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Export processing zones growing steadily

GENEVA (ILO News) - As global competition for jobs and foreign investment intensifies, Export Processing Zones (EPZs) are proliferating worldwide, growing from just a handful a few decades ago to over 850 today, according to a new report 1 published by the International Labour Office.

Press release | 28 September 1998

GENEVA (ILO News) - As global competition for jobs and foreign investment intensifies, Export Processing Zones (EPZs) are proliferating worldwide, growing from just a handful a few decades ago to over 850 today, according to a new report 1 published by the International Labour Office.

While acknowledging the huge economic and employment potential of EPZs, the ILO warns that their rise to ubiquity on the global manufacturing scene poses increasingly serious questions for the world's 27 million strong EPZ workforce (as much as 90 per cent of whom are female) and for the legions of development strategists who see EPZ investment as a quick way for developing countries to acquire the industrial skills and resources necessary to compete in the global economy.

The report defines EPZs as "industrial zones with special incentives to attract foreign investment in which imported materials undergo some degree of processing before being exported again." In some countries, these zones are indistinguishable from organized, modern business complexes, but in many others they take the form of ring-fenced enclaves of industrial monoculture. No matter what form EPZs take, the free trade, foreign-investment and export-driven ethos of the modern economy has transformed them into "vehicles of globalization."

The ILO analysis says that while EPZs are undoubtedly huge employment generators, particularly for women in developing countries, too many of them continue to be hampered by a reputation for low wages, poor working conditions and underdeveloped labour-relations systems. In addition, the ILO says that while the combination of direct manufacturing investment, employment and technology transfer can provide an important boost up the development ladder, the evidence thus far points to pervasive absence of meaningful linkages between the EPZs and the domestic economies of most of the host countries.

While many zone-operating countries had anticipated that the low-skilled processing and assembling of imported parts would be a necessary, but temporary first step up the ladder toward higher value- added manufacturing, only a few (for example Malaysia, Mauritius and Singapore) have actually managed to develop a wide range of domestic export industries on the basis of EPZ investment.

These and other concerns relating to the employment and development potential of EPZs will be examined at an International Tripartite Meeting of Export Processing Zone-Operating Countries to be held at the ILO headquarters in Geneva from 28 September to 2 October. Delegations representing employers, workers and governments of 10 countries 2 are expected to participate.

Global Growth in EPZs

The ILO report, which was prepared for the meeting, says that the largest numbers of zones are in North America (320) and Asia (225). But the concentration of EPZs is rising in developing regions such as the Caribbean (51), Central America (41), the Middle East (39) and the figures are likely to increase throughout the world. The Philippines, for example, currently has 35 EPZs operating but has approved plans for 83.

Currently, the United States and Mexico together are the most active EPZ operators, with respectively 213 and 107, most of which are maquiladora assembly plants clustered around border cities such as Tijuana, Ciudad Juarez and Matamores. Maquila plants in these cities are linked to production chains on the US side of the border. Originally established in 1965 as an emergency measure to combat unemployment, the maquila industry today produces exports worth US$5 billion annually, more than 30 per cent of total exports from Mexico. Manufacturing investment in the maquila sector is expected to grow in the aftermath of the elimination of tariffs resulting from the North American Free Trade Agreement, particularly in such areas as clothing and textiles.

Other countries in the Western hemisphere are increasingly home to EPZs established largely to provide manufactured goods for sale into the US market: the Dominican Republic has 35 EPZs, Honduras 15 and Costa Rica 9. The report cites Costa Rica as a case in point for how smaller, less populous countries can profit from zone strategies. Since 1981, EPZs in Costa Rica have created almost 49,000 jobs, mostly in the garment and electronics sector, which have the added benefit of diversifying the country's exports away from traditional sectors such as bananas and coffee. Nearly 30 per cent of all the manufacturing employment in Costa Rica is now generated by enterprises operating in EPZs. The country's unemployment level is down to 5 per cent.

In Asia, China alone has 124 EPZs, many on the scale of full-sized urban and industrial developments, complete with community infrastructure such as education, transport and social services. Bangladesh, Pakistan and Sri Lanka have extensive EPZ strategies. In Africa there are 47 EPZs, 14 of which are in Kenya. In Mauritius, the entire territory has been zoned for export processing and the judicious management of EPZs is probably the major contributing factor to that country's economic growth.

Distribution of EPZs by region, 1997

No. of zones
Key countries
North America 320 United States - 213, Mexico - 107
Central America 41 Honduras - 15, Costa Rica - 9
Caribbean 51 Dominican Republic - 35
South America 41 Colombia - 11, Brazil - 8
Europe 81 Bulgaria - 8, Slovenia - 8
Middle East 39 Turkey - 11, Jordan - 7
Asia 225 China - 124, Philippines - 35, Indonesia - 26
Africa 47 Kenya - 14, Egypt - 6
Pacific 2 Australia - 1, Fiji - 1
Total 845

Source: WEPZA and ILO.

Growth in the Asian Tiger economies was also fuelled by EPZs. For three decades, the state of Penang in Malaysia proved highly effective in attracting quality investment in hi-tech manufacturing, with the number of plants increasing from 31 in 1970 to 743 in 1997 and the number of employees rising from around 3,000 to nearly 200,000 during the same period. Similarly, much of the growth in technological and financial prowess in Singapore developed on the basis of investments and steady productivity increases in EPZs, which succeeded both in raising the quantity and quality of jobs offered and in building the necessary linkages between the domestic and international economies.

So What is Wrong with EPZs

The ILO Meeting will debate the report and examine ways in which the labour and human resource problems of EPZs can be addressed in such a way as to improve wages and working conditions and increase productivity and interlinkages between EPZs and the domestic economies of the countries in which they are located. Special attention will be given to the plight of women workers in EPZs. Women not only make up the majority of the EPZ workforce, but they tend to suffer more from the inherent problems of EPZs, including the long working hours, low wages, the almost total absence of social welfare facilities (such as child care) and the often arduous nature of the work.

The report says that "it is a regrettable feature of many zones that both male and female workers are trapped in low-wage, low-skill jobs. They are viewed as replaceable and their concerns do not receive sufficient attention in labour and social relations." The work force in EPZs worldwide is usually female in majority, but in certain activities, notably textiles, garment manufacturing and electronics assembly, women can account for 90 per cent or more of the workers.

The ILO report identifies five factors that contribute to this unsatisfactory state of affairs:

  • Most zone operating countries have an abundant supply of available labour, which tends to keep wages down, although the negative image of much zone work sometimes obliges to pay a premium to get labour;
  • Zones are particularly attractive to labour-intensive industries such as garments and footwear and assembly of electronic components, which use relatively basic technology and thus require a low-skill workforce. High labour turnover is not a problem because replacements are abundant;
  • The generous incentives and low costs to entry attracts simple processing industries to invest in the zones; such companies often lack professional management, particularly in human resources and management. They also tend to be unable or unwilling to invest in new skills, technology or productivity improvements. They are also likely to provide few if any social benefits to their employees;
  • The labour intensive nature of much processing and assembly work means that enterprises compete largely on the basis of price; with labour costs a large component of total costs, companies see labour as a cost to contain rather than an asset to develop;
  • Very few governments have managed to implement policies to ensure that zone investors transfer technology and skills to local industry and workers, with the result that the human capital base remains low.

According to the ILO, the shortage of appropriate human resource development strategies may well limit the potential for EPZs to improve productivity and upgrade jobs. The report says that "labour relations and human resource development remain two of the most problematic aspects of zone functioning." Mechanisms for improving labour standards are often inadequate: "The classic model of labour regulation - with a "floor" or framework of minimum labour standards and free trade unions and employers coming together to negotiate binding agreements - is extremely rare in EPZs."

According to Mr. Auret Van Heerden, the main author of the report, "the frequent absence of minimal standards and poor labour-management relations have predictable outcomes, such as high labour turnover, absenteeism, stress and fatigue, low rates of productivity, excessive wastage of materials and labour unrest are still too common in EPZs."

The Law of the Zone versus the Law of the Land

The ILO report finds that in most but not all of the major EPZ operating countries the national labour and industrial-relations legislations are applicable in the zones. The report notes that in Singapore, which has a very strong tradition of tripartism, "there is no question of the investment policies infringing workers rights." The authors note that the policy dates back to the 1960s, a time when Singapore was desperately in need of investment and at a very early stage of industrial development.

In Mauritius, one of the most successful of all EPZ operators, the zone workers "are covered by the labour laws and labour relations system." However, a 1993 Industrial Expansion Act has provided enterprises with greater flexibility, notably in the calculation of hours of work for purposes of overtime, which has been persistently criticized by the labour movement. Mauritius has a high degree of trade union activity in some sectors of the domestic economy, but in the EPZs only 9 per cent of the workers are unionized.

The Philippines, according to the ILO report, "provides an excellent example of a zone-operating country in which no adequate system of labour regulation and labour-management relations existed in zones, but which, after years of industrial conflict, made the necessary reforms and established a stable system of labour-management relations", including respect for trade union rights. However, not all zones in the Philippines are developing apace. The report notes that "a number of private zones appear to have adopted a "Trade union free" policy which conflicts with the labour laws."

The Dominican Republic, like the Philippines went through a period of labour unrest before instituting reforms which, the report says,"have gone a long way towards enhancing respect for labour standards and improving labour relations in the zones." Today there are 14 trade unions operating in the zones, although they are said to face considerable difficulties in establishing collective agreements. EPZs in Costa Rica are also covered by national law, "however trade union activity in Costa Rica is not well developed and the free zones are no exception," the report says.

There are very few countries which openly and officially exclude EPZs from the national labour legislation and system of labour-management relations. However, in Bangladesh, EPZs are excluded from the scope of the country's Industrial Relations Ordinance, which provides for organising and bargaining rights in other sectors. There are, however, labour regulations that do apply in the zones relating to such matters as job classification, minimum wages, leave, holiday periods, termination of employment and welfare facilities such as clinics and canteens.

Pakistan has also excluded its zones from the scope of the Industrial Relations Ordinance and prohibited all forms of industrial action in them.

Panama is the only country in Central America to have adopted special labour legislation for its EPZs, replacing the labour code. Initial legislation sought to strictly limit the influence of trade unions in EPZs. After much opposition and some revision to restore the recognition of trade union freedoms, the report says "the controversy has not been fully resolved and freedom of association is not well established in the zones."

The ILO insists that only EPZs with high-quality human resources and stable labour relations will be able to meet the high standards for speed, cost and quality in the global economy. If the full employment and productivity potential of EPZs is to be met, a proper human-resource development strategy will be necessary. If EPZs are to realize the full knock-on economic effects desired by the host countries, greater linkages with the domestic economies need to be forged. Finally, much needed investments in social infrastructure, particularly of the sort needed by women workers (for example, child care facilities, safe transport and sanitary living and working conditions) could go a long way toward making EPZ employment more stable and attractive.

1 Labour and social issues relating to export processing zones. International Labour Office, Geneva, 1998. ISBN 92-2-111357-4. Price: 15 Swiss francs.

2 Bangladesh, Barbados, China, Costa Rica, Dominican Republic, Mauritius, Mexico, Philippines, Sri Lanka, Tunisia.