditional labor-intensive assembly
industries, we believe the changing technologies will
generate new opportunities for production sharing.
The advent of low-cost microcomputers has already
resulted in a substantial growth of "offshore data
entry" operations in the past five years. In.these
operations, large masses of corporate data are routine-
ly entered into electronic data banks that are then
transferred to corporate headquarters for processing
and analysis. Companies such as American Airlines,
National Demographics, and General Motors report
savings of 50 percent because of the substantially
reduced labor costs in offshore data entry zones in the
Caribbean. This trend is likely to extend to software
development and other labor-intensive service indus-
tries. We believe developing countries that use their
EPZs to widen access to such skills and technologies
will probably substantially improve their trade and
EPZ of Mauritius has been leased out during the past
year to Hong Kong firms seeking a more stable base ' Implications
of operations. We believe the growth in EPZ use will
also be spurred by the NICs as they shift the manu-
facturing operations for products that are losing pref-
erential access to developed-country markets to EPZs
in developing countries still receiving developed-coun-
We believe the form of EPZ operations will also
change. As already described, one factor affecting
EPZ activity is the continuing rise of protectionism.
As developed countries erect additional tariff and
Although EPZs are not a solution to the developing
countries' industrialization problems, we believe they
are a useful tool for attracting private-sector resources
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to developing countries.' Moreover, we believe the
zones could attract more private-sector resources and
contribute more to the pace of LDC economic growth
if.
? Host countries offer simple, blanket incentive pro-
grams; provide well-maintained roads, power, build-
ings, and other industrial infrastructures; use a
marketing,'planning, and management staff that is
sensitive to market developments; and promote link-
ages between EPZ firms and domestic suppliers of
-raw material's and intermediate goods.
? International and regional development organiza-
tions expand their technical assistance services on
zone planning, implementation, and operation. Prin-
'cipal developing country needs include information
on'thinimizingEPZ development costs for the public
sector; on'establishing market-sensitive systems for
zone management'and promotion; on reducing regu-
latoiy;-tax; and-tariff barriers; and on strengthening
linkages by EPZs to'. indigenous entrepreneurs and
institutions: -
?'Developed=country governments continue to extend
tariff preferences that benefit EPZ exports. The
duty-flee access provided-by developed-country
trade preferences hasisignificantly affected EPZ
"performance"s: Continued or wider application of the
- GSP,Sections-8063 and 807 of the US Tariff
Concession and'other measures such as the CBI
would provide a major stimulus to EPZ growth.
As the EPZs take hold, they can stimulate private-
sector development in key LDCs, thereby alleviating
serious economic, political, and social problems. Prog-
ress on this front is important as more LDCs begin to'
reassess their policy toward the Western economic
system. This reevaluation is increasing as Third
World countries such as Mozambique realize that the
Soviet model'is flawed.-To the'extent that EPZs are
used, Third World countries can gradually channel
critical Western capital investment as well as technol-
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t,onnaennai
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