sezs - performance, lessons learned and implications for zone development

8/22/2019 SEZs - Performance, Lessons Learned and Implications for Zone Development

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SPECIAL ECONOMIC ZONESPERFORMANCE, LESSONS

LEARNED, AND IMPLICATIONSFOR ZONE DEVELOPMENT


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Copyright 2008

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Special economic ZoneS

performance, leSSonS

learned, and implicationS

for Zone development

April 2008


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Acknowledgements

This publication was produced by a team led byGokhan Akinci and James Crittle o FIAS, themulti-donor investment climate advisory service

o the World Bank Group. The drat report thatormed the basis or this publication was developedby a team at BearingPoint led by Kishore Rao, andincluding Sheri Pitigala, Michael Hoverter, and

Jean-Paul Gauthier. The report beneted rom thevaluable comments and support o Vincent Palmade,Suzanne Smith, Cecilia Sager, and Andrew Stone.Christopher Geurtsen, Samir Stewart, and EtienneKechichian provided insightul research support andinputs. Nena Terrell and Patricia Steele providedkey comments and editorial assistance in nalizingthe report or publication.


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Contents

Eecutive Summary ............................................................................. 1

Itroductio ......................................................................................... 7

Study Objectives 7

Report Organization 8

Zoe Defitio ad Developmet Treds .............................................9

The Challenge o Defnition 9

Rationale or Zone Development 12

Major Trends in Zone Development 13

Zoe Growth ad Key Characteristics ................................................. 23

Overview 23Zone Development Characteristics by Region 25

Ecoomic Perormace ad Impacts ................................................... 32

Defning Zone Benefts and Costs 32

Economic Impacts 34

Social and Environmental Impacts 39

Special Economic Zones and Countrywide Reorms 42

Lessons Learned: Common Obstacles to Zone Success 43

Are Private Zones Better Perormers? 45

Lessos Leared ad Implicatios or Zoe Developmet ...................48

What Determines Zone Success? 48

Guidelines or Zone Development 51

Outlook or Zone Development 57

AnnExES

1. Acronyms and Abbreviations 60

2. Profles o Zone Programs by Region 61

3. Bibliography 71


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Tables

Report Tables

1 Basic Policy Framework or SEZs .................................................................... 6

2 Types o Zones .......................................................................................... 10

3 Examples o Specialized Zones ................................................................... 11

4 Free Zones in Selected Industrialized Countries .............................................. 13

5 Traditional Zones Were Developed as Enclaves ............................................. 14

6 Zone Concepts in Selected Developing and Transition Economies .................... 15

7 Examples o Freeports/Specialized Zones ..................................................... 17

8 Private and Public Sector Zones in Developing and Transition Economies .......... 18

9 Examples o Public-Private Partnership in Zone Development ........................... 19

10 Examples o Zone Administrative Models ..................................................... 19

11 Zone Administrative and Regulatory Bodies ................................................. 20

12 Dates o Establishment o Zone Programs ...................................................... 24

13 Zones in Developing and Transition Countries ............................................... 26

14 Zone Development Rankings ....................................................................... 27

15 Direct Employment Impact o Special Economic Zones .................................... 34

16 Impact o Zones on Exports ......................................................................... 36

17 Zones as Catalysts and Enclaves .................................................................. 41

18 Obstructed Zone Examples.......................................................................... 44

19 Export Development Mechanisms ................................................................. 51

20 SEZ Basic Policy Framework ........................................................................ 53

Ae Tables

21 Profle o Zone Programs in the Americas ............................................................ 61

22 Profle o Zone Programs in Asia and the Pacifc .................................................. 64

23 Profle o Zone Programs in the Middle East and North Arica ............................... 66

24 Profle o Zone Programs in Western Europe ....................................................... 67

25 Profle o Zone Programs in Central and Eastern Europe and Central Asia .............. 68

26 Profle o Zone Programs in Sub-Saharan Arica ................................................... 69


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Boxes

1 Types o Zones .................................................................................................. 3

2 Special Economic Zone Facilities and Services .................................................... 21

3 ZonaAmerica Business and Technology Park, Uruguay ......................................... 28

4 Zones within Zones: The Unique Case o China ................................................... 295 Shannon Free Zone, Ireland .............................................................................. 30

6 Pomeranian Special Economic Zone, Poland ....................................................... 31

7 Both Sides o the Zone Debate........................................................................... 33

8 Government Revenues and Costs rom Zone Development ..................................... 39

9 Difculties in Establishing Industrial Linkages: The Case o the .............................. 43Dominican Republic

10 Obstacles Faced by the Dakar EPZ ................................................................... 45

11 Private Free Zone Development in the Dominican Republic .................................... 46

12 Private EPZ and Industrial Estate Designation Criteria in Thailand .......................... 47

13 Why Are Tax Holidays an Ineective Incentive? ................................................... 50

14 Prohibited and Actionable Subsidies under the Uruguay Round ........................... 55

15 Advantages o Using U.S. FTZs .......................................................................... 58


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eXecUtive SUmmarY

For developing countries, special economic zones(SEZs) traditionally have had both a policy and aninrastructure rationale. In terms o policy, the SEZcan be a useul tool as part o an overall economicgrowth strategy to enhance industry competitivenessand attract oreign direct investment (FDI). ThroughSEZs, governments aim to develop and diversiyexports while maintaining protective barriers, tocreate jobs, and to pilot new policies and approaches(or example, in customs, legal, labor, and public-private partnership aspects). SEZs also allow ormore ecient government supervision o enterprises,provision o o-site inrastructure, and environmen-tal controls.

This paper examines 30 years o experience in zones,reviewing development patterns and economicimpacts o zones worldwide. The experience shows

that while zones have been eective in addressingeconomic growth and development objectives, theyhave not been uniormly successul; successes inEast Asia and Latin America have been dicult toreplicate, particularly in Arica, and many zones haveailed. Moreover, since the onset o zone develop-ment in developing countries, concerns have been

raised about the impact o zones on employment(in terms o gender, wage levels and benets, workerrights and work conditions), the environment, andrelated social actors.

To a great extent, the ate o zone initiatives hasbeen determined rom the outset, by the choicesmade in the establishment o policy rameworks,incentive packages, and various other provisions andbureaucratic procedures. The experience suggeststhat maximizing the benets o zones depends onthe degree to which they are integrated with theirhost economies and the overall trade and invest-ment reorm agenda. In particular, when zones aredesigned to pilot legal and regulatory reorms withina planned policy ramework, they are more likely toreach their objectives.

Policymakers and practitioners in zone developmentmay nd the key considerations and lessons pre-sented in this paper useul in planning and evalu-ating their zone initiatives. The end result o thisproject is a general ramework or zone development,

which is intended to optimize uture results or bothhost countries and investing rms.


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Trends in Zone Development

While special economic zones are oten treated asan innovative topic in development economics,city-wide ree zones with goals and methods nottoo dierent rom those employed in modern zones

were in place in Gibraltar and Singapore as early as1704 and 1819, respectively. This paper genericallyuses the term special economic zoneto encompassthe range o modern ree zone types worldwide1(Box 1). SEZs are generally dened as geographi-cally delimited areas administered by a single body,oering certain incentives (generally duty-reeimporting and streamlined customs procedures,or instance) to businesses which physically locate

within the zone.

Zoe Growth ad Key Characteristics

Since the rst privately developed and operatedzones came on line in the 1980s, zone developmenthas exploded, especially with the emergence o newprograms in the countries o Eastern and CentralEurope, the Commonwealth o Independent States(CIS), and the Middle East and North Arica.

Widespread as this development may be, zoneactivity is still relatively concentrated, with lessthan a dozen countries accounting or the majorityo zone employment and exports generated. Zones

are concentrated in Asia and the Pacic (mainlyChina), Latin America, and Central and EasternEurope and Central Asia.

Despite recent diversication eorts, most zoneenterprises worldwide are engaged in labor-intensive,assembly-oriented activities such as apparel, textiles,and electrical and electronic goods. The degree oproduct specialization tends to be linked to thelevel o industrial development o the host country.Female workers account or 6070 percent o thezone workorce worldwide, a number that has

remained consistent since the inception o exportprocessing zones (EPZs) with an explicit manuac-turing orientation. However, as economic activitydiversies away rom simple assembly operations,the percentage o women in the workorce decreases.

Owership Arragemets adDevelopmet Approach

Perhaps the most notable trend over the past 15years has been the growing number o privatelyowned, developed, and operated zones worldwide.

According to the stocktaking exercise conducted orthis study, 62 percent o the 2,301 zones in develop-ing and transition countries are private sector devel-oped and operated.2 This contrasts greatly with the1980s, when less than 25 percent o zones worldwide

were in private hands. The key actor behind the riseo private zones is the realization that such acilitiescan be protably operated on the part o developers,and that the burden such SEZs place on governmentresources can be reduced.

Formal public-private partnerships have also become

increasingly popular around the world, with a num-ber o dierent models evolving, including:

n Public provision o o-site inrastructure and a-cilities (utilities connections, roads) as an incen-tive or private unding o on-site inrastructureand acilities.

n Assembly o land parcels with secure title anddevelopment rights by the government or leaseto private zone development groups, develop-ment o better land use/ownership laws andregulations and adoption o enorceable zoningand land use plans.

n Build-operate-transer and build-own-operateapproaches to on-site and o-site zone inra-structure and acilities, with government guaran-tees and/or nancial support.

n Contracting private management or govern-ment-owned zones or lease o government

1 In a ew cases, the term special economic zone or SEZ is alsoused in this report when it is part o the name o a specic zone.

2 O the 135 countries in the FIAS database, those not consideredtransition or developing countries include 16 Western Europeancountries, Australia, Japan, Singapore, Canada, the United States,and Puerto Rico (included as a separate entity, but is counted aspart o the United States). The entities o Macau, Hong Kong(China), and Taiwan (China) are included or separate consider-ation under the Asia and the Pacic region.


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zone assets by a private operator (benecialownership).

n Equity-shiting arrangements whereby a privatecontract manager o a government zone canexercise a purchase option once pre-denedperormance levels have been reached.

The entry o the private sector into zone develop-ment has also changed the range o acilities, services,and amenities available within zones. Recent trends

tied to the increase in private zone developmentinclude the development o SEZs and industrialestates on an integrated rather than stand-alone basis,increased specialization o acilities catering to theunique needs o target industries (hi-tech, petro-chem, sotware, among others) and the provision o agreater range o business support services and special-ized acilities. Many o these next generation zones

cater to higher value-added industries and are able to

charge premium rates.

Policy Considerations

The economic perormance and impact o SEZ

programs in developing countries has been evaluated

in numerous studies. Most o these, however, have

ocused on government-developed and -run zones

and largely neglected the economic impact o private

zone development.

EPZs are viewed as highly eective tools or job

generation, particularly or women entering the

workorce. Evidence suggests that such zones are

a much more signicant source o employment in

smaller countries with populations o less than

Box 1

Types Znes

The rst mdern zne ws estbished in Irend in 1959. Since then, vriety dierent zne setups hve

evved tht re subsumed under the SEZ cncept in this pper, nmey:

n Free trade zones (FTZs; s knwn s cmmerci ree znes) re enced-in, duty-ree res,ering wrehusing, strge, nd distributin ciities r trde, trnsshipment, nd re-eprt pertins.

n Export processing zones re industri esttes imed primriy t reign mrkets. Hybrid EPZs re typicysub-divided int gener zne pen t industries nd seprte EPZ re reserved r eprt-riented,EPZ-registered enterprises.

n Enterprise zones re intended t revitize distressed urbn r rur res thrugh the prvisin tincentives nd nnci grnts.

n Freeports typicy encmpss much rger res. They ccmmdte types ctivities, incudingturism nd reti ses, permit n-site residence, nd prvide brder set incentives nd benets.

n Single actory EPZ schemes prvide incentives t individu enterprises regrdess ctin; ctriesd nt hve t cte within designted zne t receive incentives nd privieges.*

n Specialized zones incude science/techngy prks, petrchemic znes, gistics prks, irprt-bsedznes, nd s n.

*Singe ctry EPZ prgrms re simir t bnded mnucturing wrehuse schemes, thugh they typicy er brder set benets ndmre feibe cntrs.


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5 million (examples include Mauritius, theSeychelles, and Jamaica) than in larger countries.

SEZs are also capable o contributing to export de-velopment, not only in terms o accelerating exportgrowth, but export diversication as well. This is

particularly important to poorer developing coun-tries reliant on the export o primary products. Inaddition, zones can play an important role in attract-ing oreign direct investment, osetting some aspectso an adverse investment climate by oering world-class acilities and best practice policies.

The scope or increased development o supplyand other linkages through the use o ree zonesappears to be signicant, due to a greater incentiveor local rms to sell goods and services to zone-based enterprises because such sales are typicallydeemed exports, eligible or duty drawback andother export incentives.

Achieving an appropriate budgetary balance can betricky or host countries, and doing so can meanthe dierence between prots and losses. Zonescan all short o intended benets or governmentsunder three scenarios: i development entails mas-sive government capital outlays (or onsite or ositeinrastructure development), are not operated on acost-recovery basis, and/or receive subsidized inputs

or electricity or other services.

There are continuing concerns regarding workconditions and social protections, including womensrights in some countries. However, wages and workconditions tend to be better within zones thanoutside them, and adverse labor and social issues arealmost wholly associated with countries eaturingprograms developed and run by the government,especially older zones catering to low-end apparel-assembly operations.

In evaluating environmental impacts, a distinctionneeds to be drawn between countrywide single ac-tory EPZ programs and industrial park-style zones.It is much harder or governments to adequatelyenorce environmental standards or single actories,as they tend to be widely dispersed.

Special Ecoomic Zoes adCoutrywide Reorms

At a public policy level, a debate continues to bewaged regarding whether special economic zonespromote countrywide economic policy reorms

by serving as demonstration areas or catalysts,or whether they act instead as pressure valves orunemployment, thereby reducing the incentiveto reorm and diverting reorm energies. A 1992

World Bank study cautioned against the possibilitythat SEZs could be used by developing countries tomuddle along without reorms, and stressed theneed to use zones as a supplement to countrywidereorm, as opposed to creating isolated ree marketenclaves. Two integration methods that have met

with success have been equal ooting policies ordomestic suppliers o capital and intermediate goods

and the extensive use o sub-contracting by zone-based rms to local producers.

Are Private Zoes Preerable?

Available data suggests that private zones are lessexpensive to develop and operate than their publiccounterparts (rom the perspective o the host coun-try), and yield better economic results. Public expen-diture cost savings through private zone developmentdepends signicantly on where private zones are

located and whether they are subject to any designa-tion criteria and development controls. Most modernzone programs have developed such measures, whichaim to ensure that new zone projects are locatedclose to existing public inrastructure and acilities,thereby reducing government outlays. On the whole,privately operated zones tend to oer better acilitiesand amenities, command higher prices romtenants and attract higher end types o activities.

As a result, private zones generally have been moreprotable and have had better social and environ-mental track records than public zones throughout

the world (with East Asian government-run zonesthe notable exception).


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Policy Implications

Three decades o zone development experiencesuggests that the ailure or success o a zone is linkedto its policy and incentive ramework, where it islocated, and how it is developed and managed. This

experience shows that the use o generous incentivespackages to oset other disadvantages (such as poorlocation or insucient acilities) is ineective interms o overall zone perormance, due in large partto the increasing commonality o zone investmentincentives in recent years.

The most common obstacles to success or zones are:

n poor site locations, entailing heavy capitalexpenditures

n uncompetitive policiesreliance on tax holi-days, rigid perormance requirements, poorlabor policies and practices

n poor zone development practicesinappropri-ately designed or over-designed acilities, inad-equate maintenance and promotion practices

n subsidized rent and other services

n cumbersome procedures and controls

n inadequate administrative structures or toomany bodies involved in zone administration

n weak coordination between private developersand governments in inrastructure provision.

The common mistake at the root o many o theseobstacles to optimal zone perormance is a lack oeective coordination, both in terms o the partiesinvolved and various physical and procedural aspectso the zone itsel.

Good Practice Guidelies orZoe Developmet

One o the clearest lessons learned rom decades oree zone developmentparticularly EPZ develop-mentis that zones cannot and should not be viewedas a substitute for a countrys larger trade and invest-

ment reform efforts. They are one tool in a portolioo mechanisms commonly employed to create jobs,

generate exports and attract oreign investment,through the provision o incentives, streamlinedprocedures, and custom-built inrastructure.

A critical determinant in conguring a zone develop-ment program is the type o zones to be promoted.International experience suggests that the recom-mended approach is to adopt a SEZ model thatincorporates these principles:

n Allow SEZ enterprises as well as those licensedunder other regimes to co-locate within the samearea. The development o separately enced-oareas solely or SEZ enterprises is a less preer-

able, but acceptable approach.

n Ensure that the SEZ regime is fexible, allowinga range o commercial as well as manuacturingactivities. I properly supervised, a separate com-mercial ree zone regime is not required.

n Promote private rather than public developmento zones.

n Develop an appropriate legal, regulatory, andinstitutional ramework to ensure adequate regu-lation and acilitation, requiring greater adminis-

trative acilities within host governments.

The key elements o a good-practice policy rame-work or SEZs are summarized in Table 1. A best-practice policy and incentive ramework is stream-lined, encouraging zones to compete on the basis o

acilitation, acilities, and services rather than on theprovision o incentives. The importance o regulatoryrelie to investors is a crucial, yet overlooked aspecto successul SEZ programs. The host governmentshould aim to simpliy investment approvals andexpatriate work permits; remove required import andexport licenses; and accelerate customs inspectionprocedures and automatic oreign exchange access.

The institution charged with regulating zone opera-tions is another major driver in the outcome o the

zone program. While a wide range o institutionalarrangements have been used, experience suggeststhat success is dependent on the autonomy o the


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body; adequate unding; customer orientation andethos; powers over other government ministries;partnerships with private zone operators and enter-prises; and maximizing the role o the private sector

in service provision. To help minimize situationsthat present conficts o interest, particularly in thecontext o an increasing number o private zones,it is critical that zone authorities remain engagedin purely regulatory unctions, and do not own,develop, or operate zones.

Finally, the success o zones is critically linked to theway in which they are located, developed, and man-aged. Management o zones is enhanced when theyare operated on a cost-recovery rather than subsi-dized basis, and are market-oriented and customer-

ocused enterprises. This is oten accomplished whenzone development and operation are undertaken byprivate sector groups on a commercial basis.

Outlook or Zoe Developmet

The dynamics o recent trade liberalization placegreat importance on the continued development o

ocused investment and export promotion mecha-nisms such as SEZs that can provide a simpliedregulatory environment. The prevalence o zonesin industrialized countries with open economiesalso underscores the importance o the concept orcompetitiveness. Mechanisms that provide eciencyadvantages are even more important with the advento modern production and distribution concepts andapproaches, and the reduction o transaction costs.There is also a continuing role or zones in manycountries to incubate and accelerate policy reorm.Given their potential fexibility and eciency ad-

vantages, SEZs could continue in the uture to serveas a viable tool or developing countries, especially

when reorms are ex ante integrated into the overallstrategy.

TaBlE 1

Bsic Picy Frmewrk r SEZs

International Standard

Cncept etr-territriity outside dmestic custms territry; eigibe r ntin certictes rigin; eigibe tprticipte in ntin trde greements nd rrngements.

Eigibiity r benets N minimum eprt requirement; mnucturers nd services; reign nd c rms;epnsins eisting enterprises; privte devepers znes.

Freign nd c wnership N imittins; equ tretment.

Privte zne devepment Cery dened in egistin; specic zne designtin criteri; eigibe r u benets;cmpetitin rm gvernment-run znes n eve pying ed.

Ses t the dmestic mrket liberized, prvided n bnket bsis rther thn cse by cse; treted s imprt intdmestic mrket; subject t pyment imprt duties nd tes.

Purchses rm dmestic mrket Treted s eprts rm dmestic mrket; enterprises eigibe r indirect eprter benets.

lbr picies Fu cnsistency with Interntin lbur orgniztin br stndrds; speciizeddispute settement mechnism.


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introdUction

Study Objectives

The rapid prolieration and economic impactso special economic zones (SEZs)especiallyexport processing zoneshave been documentedin numerous studies. By some estimates, there areapproximately 3,000 zones in 135 countries today,accounting or over 68 million direct jobs and over$500 billion o direct trade-related value added

within zones.3 Other studies have evaluated theeconomic impact o zone development, typically interms o cost/benet calculations o zone programs(Warr, 1989, Jayanthakumaran, 2002, and Sinclair,2001). Still other studies have tried to examine therelationship between ree zones and economic reormand trade liberalization eorts in developing coun-tries (Madani, 1999, Cling and Letilly, 2001, andSchrank, 2001).

Most o these studies, however, ocus on govern-ment-owned, -developed, and -operated zones. Theyoten miss the act that there have been dramaticchanges in the ways in which zones have been con-ceived, developed, managed, regulated and governedin the past two decades. These include the growingprominence o private sector developed and run

zones; the use o public-private partnerships or zonedevelopment; the implementation o World TradeOrganization (WTO)-compliant policy and incen-tive rameworks; and innovative regulatory rame-

works.

These changes have important implications or theeconomic impacts o zones, and oer signicantlessons to policymakers on how to maximize zonesuccess. The number o zones and the number ocountries hosting zones, particularly Organisationor Economic Co-operation and Development(OECD) economies, continues to grow. This trendraises a number o questions: What is the continuingrationale or zones in the ace o global trade liber-alization? And why do zones continue to expand inindustrialized countries that already oer low duty

3 These gures were derived rom a database developed by FIAS,in close consultation with the World Economic Processing ZonesAssociation (WEPZA), and International Labour Organization(ILO) data rom an ILO document dated April 2007. Puerto Ricois mentioned as a separate entity in the database, since it has azone program completely separate rom the U.S. zone program;however, it is not counted as a separate country. Macau, Taiwan(China), and Hong Kong (China), while included as separateentities in the FIAS database, are considered by the internationalcommunity under China, hence these territories do not count asseparate countries.


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and tax environments? Do zone programs promoteor detract rom countrywide reorm eorts?

This study analyzes the major development trendsin terms o zone conguration, ownership, devel-opment, management, and regulation approaches,

and identies good practices. It evaluates the overalleconomic perormance o zones in light o thesechanges, and assesses the relationship o zones andeconomic reorm eorts. The ultimate goal is to drawout lessons and implications that will enable poli-cymakers to design and acilitate zone developmentthat maximizes benets to their host economies.

The analysis is based on a review o recent studiesand assessments o EPZs and ree zones, as well as astocktaking o zone programs worldwide, includingownership patterns, legal and regulatory rameworks,institutional rameworks, ownership and manage-ment approaches, incentives, and economic impacts.To evaluate the complex linkages and impacts ozones and economy-wide policy reorm eorts, anumber o case studies o zone programs were under-taken and previous cost/benet assessments analyzed.

Report Organization

This paper is organized as ollows:

n The next section, Zone Defnition and Devel-opment Trends, documents growth patterns

and key characteristics o zones internationallyand regionally.

n The third section, Zone Growth and KeyCharacteristics, outlines recent changes in zoneconcepts, development approaches, and policyand institutional rameworks.

n The ourth section, Economic Perormanceand Impacts, evaluates the overall economicperormance o zone development and keysocio-economic impacts.

n The last section, Lessons Learned and Impli-cations or Zone Development, assesses whysome zones have ailed, identies key successactors, and delineates guidelines to maximizethe success o new zones.


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Zone definition and

development trendS

The Challenge o Defnition

Free zones have existed or centuries. They wereoriginally established to encourage entrept trade,and mostly took the orm o citywide zones locatedon international trade routes. Examples includeGibraltar (1704), Singapore (1819), Hong Kong(China; 1848), Hamburg (1888), and Copenha-gen (1891). This paper ocuses on modern specialeconomic zones, a generic term that encompasses therecent variants o the traditional commercial zones.The principles incorporated in the basic concept o aspecial economic zone include:

n Geographically delimited area, usually physicallysecured (enced-in)

n Single management/administration

n Eligibility or benets based upon physicallocation within the zone

n Separate customs area (duty-ree benets) andstreamlined procedures.

The core denition o a ree zone, as well as proposedguidelines and standards or them, are contained inthe Revised Kyoto Convention o the World Cus-toms Organization (WCO). 4 Specically, Annex Dand the accompanying guidelines provide standardsand recommendations on the treatment o importsto and exports rom ree zones including territoriallimits (ree zones are dened as outside the customsterritory or purposes o the assessment o importduties and taxes); minimal documentation require-ments; and issues to be covered by national legisla-tion. Free zones typically allow or duty- and tax-reeimports o raw and intermediate materials and, inmany cases, capital equipment.

This generic special economic zone concept hasevolved over time, resulting in a large variety o zones

4 Annex D o the International Convention on the Harmonizationand Simplication o Customs (revised in 1999) denes a reezone as part o the territory o a Contracting Party where anygoods introduced are generally regarded, insoar as import dutiesand taxes are concerned, as being outside the Customs territory..and not subject to the usual Customs control.


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(Table 2), with diering objectives, markets, andactivities, including:

n Free trade zones, also known as commercialree zones and ree commercial zones, aresmall, enced-in, duty-ree areas, oering ware-housing, storage, and distribution acilities ortrade, transshipment, and re-export operations,located in most ports o entry around the world.

A leading example is the Colon Free Zone in

Panama.

n Export processing zones, industrial estates o-ering special incentives and acilities or manu-acturing and related activities aimed mostly atexport markets, typically take two orms. In thetraditional EPZ model, the entire area within thezone is exclusively or export-oriented enterprises

licensed under an EPZ regime. Hybrid EPZs, incontrast, are typically sub-divided into a generalzone open to all industries regardless o exportorientation and a separate EPZ area reserved orexport-oriented, EPZ-registered enterprises.5

n Freeports are generally a much broader conceptand typically encompass much larger areas. Theyaccommodate all types o activities, includingtourism and retail sales, permit people to reside

on site, and provide a much broader set o in-centives and benets. The large-scale reeports inChina are a traditional example.

TaBlE 2

Types Znes

Type o Zone Development Physical Typical Eligible Markets Examples

Objective Confguration Location Activities

Free Trde Zne Supprt trde Size < 50 Prts entry Entrept nd Dmestic, Cn Free(Cmmerci Free Zne) hectres trde-reted re-eprt Zne, Pnm

ctivities

Trditin EPZ Eprt Size < 100 Nne Mnucturing, Msty Krchimnucturing hectres; ther prcessing eprt EPZ, Pkistn

tt re isdesignteds n EPZ

Hybrid EPZ Eprt Size < 100 Nne Mnucturing, Eprt nd lt Krbngmnucturing hectres; ny ther prcessing dmestic Industri Estte,

prt the re mrket Thindis designteds n EPZ

Freeprt Integrted Size >100 km2 Nne Muti-use Dmestic, aqbdevepment intern nd Speci Ecnmic

eprt mrkets Zne, Jrdn

Enterprise Zne, Urbn Size < 50 Distressed Muti-use Dmestic EmpwermentEmpwerment, revitiztin hectres urbn r Zne, ChicgUrbn Free Znes rur res

Singe Fctry EPZ Eprt Designtin Cuntrywide Mnucturing, Eprt mrket Muritiusmnucturing r individu ther prcessing Meic

enterprises Mdgscr

5 In most Asian countries, or instance Thailand and the Philip-pines, EPZ areas within hybrid zones are required to be enced-in.In contrast, many Latin American countriessuch as Costa Ricaand Mexicopermit EPZ-registered enterprises to be located inthe same area as rms registered under other regimes.


19/83

n Enterprise zones are intended to revitalizedistressed urban or rural areas through the provi-sion o tax incentives and nancial grants. Mostzones are in developed countries, or examplethe United States, France, and the UnitedKingdom, although South Arica is developing asimilar mechanism.

n Single actory EPZschemes provide incentivesto individual enterprises regardless o location;

actories do not have to locate within a desig-nated zone to receive incentives and privileges.6Leading examples o countries relying exclusivelyon a single actory scheme include Mauritius,Madagascar, Mexico and Fiji; other countriessuch as Costa Rica, the United States, and SriLanka allow both industrial estate-style zonesand single actory designations.

With the exception o the single actory zone scheme,these developments share most o the undamentalprinciples underpinning the special economic zoneconcept described earliera delimited, secure areaunder single administration; a special incentive andregulatory regime; and location-based incentiveeligibility.

It is requently pointed out that special economiczones have also evolved into highly specialized acili-

ties, congured to the needs o specic industriesand activities. Examples shown in Table 3 includespecial zones to promote high technology or science-based industries; petrochemical and heavy industry

6 Single actory EPZ programs are similar to bonded manuacturingwarehouse schemes, although typically oering a broader set obenets and more fexible controls.

TaBlE 3

Empes Speciized Znes

Type o Zone Development Objective Size Typical Location Activities Markets Example

Techngy r Prmte high tech nd < 50 adjcent t uni- High techngy Dmestic Singpre ScienceScience Prks science-bsed industries hectres versities, institutes ctivities nd eprt Prk, Singpre

Petrchemic Prmte energy 100300 Petrchemic Petrchemics Dmestic lem ChbngZnes industries hectres hubs; ecient nd ther hevy nd eprt Industri Estte,

energy surces industry Thind

Finnci Devepment - < 50 Nne oshre nnci Eprt lbun oshreServices shre nnci services hectres nd nn-nnci Finnci Centre,

services Mysi

Stwre Devepment st- < 20 adjcent t Stwre nd Eprt Dubi Internet City,nd Internet wre nd IT services* hectres universities, ther IT services* United arb

urbn res Emirtes

airprt-bsed air crg trde nd < 20 airprts Wrehusing, Re-eprt Ku lumpurtrnsshipment hectres trnsshipment nd airprt Free Zne,

dmestic Mysi

Turism Integrted turism 2001,000 Turism res Resrts nd Eprt nd Bru Isnd,devepment hectres ther turism dmestic Cmbi

lgistics Supprt gistics < 50 airprts, prts, Wrehusing, Re-eprt D1 lgistics Prk,Prks r hectres trnsprt hubs trnsshipment Czech RepubicCrg Viges

*Note: IT bbrevites inrmtin techngy.


20/83

zones relying on cheap energy sources and specializedacilities; nancial services zones to promote oshorenancial and non-nancial activities; sotware andinormation communications technology (ICT)zones accommodating sotware coding and other o-shore ICT services operations; airport-based zones,

specically support aviation and air-based activi-ties; tourism zones to acilitate integrated resort andleisure community development; logistics parks andcargo villages/cities, providing specialized acilitiesand support services to acilitate trade, supply chainmanagement, and logistics; and others.

Do these types o projects qualiy as special eco-nomic zones? The answer is not always clear-cut,and is the reason why so many studies have dramati-cally varying estimates o the number and types ozones worldwide. The key criteria in this study oridentiying eligible projects is whether they oer aspecial regulatory ramework and incentive regimethat is available only to enterprises locating withinthe zone. In many cases this is not the caseenter-prises receive general investment incentives availableto rms elsewhere. Applying this approach wouldomit single actory programs and general industrialparks/estates/zones (which accommodate enterprisesoperating under a diversity o incentives), as well asother developments that do not provide a specicincentive regime.

Rationale or Zone Development

The rationale or the development o special eco-nomic zones diers between developing and de-veloped countries. For developing countries, thesezones have traditionally had both a policy and aninrastructure rationale. The typical special economiczone policy package includes import and exportduty exemptions, streamlined customs and admin-istrative controls and procedures, liberal oreign

exchange policies, and income tax incentivesallmeant to boost an investments competitiveness andreduce business entry and operating costs. Export-oriented zones are intended to convey ree tradestatus to export manuacturers, enabling them tocompete in global markets and counterbalance theanti-export bias o trade policies.

Madani (1999) and Cling and Letilly (2001) outlineour broad policy reasons or the development ozones, especially EPZs, in developing countries:

n In support o a wider economic reormstrategy. In this view, EPZs are a simple tool

permitting a country to develop and diversiyexports. Zones are a way o reducing anti-exportbias while keeping protective barriers intact. TheEPZs o Taiwan (China) and the Republic oKorea ollow this pattern.

n To serve as pressure valves to alleviategrowing unemployment. The EPZ programso Tunisia and the Dominican Republic are re-quently cited as examples o robust, job-creatingprograms that have remained enclaves with ewlinkages to their host economies.

n As experimental laboratories or the applica-tion o new policies and approaches. Chinasreeports are classic examples o this category.Financial, legal, labor, and even pricing poli-cies were introduced and tested rst within thereeports beore being extended to the rest o theeconomy.

n To attract oreign direct investment. Most newSEZ programs, particularly in the Middle East,

are designed to attract oreign investment.

The hardware o special economic zonesullyserviced sites with purpose-built acilities or saleor leaseis aimed at enhancing the competitive-ness o manuacturers and service providers. It isalso intended to realize agglomeration benetsrom concentrating industries in one geographicalarea. These benets include eciencies in govern-ment supervision o enterprises, provision o o-siteinrastructure, improved environmental controls, andincreased supply and sub-contracting relationships

among industries, among others. This inrastructurerationale is one o the most important driving orcesbehind zone development in inrastructure-poorcountries.

The rationale or ree zone development in indus-trialized countries is more varied. The new FreeEconomic Zone program in the Republic o Korea,


21/83

which is a broader concept than a regular exportprocessing zone, and the 22 oreign access zonesin Japan, or example, are explicitly intended to

promote oreign investment. The main rationaleor the Shannon Free Zone in Ireland, in contrast,

was to establish a growth pole in the economicallydistressed southern part o the country. Revitalizationo economically distressed urban and rural areas isthe motivation behind the many enterprise zone-styleprograms in the United Kingdom, France, and theUnited States. But overall, enhancing trade eciency

and manuacturing competitiveness remains theprincipal rationale behind special economic zone pro-grams in most industrialized countries. Many compa-nies choose a zone location based on the advantageso operating in a fexible, duty-ree environment.

The U.S. Foreign Trade Zone program is a typicalexample.7 Operating costs are lower in a zone as aresult o reduced insurance, security, and overheadcosts. Cash fow is enhanced by the ability to post-pone duty payments until and only upon entry intothe domestic customs territory. Foreign trade zoneshave been critical in enabling manuacturers to oper-ate just-in-time systems. The eciency advantagesprovided by these zones are arguably more importantor industrialized countries even with the advento modern production concepts and approaches,and the reduction o tari and non-tari barriers(NTBs). The act that zones are expanding in OECDcountries suggests that they may be much morethan tools or developing countries with bad policyenvironmentsthey may be critical to rm-levelcompetitiveness in a globalized economic environ-ment. (See also Table 4, which lists types of zones inselected industrialized countries.)

Major Trends in Zone Development

There have been proound changes in the ree zoneconcept and development approach since the rstmodern zone was established in Ireland in 1959.Even more undamental changes are oreseen overthe next decade, as the WTO agreement is imple-mented in ull.

Free zones were traditionally developed as isolatedenclaves, both in terms o the underlying policyramework and geographic location (Table 5). Accessto a generous set o incentives and privileges wastightly controlled. Qualiying rms typically had

to be 80100 percent export-oriented (or EPZs),engaged in recognized manuacturing activities, and

7 In Table 4, the United States is mentioned as having 266 FTZs.It should be noted that in addition, the United States has 173Federal Empowerment Zones, which do not provide zone-likebenets that are comparable to other zones, and are thereore notincluded in the tables.

TaBlE 4

Free Znes in SeectedIndustriized Cuntries

Country Name No. o Zones

austri 10 techngy devepment znes

Cnd 1 FTZ

Denmrk 10 FTZs

Finnd 2 FTZs

Frnce 2 FTZs, 85 enterprise znes

Germny 8 FTZs

Greece 3 FTZs

Icend 2 FTZs

Irend 1EPZ, 1 FTZ

Ity 4 FTZs

Jpn 22 reign ccess znes

Mt 1 FTZ, 10 industri znes

Prtug 2 FTZs

Spin 4 FTZs, 1 reeprt

Sweden 4 FTZs

Switzernd 4 FTZs

United Kingdm 7 FTZs, 55 enterprise znes

United Sttes 266 reign trde znes

Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.


22/83

at times only oreign-owned. Zone location wasrestricted to relatively remote areas or near transporthubs, and zones were viewed primarily as growth

poles or regional development. Zones were exclu-sively developed and operated by government bodies.

This rigid concept has changed quite undamentallyover the past two decades. One o the major changesin thinking has been to permit zone developmentcountrywide, rather than to restrict zones to remoteareas. This change was in response to the ailure omany government-run zones and the growing inter-est o private property groups in zone development.

Applications or new zone development projects

are increasingly treated like any large scale propertydevelopments; they are subject to all applicable landuse planning, zoning, building, and environmen-tal clearance processes. Governments have had todevelop zone designation criteria and transparentprocesses to govern the designation o new zonespromoted by private groups.

Another major development has been the re-think-ing o the role o zones in economic development.Sinclair (2001) correctly points out that the develop-ment objectives behind the rst EPZs were viewed

in relation to a trade-restricted or closed economy.EPZs were intended to promote exports, create

jobs, and transer technology through backwardlinkages. The rapid pace o globalization and tradeliberalization is stimulating a much broader view ozones, their development objectives and perormanceexpectations. Increasingly, zones are viewed as a keymechanism to promote two-way trade and acilitateliberalization and modernization o the host econ-

omy. The new emphasis is on integrating zones intothe domestic economy.

As detailed later, this integration is evident in manyaspectsspecial economic zone policy packages,physical development approaches, governancestructures, and so on. Countries are acilitating thedevelopment o zones to meet specic objectives andtarget markets.

As depicted in Table 6, traditional EPZs are increas-ingly being augmented and sometimes supplantedby new, more fexible arrangements. Hybrid EPZsare the preerred model in most Central and Eastern

European countries and many Latin Americancountries. Commercial ree zones have been thetraditional development norm among most MiddleEastern and North Arican countries, but are arelatively recent innovation in Asia, where zonedevelopment has emphasized export manuacturing.

The extent to which traditional zones have evolvedis exemplied in the new generation o reeports,

which are oten called SEZs. Traditionally, reeportswere city-states such as Hong Kong (China), Macau,Singapore, or islands including Labuan (Malaysia)

and Batam (Indonesia), which were viewed as moreeasily secured. In the past decade, led by the ChineseSEZs, zones established in the central territorieso countries have increased. This is part a result obetter customs and tax controls and technologies,but also refects eorts to integrate zones with hosteconomies and encourage balanced economic devel-opment, rather than dependence on single industriessuch as apparel or electronics.

TaBlE 5

Trditin Znes Were Deveped s Encves

Zone Location Comments

Knd EPZ, Indi Remte re wy rm menities Deveped t id reugees rm prtitin

Btn EPZ, Phiippines Remte re, ur hurs rm Mni N supprt inrstructure eisted

Msn EPZ, Kre, Rep. Net t urbn re originy restricted t reign investrs

Min Free Zne, Cst Ric Remte re with n menities Eventuy privtized


23/83

TaBlE 6

Zne Cncepts in Seected Deveping nd Trnsitin Ecnmies

Traditional Hybrid Commercial Single Freeport

EPZ Model EPZ Model Free Zone Factory

asi nd Tiwn (Chin) Chin Chin Fiji Chinthe Pcic Kre, Rep. Indnesi Jpn Hng Kng (Chin)

Indnesi l PDR Mysi IndiVietnm Kre, Demcrtic IndnesiPhiippines Pepes Repubic Kre, Rep. Bngdesh Phiippines McuIndi Thind MysiMysi Vietnm PhiippinesPkistn SingpreSri lnk

americs argentin Bivi argentin Jmic BhmsBhms Brzi Bhms Meic ChieBeize Cmbi Beize CmbiDminicn Repubic Cst Ric Brzi PnmGutem Cub CndJmic Ecudr CmbiNicrgu E Svdr CurPeru Hiti PnmTrinidd nd Tbg HndursUruguyVenezue, R.B. de

Midde Est ageri Bhrin Isre Irn, Ismic Rep. nd Irn, Ismic Rep. Egypt, arb Rep. Jrdn JrdnNrth aric Sudn Syrin arb Rep. Kuwit

Tunisi lebnnTurkey libyUnited arb Emirtes Mrcc

omnTunisiTurkeyUnited arb EmirtesYemen, Repubic

Centr nd Sveni Berus Czech Repubic Russin FedertinEstern Eurpe abni Estnind Centr Bsni nd Herzegvin ltviasi Bugri Rmni

Crti SerbiHungry MntenegrKzkhstn Svk RepubicKyrgyz Repubic Ukrineltvi Uzbekistn

lithuniMcedni, FYRMdvPndUkrine

(Cntinued)


24/83

Freeports are undamentally dierent rom tra-

ditional ree zones. Instead o export drivers andinvestment magnets, they are designed as liberalizedplatorms or diversied economic growth that notonly could but should spill over into the nationaleconomy. As summarized in Table 7, the reeportconcept represents a major expansion over traditionalapproaches, both physically and unctionally:

n Larger size. Freeports tend to cover larger areas,thereore oering rms greater fexibility interms o plant location and scope or inter-rmlinkages.

n Broader range o permissible activities.Firms can undertake any legal activity includingmanuacturing, tourism, duty-ree shopping,inormatics, warehousing, transshipment,and re-packaging activities, among others.Individuals can reside within the zones, perma-nently or temporarily.

n Duty-ree privileges.All types o merchandise

can be introduced duty- and tax-ree by regis-tered enterprises or individual residents.Enterprises can reely import any merchandisein any quantity, and are not restricted to directinputs or manuacturing (as is the case withEPZs). Duty- and tax-ree merchandise can besold at the retail or wholesale level and some-times consumed within the zone area. This isin contrast to EPZs or even commercial reezones that do not permit retail sales or on-siteconsumption o duty- and tax-ree products.

n Full access to the domestic market on a duty-paid basis. Unlike EPZ enterprises that areusually required to export at least 80 percent otheir production, most reeports allow unre-stricted sale to the local market or to consumersas long as all applicable import duties, taxes, andother charges are ully paid.

TaBlE 6

(Cntinued)

Traditional Hybrid Commercial Single Freeport

EPZ Model EPZ Model Free Zone Factory

Sub-Shrn Cmern Benin Burundiaric Cpe Verde Djibuti Mdgscr

Equtri Guine Gbn MwiGmbi, The liberi MiGhn Muritius MuritiusKeny Tnzni SenegMzmbique Tg SeycheesNmibiNigeriSenegSuth aricTnzniTgUgndZmbiZimbbwe

Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.


25/83

Core Policies ad Procedures

Another important trend has been the expansion andliberalization o the core set o policies and privilegeso most zone programs, especially EPZs. In general,these have taken the orm o removing many o thedistortions and restrictions previously associated withEPZs, in line with best practices. Typical provisionsnow oered by many programs include:

n Expansion o activities to include commercialand proessional services (such as warehousing,transshipment, inormatics) in addition to alltypes o manuacturing and processing.

n Equal treatment o investors and orms o invest-ment. Zone legislation accords the same benetsto oreign and local investors, and to variouslegal orms o investment. This reduces distor-tions in terms o the impact o incentives.

n Provision o incentives or private zone develop-ers to acilitate private entry into zone develop-ment. (Zone developers are treated as indirectexporters.)

n Relaxation o minimum export requirements in

line with the WTO ramework and to accom-modate the globalization o production.

n Allowing zone developers and others to supplyutilities services (telecommunications, water/sewerage, power) to tenants o SEZ estates bytreating them as indirect exporters.

n Treatment o sales o goods and services romthe domestic sector to zones as constructive ex-ports eligible or all relevant export incentives.

n Shit towards a universal set o scal incentivesor all promoted activities, rather than a sepa-rate regime or zones. In Malaysia, or example,special economic zone-based enterprises receivethe same income tax incentives as promotedindustries located outside the zones. This elimi-nates the potential or unair competition thatarises when identical operations located withinand outside a zone have dierent income taxtreatment.

Zone legislation increasingly incorporates eaturesto increase program transparency and automation.Investment approvals have been transormed roma case-by-case evaluation process to a simple regis-tration process, meeting explicit criteria. The useo negative lists, deault mechanisms that conerautomatic approvals within a predetermined time-period, and other mechanisms have greatly simpli-ed investment approvals. Customs procedures havebeen simplied by the use o single orms, automatedsystems, and other technologies.

Headway has also been made by many EPZ pro-grams to dismantle previous anti-labor provisions ozone policies and management practices and movetoward greater adherence to universal labor stan-dards, as dened by the 1998 International LabourOrganization (ILO) Declaration on FundamentalPrinciples and Rights at Work and various conven-tions. (See also the fourth section, Economic Perfor-mance and Impacts).

TaBlE 7

Empes Freeprts/Speciized Znes

Size DateZone (km2) Established

City StatesSingpre 693 1819Gibrtr 6.5 1830Hng Kng (Chin) 1,042 1841Mcu 25 1887

Islandslbun, Mysi 92 1990Btm, Indnesi* 416 1978

Cities/ProvincesIquique, Chie 2.4 1975

Shenzhen, Chin 327 1980Subic By, Phiippines 300 1992Kiningrd, Russin Federtin 15,000 1995aqb, Jrdn 375 2000Hwrd, Pnm 1,500 2004

* The Indnesin gvernment hs nnunced pns t remve Btmsbnded zne sttus in vr trditin EPZs n the isnd.


26/83

Owership Arragemets adDevelopmet Approach

Perhaps the most notable trend over the past 15 years

has been the growing number o privately owned,

developed, and operated zones worldwide (Table 8).

According to the stocktaking exercise conducted or

this study, 62 percent o the 2,301 zones in develop-

ing and transition countries are private sector devel-

oped and operated. This contrasts greatly with the1980s, when less than 25 percent o zones worldwide

were in private hands. The key actor behind the rise

o private zones is the perception that private zones

are more successul than most public zones, as well as

a general lack o unding or new government zone

development.

The rst wave o private zone development, in the

Caribbean and Central America in the 1980s, and

in Southeast Asia (the Philippines and Thailand) in

the 1990s, was undertaken without much orwardplanning or government support. Governments

responded to private initiatives without systematic

criteria or zone evaluation or designation. As a re-

sult, and exemplied by the experience o industrial

ree zones in the Dominican Republic, new zones

placed signicant demands on public inrastructure

and amenities, and outpaced the ability o govern-

ments to install external inrastructure and acilities.

In other countries, or example, the Philippines andVietnam, private developers had to install external

inrastructure (access roads and utility connections)in addition to nancing on-site inrastructure and

acilities (internal roads, utilities, common acilities,actory buildings, and so on).

This is gradually changing with the advent o ormal

public-private partnership approaches to acilitatezone development. Examples include:

n Public provision o o-site inrastructure andacilities (utility connections, roads) as an incen-

tive or private unding o on-site inrastructureand acilities.

n Assembly o land parcels with secure title anddevelopment rights by the government or lease

to private zone development groups, develop-

ment o better land use/ownership laws andregulations and adoption o enorceable zoningand land use plans.

n Build-operate-transer and build-own-operate

approaches o on-site and o-site zone inra-structure and acilities, with government guaran-

tees and/or nancial support.

TaBlE 8

Privte nd Pubic Sectr Znes in Deveping nd Trnsitin Ecnmies

Public Private

Region Zones Zones Total

americs 146 394 540

asi nd the Pcic 435 556 991

Sub-Shrn aric 49 65 114

Midde Est nd Nrth aric 173 40 213

Centr nd Estern Eurpe nd Centr asi 69 374 443

Total 872 1,429 2,301

Note: Ecudes singe ctry prgrms.Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.


27/83

n Contracting private management or govern-

ment-owned zones (management contracting),

or lease o government zone assets by a private

operator (benecial ownership).

n Equity-shiting arrangements in which a private

contract manager o a government zone can

exercise a purchase option once pre-dened

perormance levels have been reached.

There are various options or private sector partici-

pation in zone development, including concession

agreements, management contracts, and build-op-

erate-transer, build-own-operate, and build-own-

operate-transer arrangements. Table 9 proles the

partnership approach that has been used in the

development o several zones.

Admiistrative Arragemets

Another signicant recent trend has been the evolu-

tion o the types o bodies developing, administering,

planning, and promoting zones on the one hand,

and regulating zone activity on the other. A variety oinstitutional rameworks has been used or SEZ regu-

lation, development, and management (Table 10).

These include autonomous government authori-

ties or corporations, specialized departments within

TaBlE 9

Empes Pubic-Privte Prtnership in Zne Devepment

Country/Zone Role o Public Sector Role o Private Sector

Gz Industri Estte, Finncing etern inrstructure s we Finncing intern inrstructureWest Bnk nd Gz s ctry shes; prvisin nd n ng-term nd mngement znes

ese bsis

aqb Industri Estte, Jrdn Finncing etern inrstructure; prvisin Finncing intern inrstructure nd n ng-term ese bsis nd mngement znes

Subic Industri Estte, Phiippines Finncing etern inrstructure; prvisin Finncing intern inrstructure nd n ng-term ese bsis; equity stke nd mngement znesin industri estte

Tn Thun EPZ, Vietnm Prvisin nd n ng-term ese bsis; Finncing intern nd eternright wy devepment rights n ccess rds inrstructure nd mngement znes

TaBlE 10

Empes Zne administrtive Mdes

Government Authorities Ministries Zone-Specifc Investmentor Corporations Management Boards Promotion Agencies

Jrdn Cpe Verde Indi Sri lnkBngdesh Tiwn (Chin) Turkey UgndKre, Rep. Seneg Ukrine IrendZmbi Svk Repubic PndKeny E Svdr Vietnm


28/830

a ministry, zone-specic management boards, andrarely, arms o investment promotion agencies.

Traditionally, zones were developed, operated, and

regulated by the same body. This approach character-izes most o the original zones developed throughthe 1980s, particularly in Asia. But the ocus o thesebodies has changed signicantly in many countries.

With the entry o the private sector into zone devel-opment, most countries have either set-up specializedpublic sector zone development and managementagencies, or increasingly divested the physical project

development unction to the private sector, andtransormed their zone authorities into purely regula-tory, planning, and promotional bodies (Table 11).

International experience has shown that countriesembarking on private SEZ development oten nd itdicult to reconcile the divergent unctions o zonemanagement, regulation, and investment promo-tion. In many SEZ-sponsoring countries, confictso interest have arisen when regulatory bodies arealso engaged in zone development activity, especially

when existing public zones would directly compete

TaBlE 11

Zne administrtive nd Regutry Bdies (seected cuntries)

Country, Body Type o Body Key Functions Relationship with

Private Zones

Traditional Structures

Bngdesh Eprt Prcessing autnmus gvernment n Zne devepment nd pertin N privte znesZne authrity uthrity n Regutin zne ctivity

Pkistn Eprt Prcessing autnmus gvernment n Zne devepment nd pertin N privte znesZne authrity uthrity n Regutin zne ctivity

Jrdn Free Znes autnmus gvernment n Zne devepment nd pertin N privte industriCrprtin crprtin n Regutin zne ctivity estte-stye ree znes

Shnnn Devepment, autnmus gvernment n Zne devepment nd pertin N privte znesIrend crprtin n Regutin zne ctivity

New Structures

Ntin Free Znes Cunci, autnmus gvernment n Zne regutin, pnning RegutrDminicn Repubic uthrity n Zne prmtin

Phiippine Ecnmic Zne autnmus gvernment n Zne regutin, pnning Regutr; pertesauthrity crprtin n Zne prmtin rigin, ur pubic znes

Industri Estte authrity autnmus gvernment n Zne regutin, pnning Regutr; pertes Thind uthrity n Zne prmtin ew pubic znes

Free Znes Crprtin, autnmus gvernment n Zne regutin, pnning RegutrCst Ric crprtin n Zne prmtin

Free Znes, Brd, Ghn autnmus gvernment n Zne regutin, pnning Regutr

uthrity n Zne prmtin

Keny Eprt Prcessing autnmus gvernment n Zne regutin, pnning Regutr; pertesZnes authrity uthrity n Zne prmtin tw pubic znes


29/83

against new private zones. Opportunities or per-ceived and actual conficts o interest are multiplied

when the entity charged with guiding and monitor-ing SEZ perormance is simultaneously one o theSEZ operators being monitored.

However, traditional structures continue to charac-terize most o the zone administrative bodies aroundthe world, despite the advent o private zones. Incountries such as Kenya, El Salvador, Honduras,Uruguay, and elsewhere, government bodies continueto develop and operate zones, while regulating zoneactivity in all zones, public and private. Frequently,public zones are not operated on a cost-recovery basisand undercut the competitiveness o private zones.

Some zone authorities are becoming more user-re-sponsive by reorganizing themselves as corporate en-tities (to escape civil service limitations) and ensuring

substantial private sector participation at the boardo directors level. This approach is more commonlyound among the industrial ree zone programs inLatin America (notably, Costa Rica and the Domini-can Republic), and it has been employed in Thailandas well.

Physical Facilities ad Services

The entry o the private sector into zone develop-ment has also changed the range o acilities, services,and amenities available within zones (Box 2). Ingeneral, there has been a shit rom price-basedcompetition (where zones competed on the basis osubsidized actory shell rentals) to product dierenti-ation and non-price-based competition. Noteworthytrends include:

n Development o SEZs and industrial estates onan integrated rather than stand-alone basis, asparts o commercial, tourism, residential, andrecreational townships. These integrated de-velopment projects allow developers to oset therelatively low protability o industrial proper-ties with higher margin commercial and residen-tial acilities.

n Increasing specialization o acilities catering tothe unique needs o target industries. High tech-

nology SEZs have been established in Malaysia,Taiwan (China), Singapore, and elsewhere. TheLaem Chabang industrial estate in the ThaiEastern Seaboard is congured or petroleumand chemical industries. SEZs catering to thesotware and inormatics services industries havebeen developed in India, Jamaica, the Domini-can Republic, Mauritius, and elsewhere.

n Provision o a greater range o business supportservices and specialized acilities. In well-runprivate zones, as much as 50 percent o revenues

can be derived rom these sources in addition totraditional rental and sales income.

The development o these next generation zoneshas in many cases outclassed traditional EPZ estates.In countries such as the Dominican Republic, privatesector zones cater to higher value-added industries,and are able to charge premium rates. Public zones

Box 2

Speci Ecnmic Zne Fciitiesnd Services

n Chidcre ciities

n Medic cinics

n Cnerence centers

n Prduct ehibitin res

n Cmmerci centers

n Trining ciities

n Sheter pns

n Repir nd mintennce centers

n Cmmn bnded wrehuse ciities

n Incubtr ciities

n on-site bnking ciities

n on-site husing

n on-site custms cernce nd trde gisticsciities

n High-speed teecmmunictins nd Internetservices, netwrked buidings


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cater to low-margin, cost-sensitive industries like ap-parel assembly. This pattern is increasingly apparentin the Philippines, as private developers move up-market in terms o acilities and services catering to

electronics and ICT operations, leaving governmentzones to accommodate apparel, handicrats, andootwear assembly activities.


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Zone growth and

keY characteriSticS

Overview

The number o zonesespecially EPZshas growndramatically, particularly over the last decade (Table12). Beore the 1970s, most zones were clusteredin industrialized countries, primarily in WesternEurope. Inspired by the perormance o the rstmodern industrial ree zone in Shannon, Ireland in1959, a number o developing countries, mainly inEast Asia and Latin America, initiated EPZ pro-grams. In the 1980s, the pace o zone developmentincreased and expanded to new regions, includingSouth Asia (Bangladesh, Pakistan), South America,and sub-Saharan Arica (Mauritius). The rst pri-vately developed and operated zones came on linein the Caribbean and Central America in the 1980s.Since then, zone development has exploded withthe emergence o new programs in the countries o

Eastern and Central Europe, the Commonwealtho Independent States, and Middle East and NorthArica.

Today, according to this assessment, there are cur-rently 2,301 zones in 119 developing and transitioncountries, clustered mainly in Asia and the Pacicand the Americas8 (Table 13). China alone accounts

or about 19 percent o these zones. Just over hal othem are privately owned and operated. Altogether,these zones account or approximately $200 billionin gross exports per annum and directly employsome 40 million workers, and perhaps some 60 mil-lion indirectly. In 1975, in contrast, there were only79 zones in 25 countries around the world, employ-ing about 800,000 people (ILO, 2003). All weregovernment-owned and -operated.

Numerous studies have pointed to certain keycharacteristics o zones in developing and transitioncountries:

n Concentration in a ew countries.A relativelysmall number o countries account or the ma-

jority o worldwide zone activity. Zones are con-centrated in Asia and the Pacic (mainly China),

Latin America, and Central and Eastern Europeand Central Asia. In general, less than a dozencountries account or most jobs created withinzones and exports generated (Table 14). China

8 This gure excludes single actory zone programs and sponsoringcountries unless they also have a physically dened zone program.


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TaBlE 12

Dtes Estbishment Zne Prgrms

Beore 1970 1970s 1980s 1990s 2000Present

Industriized Denmrk austri* Cnd JpnCuntries Finnd Mt Frnce

Germny PrtugGreeceIcendIrendItySpinSwedenSwitzerndUnited KingdmUnited Sttes

americs Bhms Chie Prguy argentinBrzi Cst Ric Peru BeizeCmbi E Svdr Trinidd nd Tbg CubDminicn Repubic Gutem Uruguy EcudrMeic Hndurs NicrguPnm Jmic Venezue, R.B. de

asi nd Hng Kng (Chin) Kre, Rep. Bngdesh Kre, Demcrticthe Pcic Indi Mysi Chin Pepes Repubic

Mcu Phiippines Fiji* MngiSingpre Sri lnk Indnesi VietnmTiwn (Chin) PkistnThind

Midde Est Cyprus Jrdn ageri omnnd Egypt, arb Mrcc BhrinNrth aric Rep. Tunisi Irn, Ismic Rep.

Isre Dubi, United arb KuwitSyrin arb Rep. Emirtes lebnn

libyYemen, Repubic

Centr nd Bugri Berus abniEstern Eurpe Hungry Crti Bsni ndnd Czech Repubic HerzegvinCentr asi Estni Mdv

KzkhstnKyrgyz RepubicltvilithuniMcedni, FYRPnd

RmniRussin FedertinSerbiMntenegrSvk RepubicSveniUkrineUzbekistn

(Cntinued)


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hosts a greater number o zones, zone workers,and exports than any other emerging marketexcept or Mexico, which employs a single ac-torymaquiladorascheme.

n Concentration in a ew product areas. Themajority o zone enterprises worldwide areengaged in labor-intensive, assembly-orientedactivities such as apparel, textiles, and electricaland electronic goods. In 1999, it was estimatedthat these activities accounted or more than80 percent o zone output worldwide (Madani,1999). This is less the case today, given the re-cent increase in zones with a diversied output,especially in the CIS. The degree o productspecialization tends to be linked to the levelo industrial development o the host coun-try. Apparel assembly operations, or example,dominate activity in low-wage countries likeBangladesh, Sri Lanka, Madagascar, and theDominican Republic.9 Electronics, electrical andautomotive components predominate in middle-income countries like Mexico, Malaysia, andThailand.

n Reliance on a emale workorce. Female work-ers account or 6070 percent o the zone work-orce worldwide, a number that has remainedconsistent since the inception o EPZs. As

economic activity diversies away rom simpleassembly operations, the percentage o womenin the workorce decreases. In the MalaysianEPZs, or example, 40 percent o the workers areemale, down rom 60 percent two decades ago.

Zone Development Characteristicsby Region

Americas

The Americas are characterized by the widespreaduse o zones to support export development andacilitate trade. The U.S. Foreign Trade Zone (FTZ)program, which permits both trading and manuac-

TaBlE 12

(Cntinued)

Beore 1970 1970s 1980s 1990s 2000Present

Sub-Shrn liberi Djibuti Burundi Gbnaric Seneg Muritius Cmern Gmbi, The

Cpe Verde MiEqutri Guine Suth aricGhn ZmbiKenyMdgscrMwiMzmbiqueNmibiNigeriRwndSeycheesTnzni

UgndZimbbwe

*Fiji nd austri withdrew their ree zne schemes in 200304.Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.

9 Exceptions include the cases o Tunisia and Mauritius, whichtend to specialize in the apparel sector although they are middle-income countries. This is due to the outward processing benetsgranted to both countries by the EU (Cling and Letilly, 2001).


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turing activities, was established in 1934. The U.S.FTZ program dominates zone activity in the Ameri-

cas, with 266 industrial estate-style zones at ports oentry in the country. The region also hosts some othe most dynamic zone programs in the worldinMexico, the Dominican Republic, and Costa Rica.

Over the past three decades, ree trade zones andexport processing zones have become ubiquitousin the region. Initially, most were developed andoperated by public sector entities. This approach wasquickly abandoned in avor o private zone develop-ment in most countries, infuenced by the experienceo private zones in the Dominican Republic and

Costa Rica, and private industrial parks in Mexico.A number o countries in the region have ully orpartially privatized government-owned zones; promi-nent examples include Costa Rica, Colombia, andthe Dominican Republic (with projects underway inEl Salvador and Honduras). Still others, such as Uru-guay and Argentina, relied on private zone develop-ment initiatives rom the beginning.

Some o the key characteristics o these programs arepresented in Table 21, Annex 2. In general, theycan be grouped into the Mexican maquiladoraprogram, comprised o a countrywide, single actoryEPZ approach; the Central American industrial reezones, exemplied by the Dominican and Costa

Rican zones; zones in the English-speaking Carib-bean; and South American zones, typied by Colom-bia and Uruguay. While similar in many ways, thesezones ace quite dierent competitive environments.

n The Mexican maquiladoraprogram consistso some 3,700 actories spread throughout thecountry, employs over 1 million, and exportsclose to $80 billion per year. Unlike other zonesin the region, industrial activities are highlydiversied and important sources o oreigninvestment rom Japan as well as the UnitedStates. The key competitor or the Mexicanzones is China, rather than other zones in theregion; since 2000, Chinese exports have beenable to displace a number o Mexican products,and have become the second-most importantsupplier to the U.S. market in doing so.

n Unlike the maquiladoras, zones in Central Amer-ica and the Dominican Republic are ocusedon the United States, both as an export marketand the chie source o oreign investment. In

act, FDI infows und 80 percent o Domini-can zone enterprises, and 54 percent o those inCosta Rica. Most o the zones in these countriesare privately developed and operated, and ocusalmost exclusively on apparel, ootwear, luggage,and other sewn good products. Even the phar-maceutical industry in the Dominican Repub-lic is comprised mostly o assembly activities.Industrial diversication is taking place muchmore rapidly in Costa Rica, where zone produc-tion is dominated by electronic semiconductors,due to the establishment o a large Intel plant.

n Zones in the English-speaking countries othe Caribbean and Central Americamainly

Jamaica, Trinidad and Tobago, and Belizeremain mostly in public sector hands, and theyhave not kept pace with their Latin counter-parts. These zones depend almost exclusively onthe United States as both investment source andexport market. Apparel and sewn goods

TaBlE 13

Znes in Deveping ndTrnsitin Cuntries

Number o countries with zones 119

Number o zones 2,301

asi nd the Pcic 991

Chin 187

Vietnm 185

americs 540

Centr nd Est Eurpe nd Centr asi 443

Midde Est nd Nrth aric 213

Sub-Shrn aric 114

Notes: Ecudes singe ctry zne prgrms nd spnsringcuntries. Znes in the entities Mcu, Hng Kng (Chin),nd Tiwn (Chin) re incuded in the asi nd the Pcic regin.Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.


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dominate, although zones in Jamaica, Barbados,

and elsewhere have been successul in diversiy-

ing into data entry, call centers, sotware coding,

and other inormation technology (IT) services.

n The majority o South American zones, with the

notable exception o Colombia, are relative late-

comers to zone development. Most o these were

in private hands rom the start, or were later

privatized. Manyparticularly in Colombia and

Uruguayare high-end zones, oering cut-

ting-edge acilities and services (Box 3).

Asia ad the Pacifc

The Asia and the Pacic region has been at the

oreront o zone development over the last three

decades, led by the Asian Tigers in East and

Southeast Asia. The region displays a wide range o

development and management approaches (Table22 in Annex 2). Zones in East Asia and South Asia

continue to be mostly government-run, usually bycentral government zone authorities (or example,the Republic o Korea, Singapore, and Bangladesh),state government corporations (Malaysia, India) orministerial departments [Taiwan, (China)].

Traditional export processing zones have played a keyrole in the development o export sectors in a num-

ber o Asian economies, including Sri Lanka, Taiwan

(China), and Malaysia. However, only a ew o theseeconomies have been able to break away rom low-skilled textiles and apparel manuacturing into highervalue-added manuacturing and services. Thailand,Malaysia, and Taiwan (China) are all oten pointedto as models in utilizing their zones to both promote

and diversiy their export bases. Each o these econo-mies has succeeded in moving rom low value-addedmanuacturing to attracting investment and encour-

TaBlE 14

Zne Devepment Rnkings

Number o zones Employment (thousands) Exports (US$ millions)

Regins asi nd the Pcic/ltin asi nd the Pcic/ltin asi nd the Pcic/ltinameric/Centr nd Estern americ/Centr nd Estern americ/Centr nd EsternEurpe nd Centr asi/ Eurpe nd Centr asi/ Eurpe nd Centr asi/Midde Est nd Nrth aric Midde Est nd Nrth aric Midde Est nd Nrth aric

Cuntries Chin 187 Chin 50,000 Chin $145,000Vietnm 185 Indnesi 6,000 Mysi 117,013Hungry 160 Meic 1,300 Hng Kng (Chin) 101,500Cst Ric 139 Vietnm 950 Irn, Ismic Rep. 87,289Meic 109 Pkistn 888 Irend 82,500Czech Repubic 92 United arb Emirtes 552 Czech Repubic 68,626Phiippines 83 Phiippines 545 Indi 49,000Dminicn Repubic 58 Suth aric 535 ageri 39,423Keny 55 Thind 452 argentin 36,478Egypt, arb Rep. 53 Ukrine 387 Phiippines 32,030Pnd 48 Mysi 369 Kre, Rep. 30,610Nicrgu 34 lithuni 369 Tunisi 20,544Thind 31 Hndurs 354 Bngdesh 11,716Jrdn 27 Hng Kng (Chin) 336 lithuni 11,404United arb Emirtes 26 Tunisi 260 Meic 10,678

Notes: Ecudes znes in oECD cuntries. as, r Indi, the updted FIaS dtbse using WEPZa dt shws 341 znes hving received npprv, but ect pertin gures r Indi re nt vibe. accrding t WEPZa, dt n eprts rm znes is nt esiy vibe ndmkes it dicut t issue meningu rnkings.Sources: BeringPint; Ilo dtbse; WEPZa (2007); FIaS reserch.


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aging exports in a wide range o industries, including

electronics assembly and component manuacturing

(Thailand, Malaysia, and Taiwan, China), automo-

tive assembly (Thailand), and chemical processing

(Thailand).

A trend towards private zone development in Asia

has developed recently, particularly in the Southeast

Asian countries. In the early 1990s in Thailand and

the Philippines, or example, the decision was taken

to stimulate the development o private zones and

industrial parks rather than expand public ones; the

Philippines has completely eschewed the develop-

ment o new public sector zones since new legislation

was passed in 1995. Vietnam has relied mostly on

private zone developers rom the very start o its

program in 1991 with the establishment o the

private Tan Thuan EPZ in Ho Chi Minh City.Indonesias bonded zones are in government hands,but its over 100 export-oriented industrial estates arealmost wholly privately developed and run.

While most zones host traditional light manuactur-

ing and assembly-style export processing activities,Asia has taken the lead in promoting large-scale ree-ports. Following the phenomenal success o Chinasreeports (Box 4), a number o other countries in theregion have sought similar results, including:

n The Philippines, which converted a number oormer U.S. military bases into large-scale ree-portsSubic Bay and Clarkwith impressiveresults.

n

Indonesia, which provided bonded zone statusto Batam and Bintan islands, located 20 minutesaway rom Singapore.

n India, which has launched a major reeportdevelopment initiativesome 26 reeports havebeen approved or development, 5 o whichare underway, several by leading private sectorconsortia.

n The Republic o Korea has initiated a majorlarge-scale Free Economic Zone development

program, with three large-scale zones beingimplemented by private property developmentconsortia; it has also designated Cheju island asa Free International City with special benets.

A number o Asian countries have also implementedspecialized zones or nancial services, inorma-tion technology, science-based industries, and otherindustries requiring tailored inrastructure, acilities,and business development services.

Middle East ad north Arica

Several countries in the Middle East were earlyadopters o ree zones. The Arab Republic o Egypt,the Syrian Arab Republic, Israel, and Jordan, orexample, established government-run zones in the1960s and 1970s, at about the same time that zones

were rst set up in the Philippines, the Dominican

Box 3

ZonaAmerica Business ndTechngy Prk, Uruguy

ZonaAmerica is ne the eding-edge speciecnmic znes riented t IT, stwre, reginhedqurters, nd bi-techngy nd eectrnicspertins.

Tt Cnsuting Services (Indi) is mng theeding cmpnies engged in stwre devep-ment r the Spnish-speking mrket.

Empes speciized ciities prvided bythe zne incude:

n Fiber ptic nd Wi netwrk

n Teeprt nd micrwve inks

n Internet security nd n-site hep desk

n Inteigent buidings

n Wireess perimeter security

n Reserch b ciities

n Business services center

n Medic nd dycre ciities

Source: www.znmeric.cm.


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Republic, the Republic o Korea, and Taiwan(China). The majority o zones in the Middle Eastand North Arica region are ree trade zones (Table23 in Annex 2), aimed at acilitating trade withtheir host countries. Though many o these zonespermit manuacturing, trading and associated activi-ties (or instance, packaging and repackaging, breakbulk) remain predominant. With a handul o excep-tions, the economic contribution o zones in theMiddle East has been negligible compared to zoneprograms in the Far East and Latin America, largelydue to their traditional ocus on trading activitiesrather than manuacturing. The notable exceptions

to this are zones in Egypt and Jordan, which havedeveloped a manuacturing ocus. Enterprises in thequalied industrial zones (QIZs)10 in Jordan, orexam

sezs - performance, lessons learned and implications for zone development

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