I am here today to speak about developing trade capacity through the use of Economic Processing Zones (EPZs) or Free Zones. Throughout the world, and even throughout history, EPZs have proven themselves to be one of the most effective tools available for trade development. However, before I get into the details of how zones can build trade, we need to spend time understanding trade capacity development, and how it is currently being supported.
One of the most robust statements that economists can make is that trade improves overall welfare. The protests about globalization are much more about how the improved welfare is distributed and not so much a challenge as to its creation. It is not certain that all people benefit from all trade, but it is certain that without trade there would be greater misery and suffering in the world. Indeed without trade there will be no hope of meeting the millennium goals that Lord Brennan spoke about yesterday. That is why the WTO minister at Doha renewed their commitment to build the capacity of developing countries to participate in the world trading system.
But trade capacity itself is not the goal we seek. Trade capacity does nothing to solve the problems of poverty and misery. What is really sought is trade or the conversion of trade capacity into to the actual trade in goods and services. The capacity to trade is a necessary, but not sufficient step, in realizing the benefits of trade.
Throughout the world there is often more capacity to do both good and evil than we utilize. We all have the capacity to make the doorman at our hotel very happy tonight. We could give him $100, but we won't. Also we all have the capacity to take another's life this evening, but we won't do that either. Capacity does not need to be utilized.
Throughout the world we have many instances where the capacity to trade is far greater than the volume of trade. A clear example of this is oil from Saudi Arabia. Political decisions are regularly made to export less oil than the capacity of the country to produce. In the 1990's telecommunications companies spent massively to build tremendous capacity into fiber-optic networks, but the demand for that capacity never developed, and the result was a the dot.com bust where trillions of US dollars were lost. Many countries have the capacity to export more coffee then they do. In this case it is because they cannot find enough buyers at the price that they seek, and the coffee either rots on the trees or in the warehouses.
For trade to take place there must be both capacity to produce and deliver a products and the demand for the product. My first point is that when we desire to build trade capacity, we should ensure that we are building capacity that will be utilized to create trade. My observation is that most of the time what the international donor community calls trade capacity development doesn't meet that criterion.
At Doha the trade ministers reaffirmed their commitments to build the capacity of developing countries to participate in the world trading system. The words were such that no one could disagree with the statement but also that no one needed to agree on what the words really meant in action. Indeed, the entire Doha process is in jeopardy today because firm commitments were made to high sounding but wobbly and ill-defined goals. Goals in which the participants agreed to ignore the ambiguities of phrases in order reach apparent agreement while maintaining substantive difference.
So it is that the OECD can declare this year in a study on capacity development that:
"… though the terms capacity and capacity development are in common use, interpretation of their meaning tends to vary from one setting to another."
Even more difficult was the observation that:
"… even people involved in capacity development activities have only a limited understanding of how capacity actually develops. Practical guidance on how to stimulate the process is equally scarce."
"… the international development community has paid relatively little attention to the why's and how's of capacity development."
While these statements are true and lead to a general failure of the trade capacity development programs to produce tangible results, the mechanism of failure are difficult to understand in a short period of time. However, a listing of some trade capacity development projects will give a good idea of how ambiguous goals and limited understanding have led to a series of projects that may be individually worthy, but collectively ineffective.
This year in Morocco USAID spent nearly US$ 9 million for what it reported as trade capacity development projects. I list here all of the projects reported by USAID under their trade development program:
While these programs have a few components that have the potential to increase economic activity, such as making company formation easier, these components are so poorly funded and disconnected from each other that they will have little national impact. Taken all together, these programs are more likely to decrease trade rather than increase it.
And the list for 2003 for Morocco is typical of the types of programs that are being funded in other countries as well. Egypt had a program for US$ 3 million for the improvement of different areas in the administration of Justice, US$ 20 million to develop the mortgage market, and US$ 2.5 million for reducing air and water pollution. In other countries trade capacity development has also included the support of rural health care. In one case the result of USAID intervention was a law in the Philippines called an "Act Strengthening the Mechanisms for the Imposition of Countervailing Duties."- a title that does not appear to be very supportive of trade. It is a telling fact that none of these programs had an increase in trade as even one of their evaluation criterion.
Altogether USAID spent over US$ 2.3 billion in the last five years on trade capacity development programs, with little if any net impact on actual trade. Without the realization of trade, the benefits of trade are not received.
So my second point is the current international programs for building trade capacity are in general not working to build capacity that has been realized in any meaningful way. They are clearly not bringing the benefits of trade to the poorer countries. More focused programs are needed. These programs can be focused around trade creating institutions like EPZs.
Trade creation is a complex topic. For trade to take place, there must be a direct connection between the producers of goods and services and the final consumer. In industry this is often referred to as the "supply chain". For a supply chain to work, for trade to take place, every link in the chain has to be functioning and capable of carrying out the tasks required of it. Building a few strong links that will have the capacity to support a large amount of trade provides little value, unless all of the other links are also present and strong. There is no demand for a strong link connected to a weak link. Current trade capacity development programs mostly focus on single links, with the resulting inability to use the capacity developed. A business friendly legal system is not of much use in a country that lacks the physical infrastructure to support business. More education is not of much use in an economy that lacks jobs for the educated. Building a full chain for an entire country at the same time is an impossible job unless, like Singapore and Hong Kong the territory of the whole country is relatively small. Improving national health care, infrastructure, governance, and education requires the many billions of dollars for even a relatively small country like Morocco, and far more than the international donor community will ever have available. If Morocco, or any other country, is to become developed it will do so because it has earned the resources it needs and utilized them efficiently.
A properly designed EPZ-based program is fundamentally based on creating an alternative policy framework for a certain generally small geographic area or a particular industry. It focuses government attention on providing an economic climate within the zone that will match the conditions available to business in other functioning business environments. It provides a demonstration program that the country can compete in trade, that its workers can be productive on the international stage. It brings together all the links of a supply chain, to ensure that trade capacity is developed and utilized. It is the only known tool that can incorporate all aspects of trade capacity development and trade realization in one program.
It brings together these links by providing the needed infrastructure and finance for trade, the availability of both local and international sources of supply, and the investment of companies that already have a broad base of products and consumers for whom they know what to produce, how to produce it in sufficient quality, and how to deliver it to them. In other words with FDI, the country starts to build its trade capacity by importing the demand side of the supply chain, and building all the links of the supply side.
The World Bank and most economists will tell you that an EPZ is a second best policy. That the best policy is to liberalize the entire national economy, eliminate illiteracy, create good governance, a reliable public health system, and a stable political environment. I would agree it would be wonderful; it is also an unreachable utopia. Not only are the resources not available to do that in any significant country, but also the limits of man's ability to understand in one instance all that is needed to bring about utopia dooms such policies to failure. It has time and time again. The World Bank blames poor implementation for the systematic failures of Latin American countries to develop, but now that implementation has failed a dozen times over, suspicion must fall on the underlying fantasy that nationwide change is a workable best policy.
For all countries, the resources are available to build and operate a small area where there is adequate infrastructure, transparent and efficient customs administration, good governance, an educated workforce, a functioning public health system, and good labor relations programs. The World Bank argues that not all zones succeed, and that is true. But if such an environment cannot be created on 50ha of land, there would have been no chance that it could be created in the entire country at much greater cost. If such an environment can be created on 50ha, there will be no resource constraints that can keep it from spreading to the rest of the country.
The success of China in using zones to move from one of the most repressive and inward looking economies to one of the most dynamic and outward focused economies demonstrates clearly the power of zones in turning trade capacity into trade reality under even the most extreme conditions. All of the Asian tigers and Newly Industrialized Countries have used zones to their advantage. So have Mexico, Central America, and a number of Caribbean states. In this part of the world Egypt, the UAE and Jordan have thriving zone programs, and Turkey has been one of the most innovative and successful zone countries. Zones have also driven trade growth in Kenya, Mauritius, and Madagascar. In fact today more than 128 countries and territories in the world operate more than 1300 zones.
WEPZA research shows that zone policies are most effective in middle-income countries, like Morocco, where GNP/Capita is between US$800 and US$3000. Over a period of three years such countries with zones saw trade grow at 68% while such countries without zones had trade growth of only 1%.
How does a country begin to make trade capacity development a trade reality?
A Zone-based strategy does not mean focusing on trade policy frameworks, the WTO, the quality of national trade unions, revamping the judicial system, creating universal education, etc. These items can be dealt with with normal urgency. They will be anyway. With the increased resources that come from realizing trade benefits these national issues can in fact be dealt with more effectively and quickly.
Contrary to popular belief, zones are not contrary to the WTO rules. Some incentives zones have offered can be prohibited or actionable subsidies. Due in part to the efforts of WEPZA, the most restrictive WTO rules do not yet apply to Morocco and many other Arab and African countries. With the help of other zone countries, the rules may be rolled back even further. Secondly, there are many incentives that zones can offer that are WTO compliant, such as worker training or efficient government services. Finally, just because an incentive is actionable, does not mean that it cannot be used. It does not become a problem until another country complains about it, and can show that it has significant impact. You should look forward to being so successful that another country can complain about your having a significant adverse impact on their trade.
In conclusion, I want you to imagine that your King has asked you as his army commander to develop a plan to increase the countries capacity to wage war. First imagine his reaction you would get if you came back with a plan to:
This is the current trade capacity development environment.
Now imagine that you came back and said, "I am going to take one division and recruit the most literate and intelligent men of our country. Then I am going to train and equip them to fight against the best in the world. When I have done that, I will take the best I have learned and teach it to the rest of our military forces." This is the zone strategy.
I will let you determine which will please your king the most, and which would be most effective. Thank you.