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| 41. The American economist Richard Barnet, who has closely observed the cultural aspects of globalisation, adds a third element: the modern sector of the economy, including the export processing zones, tends to encourage people to leave their countries. "Employees in the zones" writes Saskia Sassen in the World Policy Journal, "have encountered the American dream in their countries, in many different ways: magazines, toys, consumer goods, meeting the people who are searching for a disciplined and accommodating workforce, rock music... factors which all stimulate the desire to seek their fortune in the countries of wealth and freedom". "In these modern enclaves that have been set up in the middle of their traditional societies" adds Richard Barnet, "these young workers develop a new vision of their own possibilities, and the more adventurous among them want to seek a new life elsewhere." | 41. The American song from the First World War
(1914-1918) was "How're ya' gonna keep 'em down on the farm after they've seen
Paree??" And you couldn't and they didn't.
Peter Drucker once told us that the humane and moral thing to do was to bring the work to the worker, not the worker to the work. The culture shock of immigration is very great and hard to bear. While the imaginative younger person takes the risk of migration out of desperation or desire, and while the nation receiving such immigrants benefits greatly, most people are unlikely to emigrate if they are in a country which shows it is moving ahead by establishing an outward-looking industrialization policy -- and puts reality into the policy by initiating EPZs. It is odd but an organization that effects workers by stimulating "the desire to seek their fortune in countries of wealth and freedom." and that help young people "develop a new vision of their own possibilities" do not sound much like the concentration camps described in paragraph 10. They sound more like islands of opportunity. Unfortunately for trade unions, workers with these visions are not likely to join old-fashioned trade unions, but for the human soul it is a wonderful achievement. |
| 2. The History of the Export Processing Zone | |
| 42. Export processing zones have grown considerably in size and number over the last few decades, but the model is not a new one. Under the Roman empire free trade zones were set up along commercial routes. Used for storing duty-free goods before re-exporting them, they were a marginal element in a mercantile economy. The free towns of the Middle Ages and the duty-free ports of the British Empire (Singapore, Gibraltar, Hong Kong) continued the tradition. | 42. With all respect to the grand history of free zones, the tradition is broken in many ways by EPZs. A free zone warehouse of 5000 square meters for temporary storage of goods can be operated with a customs officer, accountant and 2 forklift truck operators these days. But 40 years ago the EPZ changed all that. In the same space there can now be millions of dollars investment in modern machinery and several hundred persons employed. The EPZ contribution to the community in terms of value-added in export, foreign currency earnings, training, linkages and vision of the future is immensely greater than that of a free zone warehouse. There is only the duty-free element and the respect for freedom in common with the older free zones. The model is a very new one. |
| 43. It is interesting to note that the special economic zones in China "are often located where concessions had been obtained in the Chinese Empire by the great powers using the diplomacy of the gunboat in the XIX and beginning of the XX century", writes Olivier Dollfus. At the end of the last century, free trade zones, used not only for trade but also for production, were emerging in the wake of the industrial revolution, colonial expansion and the internationalisation of liberal economics. | 43. Since the industrial revolution in Britain in 1825 it has
been known that manufacturing industries do better in or near cities than they
do out on the farm. It is not a coincidence that zones are located in the same
port cities that earlier attracted gunboats. They were good sites for trade.
Nor is it a coincidence that most major cities are still located on rivers, but
it is of no significance to the discussion either.
It is more interesting to note that the statement by Olivier Dollfus is not strictly true. Of the five SEZs, Shenzhen is located next to the concession lands of Hong Kong, but not where any concession had been given. Shantou is also not concession land. Chinese Special Economic Zones started out as "whole city" zones, but now are thriving as smaller "technical and economic development areas" which look more and more like EPZs. New EPZs now appear in the "whole city" zones. It is also interesting to note that far from being "enclaves" zones such as Shenzhen have invested over US$700 million in creating 500 co-operative projects in other regions of the country. So close is the cooperation that many Inland enterprises have opened representative offices in the SEZs. |
| 44. In the banana-growing regions of Central America and the Caribbean, the "enclaves" of the United Fruit Company already had many of the characteristics found today in an export processing zone. Their history has a smell of gunpowder about it. Extolled by the liberal parties of the day, the advocates of free trade and the modernisation of society through foreign capital, the rapid spread of the banana plantations in Central America is the story of how a region was plundered. The host countries only saw a marginal benefit: their workforce was exploited, vast areas of land were given away to the companies, the infrastructure that was set up was only of use to the banana barons, the quantities exported were systematically underestimated, and the companies pulled out when conditions became less favourable. | 44. This, of course, has nothing to do with modern export
processing zones or modern government actions. Foreign firms are quite
vulnerable to the sovereign power of even the smallest state. Cuba expropriated
them all in 1959 for example. This is not 1890-1920. No gunboats, just
investment, jobs, and connections to the globe under the direct control of
government regulators.
Why did we say earlier that the leadership of ICFTU is from the last century -- not this one? And now it appears certainly not ready for the next one if they keep touting banana history. And the bananas keep coming to the world from the "plundered" "exploited" areas of Central and South America, but not so much to Europe these days due to import restrictions of the European Community. Most companies will pull out when their lands are expropriated, their factories are burned, and their workers shot. They are fickle, aren't they? |
| #45. The modern phenomenon of the export processing zone was born in 1960 in Ireland, around Shannon airport. With its future threatened by advent of the transatlantic jet, the airport was turned into a duty free production zone for goods with a high value added. Its success surpassed all expectations: in the first year, nearly 440 jobs were created. Ten years later, the zone employed 4,750 people, giving a new lease of life to the airport, whose staff grew from 1,250 in 1960 to 2,200 in 1975. By 1970, less than ten countries had set up export processing zones. | 45. See our paragraph 2 and editorial. Shannon did a good job developing its zone, but it was not the first nor is it in a really poor country. Ireland is now selling very high-tech, very high education level projects -- a good example of how EPZs evolve and gain in a few short years. Most of the jobs created in/by the free zone are in fact located outside the free zone border. |
| #46. In Asia, the first zone was created in Kandla, near Bombay. Sixteen years later, there were nearly 175 spread across fifty countries. Since then export processing zones have been created in nearly half the world's countries, mainly in the Third World. Many developing country governments make the zones the mainspring of their economic future. In August 1995 El Salvador had five export processing zones employing 83,500 people. Four other zones are due to open in the next three years. The number of people working in the zones is expected to rise to 180,000 people. | 46. It would be useful to look at a map of India. Kandla is a
small port located at the head of the Gulf of Kutch 400 km. southeast of
Karachi, Pakistan and 520 km. north northwest of Mumbai (Bombay). The zone was
founded in 1965 and has spent most of its life as a barter trade point between
Japan and the former USSR to permit converting rubles to yen.
The port of Kaohsiung, Taiwan, ROC was designated as a site of the new EPZ on an island being dredged from the bay in November 1960 when a consultant from Puerto Rico, Alexander Firfer, enthusiastically supported the idea of the Government to start the first Southeast Asian EPZ there. (See our endnote 2). |
| 47. Export processing zones have often been created in response to plans drawn up by the International Monetary Fund or the World Bank. They were perceived international financial institutions as one of the essential ingredients of the opening up of Third World economies. The UN system also played an important role in the development of export processing zones. | 47. Top management at the World Bank has often been negative
about EPZs and the Bank has been more reactive than proactive. Down in the
operating divisions, funds have been provided to plan and execute a number of
EPZs while top management has been preaching that EPZs are temporary and impede
general development. (They can't name a country where this has happened but
that does not stop the comments.)
Mistakes have been made by the Bank, notably at Cartagena, Colombia where poor planning and management threw money away in large quantities. But their recent record in the Dominican Republic of financing private EPZs has been good. The studies by UNIDO of EPZs and its support for founding the World Export Processing Zones Association (WEPZA) in 1978 have been positive. But UNIDO cannot finance EPZs. |
| #48. A report by the ILO and the UN Center on Transnational Corporations openly recognises it, describing as essential the "link between the experience at Shannon and the technical assistance provided by young international agencies such as the UNIDO (United Nations Industrial Development Organisation) and UNCTAD (United Nations Conference on Trade and Development)". | 48. Please quote source. |
| 49. "The history of these links has yet to be written", continues the report, "but we already know that one of the entrepreneurs from the Shannon zone went on to work as an expert for UNIDO and that he prepared for this organisation the first manual on the creation of export processing zones and that he seems to have taken part in several UNIDO missions for the establishment of EPZs in developing countries. UNIDO has played a key role in the creation of the World Export Processing Zones Association (WEPZA) while UNCTAD has contributed greatly to legitimising the idea of EPZs through basic studies on the costs, benefits and advantages of these zones." | 49. You are speaking of Tom Kelleher, of
course. A good job of explaining the basics from Shannon's experience.
WEPZA is much obliged to UNIDO (and to EPZA of the Philippines) for its creation in 1978, although money to support the organization in its early years was not forthcoming. Opposition from the USSR and Swedish Labor Unions to UNIDO's helpful role impeded progress. When WEPZA became an independent private organization in 1985, UNIDO continued moral support by accepting WEPZA as a non-government consultative body on EPZs. This provided UNIDO access to WEPZA's publications and resulted in some consulting work and speaking engagements for WEPZA advocates. UNIDO did what it could to help and should be proud of its role. EPZs may be the most effective industrial development projects undertaken by any UN agency. |
| 50. In Central America, USAID (the US international development agency) is behind most of the initiatives aimed at creating export processing zones. In El Salvador, for example, in 1974, USAID tried to promote the installation of EPZs in vain. After the peace accords, which followed ten years of civil war, the agency resumed its efforts. | 50. In the early 1990's the AFL-CIO led a major publicity
campaign against USAID help to poor countries to create export industries. It
succeeded in closing down the USAID help to EPZs everywhere. The argument the
AFL-CIO used effectively on TV was "stealing American jobs with American
taxpayers money"-- a typically catchy media oversimplification of a complex
idea beyond the media capacity or wish to understand or explain.
Fortunately, there are now enough people who have EPZ experience in the private and public sectors in 30 countries around the world to pass on their knowledge to others without the assistance of USAID. Many meet regularly at WEPZA networking sessions. So it really doesn't matter, as it once did, that the US Government is "out of the EPZ consulting business". |
| 51. The industrialised countries clearly favour the promotion of exports from certain Third World countries. The Generalised System of Preferences, which grants privileged tariffs for exports from developing countries, aims to help these countries diversify their productive structures. The system applies to products that have acquired at least 35 percent of their value added in the beneficiary country. Countries in the North provided financial support for organisations responsible for export promotion. In October 1991, AIFLD (American Institute for Free Labour Development) revealed that at a conference on export processing zones, the representative of a Costa Rican organisation, partially financed by the US government, boasted of the elimination of trade unions in his country. | 51. The Generalized System of Preferences (GSP) provides access to advanced nation markets duty free to poor countries. All poor countries are eligible until they become too rich to qualify (as the NICs have). The programs are administered separately by the individual advanced nation governments. Many poor countries have not yet taken advantage of the system. The support of export promotion in the poor countries by advanced nations is NOT part of the GSP system. Many other incentive tariffs exist to help poor countries gain market access. The Flagstaff Institute Journal in July each year since 1976 has published detailed statistics on the performance of all countries in using these incentives to access the US market. |
| Government promotion | |
| 52. Most governments are keen promotors of the zones, and their attempts to attract foreign enterprises to the EPZs, from Karachi to San Salvador, seem to have been written by a single author. But countries don't all set out from the same starting point when trying to attract foreign investment. | 52. Yes, as well they should be, as it aids their balance of payments, provides employment, and many other benefits to their citizens and to the government itself. |
| International organisations | |
| 53. "To compete at the world level, you have to build on comparative advantages. What advantages can the smaller States offer, except lower levels of regulation? History shows that the small States close to rich centres of consumption develop a parasitic strategy" ----- (Alternatives Economiques). | 53. They can offer quicker decisions, friendlier climate, more attention to the customer, and greater support from top government officials. "Parasitic" -- another clever use of rhetoric. If I buy from you, who is the parasite? If you need me, and I need you, the relationship is symbiotic not parasitic. It is to the mutual advantage of both. One of the most important trends of the last 40 years is that the liberalization of trade and the creation of the WTO means that small and large countries both play by the same rules, and small countries can compete very effectively with larger states. This greatly increases the potential for ethnic and political freedoms, and has been one of the most important post war achievements. Only 50 years ago countries the size of Hong Kong could not exist except as part of an empire. But small states like Singapore now show the adjacent and often larger states how to achieve economic development. A marvelous development in the struggle for human and worker rights. |
| #54. It is at this stage that fiscal, customs and social dumping become a comparative advantage. The government of the Philippines adopted a law on foreign investment that provided for the long term rental of private land for a period of 50 years, renewable for 25 years. The foreign investors may take part in public projects through the government's BOT programme (build; operate; transfer). In the Subic Bay zone, the metropolitan authority was given the power to issue visas to foreign nationals, a responsibility that had previously been the exclusive prerogative of the national government. | 54. First sentence confusing. At what stage? The stage they
adopt a "parasitic" strategy? It hasn't been shown that they do! Fiscal,
customs and social DUMPING. Now there is nonsense terminology. Dumping is
selling abroad at below manufacturing cost and is subject to trade sanctions.
Fiscal policy, customs procedures, and social policy are domestic political
decisions. From context the reader is to believe that allowing manufactures to
lease land, at market rates since the land is private and not therefore
subsidized by government, should not only be illegal, but that the law should
be enforced by trade sanctions imposed by foreign governments. Such a concept
is intellectual gibberish.
BOT projects are hard to sell and execute as the world is finding out. We prefer 99 years of quiet enjoyment of a site for an EPZ. To accept less is to confuse potential investors as to who they must deal with when things go wrong, as they surely will. Subic Bay can issue visas for the convenience of customers. So can Jebel Ali Free Zone, Dubai, for the convenience of workers from abroad. Speeds things up without any lessening of control. Iran allows visitors to enter zones without any visa. England allows Americans to visit without visas. A not-for-profit non-government organization issues US visas in Taiwan. So what! Who is required to have visas and who issues them is entirely up to the government of the country. |
| 55. The provisions adopted by Guatemala give an idea of the concessions granted to investors.
Decree 29/89 on maquiladoras offers:
| 55. The Guatemala list is typical -- here are
some comments (letters to separate items inserted by us in ICFTU list):
a, b, c, d. Great. The items coming into the maquiladoras are not for local consumption, and thus should not be charged duty anyway. While they are worked on in the country, the principle is not different from the duty exemption for personal baggage of a tourist. In the past this was often done with a cumbersome duty drawback system, and the duty free entry has reduced bureaucracy without a loss of customs control. VAT (Value Added Tax) is also a consumption tax, and thus is not charged on transit goods. Indeed, under international agreement VAT is refunded on exports since the goods have not been consumed in country. These EPZ "incentives" thus reduce paperwork and bureaucracy, for both the investor and the government. They may even save government money. e. In Italy you must use the ancient drawback system to import goods temporarily to be used in production and then exported as your upgraded product. To do this you pay full duty on goods imported and then petition to recover your payment when the upgraded goods are proven to have been exported. The drawback duty is 19% ad valorem. In Italy after exporting you can wait up to 5 years to receive your payment. This is not the fault of the European Union. EPZs avoid drawback completely -- an advantage everywhere in the world where the antiquated drawback system is still used. EPZ import-export freedom is the only way to share production efficiently with other countries to serve the global market. f. This needs further explanation before any comment since import taxes are not to be collected under item a. g. This follows an earlier Mexican practice related to last year's production volume now phasing out as NAFTA takes over. Duty can be paid on imported components at their normal duty rates, or it can be paid on the entering product less the value added by manufacture in the zone. h. Good Idea. Gives locals the right to buy high quality products at reduced rates, much like consumer in the United States do at "T.J. Maxx", or "Hit or Miss" or other off price outlets stores where they buy "seconds" or "irregulars". Helps to improve the citizens' standard of living at low cost. Products that do not pass safety tests or performance tests are normally not permitted. i, j. Not clearly expressed, but the idea of Customs controlled access out of the zone to local service or subcontractor companies and return. Such a practice is the main basis for the high value added percentages of Taiwan and Korea (40%-50%) in linking to their communities. Softballs have been exported from the Puerto Cortes Zone in Honduras after their cores were wound by subcontractors in the domestic territory. Final covers were put on the balls inside the zone before export so Customs felt secure about the operation. The same principal applies to machinery repair and service outside the zone by domestic suppliers -- 10 days is too short a time for some equipment. Helps the EPZs integrate to the economy, and not have any of the "enclave" nature that the ICFTU focused on earlier. A very good policy. |
| What is an export processing zone? | |
| 56. In concrete terms, an export processing zone could be defined as "a clearly demarcated industrial zone which constitutes a free trade enclave outside a country's normal customs and trading system where foreign enterprises produce principally for export and benefit from certain tax and financial incentives". Definitions abound, exceptions too. In some cases entire countries, such as Singapore or Hong Kong, are virtually EPZs in themselves. In others, such as China's "special economic zones", they are on such a vast scale that they don't seem to fit the definition. In fact the term export processing zone, in the sense of an enclave with clear geographical borders, does not cover all aspects of the phenomenon: individual firms have been granted zone status, notably in Tunisia, where nearly 580 firms (1989-90 figures) in nine regions of the country fall into this category. | 56. This is wrong in many places and very incomplete.
"Concrete terms" - indeed! EPZs are ALWAYS under strict customs control --
stricter than usual because customs officers, until they learn how to operate
zones, are fearful something will escape them. And EPZs are ALWAYS part of the
legal trading system of the country written into the law that creates them.
A better definition is that an Export Processing Zone is an industry sector or geographical area subject to an alternative set of development policies designed to encourage the export oriented industries. Mexico operates under a "regime" system in which each factory obtains the zone-like privileges. But for efficiency the factories prefer to locate in private industrial parks that become "open-fenced" free zones in effect. Mexico has 90 such industrial parks that account for over 60% of its maquila output and over 80% of its employment. But these are true EPZs as well as are the fenced zones in other countries. It is the law that controls their activities, provides their privileges and oversees their operations. Duty-free in and out under Customs supervision is the common function. Mauritius is similarly structured. |
| Textiles | |
| 57. Unlike the free trade zones of previous centuries, the new zones are not always located along major trading routes, or at the junction of such routes. They are located wherever the movement of goods can be most easily ensured, usually close to ports or airports, regardless of whether these are far from the trade routes. One of the main criteria is the type of product: they need to be relatively light and ensure a high added value. It must be possible to produce them with a relatively unskilled workforce. Which covers a wide range of activities: the zones produce anything from tennis rackets in St. Vincent (Caribbean), to shoes in the Dominican Republic and toys in China. | 57. Zones are located where there is appropriate
infrastructure and policies, and provide opportunities for countries that were
not blessed with a strong geographical location. This is good, for it means
that most of the world can benefit from EPZs as a development tool and not just
traditional trading countries.
Garage door openers, wiring harnesses, surgical garments, television sets, automobile engines, aircraft fuselage assemblies, computers, and many heavy items with low value added like rebuilt auto brake shoes, interior doors for houses, furniture and fixtures are among zone products. Logistics to connect to sources and markets are critical -- if the ancient trade route does not pass by, it is because the EPZ is creating a new trade route. As an EPZ moves to high-tech, the skills needed must be there. The publicly owned Barcelona Free Zone in Spain finances five universities in the city just to keep up. The private Bermudez Industrial Park and its client industries at Juarez, Mexico paid for a new campus to attract Monterrey Tech to extend its faculty to Juarez a decade ago -- now has 1000 engineering students. (WEPZA conference at Tianjin, PR China, October 1996). |
| 58. Despite this diversity, however, the zones mainly concentrate on the production of textiles, clothing and electronics for the mass market. In Mexico, in July 1995, there were 705 textile factories out of a total of 2,747, representing 26.6 percent. In El Salvador, in the same year 141 of the 225 enterprises in its zones, or 62 percent of the total, belonged to this sector. In Guatemala, 90 percent of Maquiladoras are textile or clothing factories, and in Sri Lanka clothing represents 80 percent of total production. | 58. There being many small garment factories in many countries, it is better to use employment figures rather than number of plants to measure the impact of a development program. The Motorola pager and cellular phone plant at Tianjin, PR China with 5000 employees equals about 20 ordinary garment factories. In Mexico, for example, employment in 1993 in textiles and garments was about 80,000 out of 550,000 total in maquila (14.5%), automotive and other transport equipment was 120,000 (21.8%) and electrical and electronic was 190,000 (34.5%) while other maquila was 160,000 (29%). Most developing countries start with garments, but in Mexico's case from 1970, this activity never rose above 20% of the maquila workforce. Electronics was about 60% in the early years until transport equipment passed apparel in 1984. |
| Multinationals | |
| 59. The export processing zones are closely linked to the multinationalisation of the economy. "Local entrepreneurs" says an ILO report, "may be active in the EPZs, but without the multinationals there wouldn't be any export processing zones." In 1986, more than two thirds of the 1.5 million jobs in the EPZs were provided by the multinationals. While it is true that big names such as Sony, Sara Lee or Hewlett-Packard are to be found in the zones, they are not the only ones to invest there: more and more medium-sized enterprises are taking their chances in what is often their first experience of producing in a developing country. | 59. The main point here is that there would be little need to
import factories from abroad if local entrepreneurs were already exporting to
the global market. But in all developing countries this is the problem. Local
commercial enterprise is import-related and vastly ignorant of the wide world
of exporting. Whether the investor in an EPZ is multinational, transnational or
whatever, he brings knowledge of the outside world to the poor country. EPZs
are for foreigners until local firms develop an ability to export (which they
do rather quickly once shown how -- and once their culture absorbs technical
and factory knowledge -- and once they can borrow some capital and learn how to
manage a global market business.) Then the locals find EPZs are valuable tools
they didn't know about before.
This is a very important point. Despite claims of the dominance of multinational and the lack of benefits EPZs bring, we find out here that EPZs are particularly good for local firms and small and medium sized enterprises. The local firms have gained knowledge and the ability to compete in the global market, and small firms have learned to go abroad to compete against the large multinational firms. It would seem that a lot of very complex organization, marketing and production management skills have been transferred. We guess EPZs are pretty effective development tools after all! |
| 60. It is certainly a very tempting prospect: instead of having to explore unknown territory, adapting to inadequate infrastructure and often very complex legislation, the export processing zones provide a modern, predictable, environment, with ready-to-use infrastructure. | 60. Yes, these are the real reasons why investors like them, not the low wages and lax regulations which were claimed earlier. There are also many culture-shock absorbing services provided by modern EPZ management which, in the long run, are even more important than buildings and infrastructure. |
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