Export Processing Zones (EPZs)
MODULE 3:  Economic Impact of Export Processing Zones

What is the difference between exports and net exports?

Why do foreign investors buy their materials elsewhere?

Do local companies benefit from EPZs?

Foreign exchange earnings are one frequently cited benefit derived from EPZs. However, only 3.5% of global exports from developing countries came from EPZs in 1988. In addition, about half of the content of EPZ goods are imported materials, especially in the electronic and textile industries common in EPZs. With considerable foreign exchange spending required to merely produce the goods, the foreign exchange gains from EPZs tend to be only 15-20% of the total value of exports.

The high imported content in EPZ goods is also an indication EPZs producers do not link with the host economy to use local production and producers for inputs except for packaging materials and simple engineering inputs. This is because EPZ companies are free to choose inputs at the best price and quality available. Often firms in the host countries are not able to produce inputs at the required standards or at internationally competitive prices. In Sri Lanka, Indonesia and Malaysia for example, local batik industries were unable to sell their fabrics to EPZ textile firms. In general, according to the ILO, EPZ firms tend to develop far fewer links with host economy than conventional foreign companies which at least buy some of their inputs locally.

Do EPZs help to diversify and develop manufacturing?

Divide into two groups to discuss and report your discussions in plenary:

GROUP 1

Look at the table below:

  What are the most common industries in the EPZs?

Why do you think only certain industries come into EPZs?

GROUP 2

Look at the quote and stories below:

Rosalia's Story

Rosalia is a 31-year old woman from the Cordillera who has been employed as a production specialist at Texas Instruments for the last five years. She is a commerce graduate from one of the universities in Baguio City. She is married to a church pastor and they have two children aged 3 years and 1 year.

In 1988, Rosalia applied to work for TI after more than 6 years of unemployment. Upon application she took an IQ test and was later scheduled for an interview. She was interviewed six times by different TI personnel such as the personnel manager, staffing manager and 2 supervisors. She passed the test and the interviews, after which she underwent an orientation session.

During the three-day orientation, she found out that no workers unions exists in the company. She was told that if she or any of the newly-hired workers wanted a union then they had better not enter the company. This condition was also stated in the employment contract she signed the orientation.

Rosalia started to work as a production specialist on probationary status for six months. During this period, she received less than P100.00 per day. When she was regularised after six months, she started to earn P153.00 per day. After 5 years of work with the company, she now receives P170.00 a day for doing the same work as a production specialist. Rosalia has an average gross pay of P4000.00 per month. However, this is not enough to support all of her family's needs.

Rosalia's net pay or take home pay only amounts to P3442.00 per month after all the deductions are made. P400.00 of her salary goes to withholding tax, P133.00 goes to her SSS and P25.00 goes to her Medicare. Her take home pay added to her husband's allowance from the church which is P2000.00 per month is what she budgets for their family expenses.

The expenses of Rosalia's family are not exceptional for a married worker. Below is Rosalia's family usual expenses in one month compared to what she and her husband earn. The remaining cash goes into their savings which they use in cases of emergency. If they need a big amount during a crisis, Rosalia has no choice but to borrow from friends. However, she considers herself luckier than the workers in other companies because, according to her, "TIers are paid better". When asked if her work is fairly compensated, her answer is negative because she says: "my job is very difficult. I have to operate four machines simultaneously. I am always running from one machine to another, or else, standing to make sure that the machines are running in good order. I never go to the comfort room unless it is break time. I never have the chance to sit down while working."

The World Bank says that

"Wages in the zones tend to be equal to or higher than wages for comparable jobs outside the zones and higher than the opportunity cost of most of those employed. Working conditions in EPZs tend to be distinctly better than those outside the zones. Safety and health conditions in EPZs are generally better than the conditions in plants outside EPZs in the same economies, partly because the EPZ plants are cleaner, better lighted, better ventilated, and more spacious. In simpler industries, such as garments, with inexpensive capital equipment, most EPZ plants work only one shift. However, some EPZ plants, particularly in electronics, work three shifts and others two, so that many EPZ workers are obliged to keep unconventional hours.... Since EPZs are implicitly fiercely competitive, distortions of wages are rare and wage increases seldom accelerate beyond productivity increases unless exchange rates become overvalued.

What are wages and working conditions like in EPZs?

Do you agree with the World Bank statement?

What kind of wages do EPZ workers earn?

What kind of jobs do EPZs provide?

There is very limited technology transfer from EPZ companies to local firms. Successful technology transfer to such indigenous companies could create competition for EPZ firms and is therefore not in their interest. EPZ decisions are dominated by the direct interests of the investors and not by the national development aspirations of the host countries. It Js also important to ensure that technologies used are safe and do not damage the environment. Compared with EPZ companies, even the conventional foreign investors outside EP s are rather more integrated into the host economy and may provide some technology transfer and upgrading of local industries.

Hence instead of EPZs contributing to higher levels of industrial development and diversification they actually lead to "industrial monocultures", very few and specific types of industry, usually textiles and clothing or electronic. The ILO attributes this to the way investors in EPZs attract newcomers in the same industry.

EPZs attract labour intensive, simple assembly line processes without advanced physical capital. EPZ workers have no control over the production process. Most EPZ workers are engaged in low skill activities, and knowledge transfer merely occurs through on the job training. EPZ investors often to employ their own nationals in managerial and technical positions. This is partly in order to avoid the costs of training nationals of the host countries, but also because they plan to take their experienced and skilled employees with. them when they move on to 'greener pastures'. Companies which are exclusively or at least partly owned by local capital could be expected to place more emphasis on training of local people for specialised jobs compared to those companies which are foreign owned.

In a SATUCC workshop with unions from Mauritius, unions noted that:

"EPZ jobs are low skills assembly line jobs, although a few skilled jobs have been created. This signals a low wage strategy in EPZs that will undermine income growth for EPZ workers. Women workers now do double work, work in the factory and in the home. The jobs that women fill are unskilled jobs and there is a risk that as jobs become more skilled women will lose employment. There has been little investment and slow shift in division of labour in the home to lessen the workload for women. Low incomes are an increasing problem as the Mauritian rupee devalues and the cost of living rises, so that more people per family have to work to earn enough to meet the cost of living. Piece wage rates in EPZs are generally lower than in other sectors and encourage high intensity of work to earn incomes that are equal to or above other sectors.

EPZ workers have lower retirement benefits than other workers. Some EPZ producers in the 1990s have left for lower wage economies while others have imported mainly female labour from low wage economies like Sri Lanka, Bangladesh and Pakistan. This is reportedly due to shortages of labour but is actually due to their captive more exploitable nature."

Look at related newspaper articles.

What do they tell about costs and benefits of EPZs?

In plenary discuss listing on two flip charts, one labelled 'COSTS', one labelled 'BENEFITS', the direct and indirect costs and the benefits of EPZs.

Which are higher, the costs or the benefits?

What may be the longer term costs of EPZ development?

EPZs have direct financial costs such as costs of infrastructures, low wages, advertising and promotion. They also have indirect costs such as subsidies, lost taxes and tariffs. They also have costs of financial instability, dependency on foreign investment, the downward pressure of competition and the pressure on local industry created by special conditions for EPZs.

These costs can be enormous. The benefits in terms of industrialisation are limited by the lack of diversification. of technological transfer and of links with domestic producers. Do the employment benefits justify these costs?

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