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| 81. According to an ILO document on Central America and the Dominican Republic, "the net macroeconomic impact and the effect the maquilas in terms of training and integration on the rest of the economy is quite limited. Similarly, the wide range of subsidies, incentives, tax exemptions, customs facilities, etc. costs the host nation a considerable amount." | 81. This process of netting the exports from the imports is
very weak economics for it does not take into account the economic value of the
domestic jobs created by the value added in the country (what good economists
call the multiplier effect). These effects are at least twice the value added;
so the effect is indeed equal or greater than the raw value of exports.
A tax incentive given to attract an investment that would not have come without it has no cost to the government. In many countries the customs costs are paid by the users either through rent to the EPZ or in user fees. Direct subsidies are rarely given. It is quite inconceivable that the government costs would be a major factor except in cases of costly regional development schemes not based on sound economics. |
| 82. Research in the region also shows that the goal of transferring technologies has not been met, again owing to the very nature of the zones. "They are physical, economic and social enclaves, in which there is no real motive to associate with local producers or establish links that would result in an increase in local technological capacity." | 82. The pioneering garment industry. See our paragraph 78. Also see their paragraph 62 where ICFTU gives figures to prove that technology has been transferred to local firms. In fact 70% of the enterprises are now in local hands. |
| 83. There is virtually no technology transfer, reports the review "Pensamiento Propio", referring to Guatemala. "In the textile sector, for example, the machines are obsolete, the initial investment is derisory and it does not contribute to the modernisation of the industrial apparatus." | 83. The pioneering garment industry. See our paragraph 78. Yet Guatemalan managed and owned firms are now competing in the world market, something they had never before been able to do. It seems the "Pensamiento Propio" has completely missed the point. Technology is not primarily in a sewing machine, it is in the organization of production, quality control, meeting schedules, sales and marketing and the thousands of other tasks that are required to compete on the world stage. All over the world high technology equipment rusts because what can be built into a machine is not what developing countries need to learn. |
| 84. The advantages granted by governments to enterprises based in the zones - exemptions, infrastructure, etc. - also imply a cost, and it is by no means certain that the host country gains anything. Some companies pack their bags and leave before they can be asked to pay tax, and their contribution to the country's economy is lower than the investment the host government made to attract them there. The study by the ICFTU and APRO estimates that "Bangladesh invested 6,000 dollars for every Bangladeshi working in the zones and it will take it twelve years to recover its capital". | 84. By now it should be obvious that this paragraph is
unsupported nonsense. Here are some of the reasons why:
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| Failures | |
| 85. Cases of failures or mitigated success with regard to profits are not unusual: in 1989, for example, the government of South Korea concluded that "the effect of the export processing zones on the Korean economy is relatively small, if not to say negligible". In India and Pakistan, progress has been slow, and the results so far in terms of export figures have been disappointing. | 85. If only all failures could work as well!
The Republic of Korea opted for two EPZs (Masan and Iri) and based on their success extended EPZ-like benefits to 19 industrial sectors that were not limited as to location. Exports per worker in these industries were as high as in the EPZs, and five times the general industrial exports level, and constituted the bulk of all exports from Korea. From the small seeds of the EPZs a great trading nation has been formed. Maybe 1989 was a bad year, but the government of Korea should be absolutely delighted with the latest figures from the Masan Free Export Zone for 1996: Duty-free area 80 hectares, Companies 72, Exports US$ 2.07 billion, Imports US$ 1.24 billion, Employees 12,492. Value added in export per employee in 1996 = US$ 66,000 That is not small, and it is certainly not negligible -- nor a "FAILURE"! |
| #86. The reasons for these failures may be related to mistakes in the choice of location or poor management. In the Philippines for example, the Bataan zone, the largest in the country, located in a deprived region 150 km from Manila, cost a lot more to get started than initially foreseen: granting comparative advantages, in relation to enterprises situated elsewhere in the country, and the cost of setting up the infrastructure, proved a heavy drain on financial profits. But failures can also be due to more fundamental factors. In some cases, such as Korea, the impact of the zones proved insignificant beside the success of the country's industrialisation. | 86. Bataan was a regional development project which included a
huge dam and small city -- all charged against the Bataan EPZ. It was 130 miles
by truck to Manila to load a ship that passed by 2 miles offshore on its way
out of Manila Bay. Government made a political choice in locating its first EPZ
in Bataan. Its other zones have been more favorably located. Now Bataan's time
may have arrived. It is fortunately located close to the new Subic Bay port and
major airports at Subic and Clark and will have much better service. Bataan EPZ
has served for 30 years to keep the vision alive on the peninsula, and will now
grow.
To understand Korea, read our paragraph 85. |
| 87. "The EPZs" comments Won Sun Oh, author of a report for the ILO, "have made an important but relatively limited contribution to the promotion of export based industrialisation and the country's technological progress. The future of these zones will depend on what favourable conditions can be granted to turn them into high technology industrial zones capable of attracting investment from the high tech industries and providing employment for large numbers of skilled workers as well as technicians and professionals." | 87. Since the ICFTU and ILO are not in favor of zones, it is no surprise that their reports make unsubstantiated negative claims. A more objective observer would note that EPZs have been a feature in the development of all of the NICs. In places like Korea and Taiwan they continue in a leading role of attracting higher value added industries. |
| 88. The experience of the Asian countries merits careful thought, because there is a strong temptation for some host countries to consider the zones as the easy answer to industrialisation, adopting a strategy based on the export of manufactured goods, as if this would miraculously open the door to development without having to make fundamental changes in government or employer practices. The Asian "dragons" have never considered the EPZs as real "enclaves". The search for a link between the "export platforms" and the national economy has been constant. | 88. After reporting that the Korea and Philippine zones were
failures, these Asian zones are now models for others to follow. Guess they
really were successes.
"The Asian 'dragons' have never considered the EPZs as real "enclaves." No doubt this is because they never have been -- only ill-informed writers have suggested that. Only these same writers claim that the EPZs are seen as a miracle cure. Host governments know that they are only one good tool to be used in the hard work of national development. |
| 89. "South Korea", notes the "Report on the Americas" in a comparative study (February 1993) has never applied indiscriminate economic liberalisation. Rather, it has applied a mixture of an active promotion of exports and efficient import substitution. Furthermore, industrialisation was preceded by a massive redistribution of wealth and income through agrarian reform...A fairer distribution of income created the necessary basis for the expansion of the internal market, such that growth was directed both inwards and outwards." | 89. As we just stated. Host governments know it is not a miracle cure. Korea, like most host governments, is not indiscriminate in its policy. Thus we no longer need to be concerned by the irresponsible "straw man" present in paragraph 88. |
| 90. Furthermore, as shown in a recent report by the World Bank on the origins of Asian countries' development, the State was a decisive factor in their economic takeoff. "Strong State intervention" adds the Report on the Americas "has played a key role in integrating private sector activity into a coherent industrialisation strategy." | 90. An active, involved state. No need to worry about lax regulations, in this environment either. The government might find Export Processing Zones a useful tool to use in integrating the private sector into a coherent industrialization strategy. Cheap labor is not a part of this equation either. |
| 91. The low wage strategy is also an illusion. The ICFTU/APRO study clearly shows that foreign investors are not only in search of the lowest wages. Productivity is also a key criteria: it explains, notes the report, that enterprises that had been based in Bangladesh had moved to Vietnam where wages weren't any lower. "The quality of the workforce is a fundamental consideration. The countries that make huge investments in export processing zones without at the same time making substantial investments in education are getting their priorities wrong." | 91. This statement again refutes the simplistic argument made
elsewhere in the report. ICFTU will try to make out that cheap labor is the
only benefit again, but when they do, it will be easy to recognize that it is
not true, -- and that they don't believe it either.
It takes at least a generation to move education up to the necessary levels for higher technology development. Countries need the EPZs now to get started because the vision keeps growing. The more they know about the globe and how it works, the more effective will be their development. EPZs also help to generate the resources needed to provide the higher education. |
| 92. For those who believe that not everything can be reduced to figures, it seems that some investment decisions are made for "far more trivial reasons" such as "life style". The Cebu island in the Philippines, for example, attracts Japanese investors because of the quality of life there, even though wage costs are higher than in other zones in the region. | 92. Now ICFTU is getting into the cross-cultural factors of
investment attraction, and to the important fact that managers and workers are
human and respond productively to better work environments. It is also the
reason most workers in EPZs are treated better than the workers outside. The
management is more sophisticated, and the need for productivity is high. These
are not trivial reasons at all, and to think of them as such shows an archaic
view of labor practices.
EPZs are practical organizations that use their knowledge of these factors to market their zones. And they pay for themselves to obtain and use this knowledge. |
| Abdicating responsibility: the Central American case | |
| 93. This is not necessarily the case in other regions of the world where States abdicate all responsibility and opt for export processing zones as a substitute for real economic and social reforms. In the small countries of the Caribbean basin, the proliferation of export processing zones is simply an extension of the bad economic development "model" inherited from the colonial era. | 93. Here we go -- Back to the Gunboats! There were no EPZs in the Colonial Era and the model is quite different. This view of economics shows that union attitudes are stuck in the 19th century. |
| 94. From independence in the second decade of the 19th century, Central America pursued the goal of development from the cochineal boom to the coffee boom, from bananas to cotton, but never quite succeeded. Then came the crisis of the 1930's, marked by the collapse in the price of raw materials followed, with the onset of war, by the loss of markets, sending shockwaves through the region. | 94. No EPZs here, either. |
| 95. The nationalists and revolutionaries of Central America believed their outwardly oriented development was to blame. The question was how to break the vicious circle of dependence and poverty with such small and impoverished markets. The obsession of Central American nationalist leaders and economists, heavily influenced by the experts of the ECLAC (UN Economic Commission for Latin America and the Caribbean) was to reverse the mechanism and base the region's development on industrialisation and import substitution. | 95. Then they really lost out. They squandered whatever wealth had been created on endless civil wars and corrupt and ineffective economic and social policies. None tried the development of exports through EPZs and none succeeded. |
| 96. From the thirties onwards, in Mexico, Brazil, Argentina, Chile, and to a lesser extent, Colombia, this "national industrialism" was to lead to the establishment of a solid albeit inefficient industrial base in the three largest Latin American countries. In the sixties, to create a credible market and support new industries, Central America entered into the hazardous territory of economic integration, which would be used principally by the subsidiaries of American multinationals. Success was limited, however, as this industrialisation was not accompanied by the fiscal and social policies needed to create a real internal market. | 96. "Solid" and "inefficient" are not two words that can go
together to describe an industrial base. A "precarious, inefficient industrial
base dependent on state subsidies generated by the wealth taken from poor
farmers and workers" is a more accurate description. Such a program could not
have the fiscal and social policies needed because the demands of the
inefficient industrial sector soaked up any chance of improving the standards
of living. High cost protected products, were beyond the reach of most people.
Limited markets meant limited jobs, so the situation did not improve.
The experience we had of using top business professionals to find 30 good feasible import substitution projects for the Central American Bank for Economic Integration and present them to 300 business and government leaders at Managua in 1964 tells the story. Not one of the projects was taken up during the next 10 years. A similar experience in the Dominican Republic in 1968 was followed by no local investment in 25 suggested feasible manufacturing projects during the next decade (An outside investor built the battery factory). The lack of knowledge of manufacturing in a society based mostly on agriculture, trade and commerce seems to be difficult to overcome, no matter the size of the import substitution market. The EPZ brings world manufacturing knowledge and makes it available in the country. An outward-facing policy thus has great advantages for modernization through manufacturing. It is no virtue to be ignorant of how complex and difficult manufacturing is. The persons with no training in science and engineering, or modern management, tend to have strange ideas about development -- like some union people with whom we are acquainted. The import substitution policy was not driven by manufacturing people who knew what they were doing. |
| 97. In reality, Central American integration, in the absence of income redistribution through taxation, the promulgation of agrarian reform and the adoption by the State of a more voluntaristic role in economic and social development, turned into a "miracle recipe" for avoiding reform. By the beginning of the seventies the inwardly-oriented development model had had its day, and Central America found itself facing the very curse it had tried to escape: dependence on the outside. Just three hours flight from the world's richest consumer market, Central America decided to base its development on exports, not of agricultural products this time but of industrial products. | 97. Of course countries that tried to follow the prescriptions outlined here such as agrarian reform and income redistribution, such as Cuba, did even worse. These were poor countries and there were too many people on the land, and no income to redistribute. |
| 98. At first glance, the region had a lot to offer: a cheap labour force, watched over by a strong police force and army, relatively modern infrastructure and management systems the legacy of the "integration decade" which had instilled a management mentality among a new elite trained in the best North American universities and governments prepared to go to almost any lengths and make any concessions to attract foreign investors to their country. Using their meagre budgetary resources, appealing again for international loans which in the guise of development cooperation were to reduce the investment costs for foreign companies, Central American governments set about building the infrastructure needed for foreign companies, before offering them huge concessions in terms of exemptions from tax and customs duty. With this legislation, Central America was reproducing the model of the old banana enclave. | 98. See our paragraph 84 for the realities of exemptions from
duties and income taxes. Actually at first glance the region had very little to
offer. Most of the developing world had cheaper wages. The countries had
inefficient infrastructure, costly communications, poor transportation,
political instability, and often a slow burn civil war. In order to attract
investment they had to offer a better environment.
Since the author has been kind enough to show us that the EPZs are not enclaves, and are often locally owned and managed, the image he portrays of the old banana enclave is, of course, without any merit. |
| 99. For the host country, the only real advantage was the wages earned by its workers, pitiful wages that would never enable them to overcome their poverty. Economically, the industries in the zones, producing only for export, were a failure. Central American governments have had to enter into ruinous competition to attract multinationals to their shores. The cost in terms of their public debt was often higher than the revenue gained through exports. | 99. The cheap wages are the only benefit argument again. At
least now we know it isn't true the ICFTU told us it was an illusion only
8 paragraphs ago.
Most of these Central American countries would love to "fail" as well as Korea and Taiwan, and some are beginning to move down the same path. "Ruinous competition" is not the right concept. A better description would be that they have taken the first steps toward development, which has helped them become richer, more educated, more democratic and more influential. Just like Korea. |
| 100. Neither do the maquiladoras have any knockon effects for the rest of the economy. Workers are cut off from other activities in the national economy. Their only link with it begins at the end of their working day when they spend their meagre wages in the local markets. The final drawback of the maquiladoras and the EPZ model will come as no surprise to those who have followed the economic history of Central America since laissez-faire policies became the vogue in the 1850s: extreme vulnerability and a dependence on decisions taken thousands of miles away. The cost to multinationals of setting up a subsidiary is so low that they can very easily relocate their plants following a change in their international strategy or when their fiscal, wage or political advantages are threatened. | 100. Fortunately, by this time we also know that this is also
not true and that the author doesn't believe it either. Not only do they have a
direct impact, but also a multiplier impact that is not negligible. (IFCTU
paragraph 77)
The benefits of EPZs go far beyond the initial payroll of workers. See our paragraphs 20, 42, 57, 59, 67, 69 and 77. In the garment industry the costs to set up a factory are low but the cost of high-tech factories in EPZs is in the range of US$200 million to $1 billion. These do not move away easily. ICFTU must get beyond the early pioneer garment industry mentality if it wants its statements to mean anything. This "runaway" industry suggestion is without merit. |
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