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Export Processing Zone (EPZ) and Its Role on Regional Development

Dr. Pranab Kr Das, Assistant Professor, Dept. of Geography, Sree Chaitanya College, Habra

Introduction:

The contemporary development strategy emphasis upon the ‘outward orientation’ of countries, i.e. exports. Export promotion is now seen as an important policy for economic growth in developing countries. Various measures are being adopted to promote export competitiveness by governments in these countries. In this scenario, export processing zones (EPZs) have become rather popular trade policy instruments due to their catalytic role in outward orientation to the economies. Over the past four decades, export processing zones have become popular. In 1970 only a handful of countries permitted such zones. There were 176 zones across 47 countries in 1986. In 2003 the number of zones increased to over 3000 across 116 countries, the majority of them are developing countries.

What is Export Processing Zone or EPZ?

An export-processing zone (EPZ) is a specific type of FTZ usually set up in developing countries by their governments to promote industrial and commercial exports. According to the World Bank, “an industrial estate, usually a fenced-in area of 10–300 hectares that specializes in manufacturing for export.” (World Bank 1992, p. 7). 

Export processing zone can be defined as a “territory within a certain geographical location where the government allows the import of various factors of production i.e. capital, machinery, labour etc. without levying any taxes so that goods can be manufactured and exported from the country”.

   It’s mean the EPZ are specialized for export purpose only, however, few countries have liberalized this rule, for example, 

Mexico allows 20–40 percent of its zones’ output to be sold domestically, in India a minimum Export performance (EP) & Net Foreign Exchange Earning as % of exports (NFEP) is required which varied in different periods. 

The primary goals of an export processing zone are:

• To provide foreign exchange earnings by promoting non-traditional exports.

• To provide jobs to alleviate unemployment or under-employment problems 

• To attract foreign direct investment (FDI) and technological transfer, knowledge for 

non-traditional production system. 

Some common features of EPZs:

  1. They allow duty-free imports of raw and intermediate inputs and capital goods for export production.
  2. Government red tape is streamlined, allowing “one-stop shopping” for permits, investment applications, and the like.
  3. Labour laws are often more flexible than for most firms in the domestic market.
  4. Firms within zones are given generous, long term tax concessions.
  5. Communications services and infrastructure are more advanced than in other parts of the country.
  6. Utility and rental subsidies are common.
  7. Zone firms can be domestic, foreign, or joint ventures. Foreign direct investment plays a prominent role.

History of the Export Processing Zone:
The notion of the EPZ may have originated from free trade zones established in major ports such as Hong Kong, Gibraltar, and Singapore during the nineteenth century. Some of the first free trade zones allowed imports and exports free from custom formalities so that goods could be re-exported quickly. The EPZ has been used by developing nations since the1930’s to encourage foreign investment. The mechanism is called EPZ is some countries, while it can also be called Free Trade Zone (FTZ), Special Economic Zone (SEZ) and maquiladora, such as found in Mexico. Some of the first EPZ’s were found in Latin America, while in the US, the first free trade zone was created in 1934. Since the 1970s, developing nations have seen EPZ’s as a way of stimulating their economies by encouraging investment from the developed world. In 2006, 130 countries had established over 3500 EPZ’s within their borders, with an estimated 66 million workers employed in those EPZ’s. Some EPZ’s are single factory locations; whereas some, such as the Chinese Special Economic Zones, are so large that they have a resident population.

 Export Performances:   

 The overall benefits to the host country are not clearly measurable as there are the initial development costs of creating the infrastructure for the EPZ, as well as the tax incentives offered to foreign investors. Where studies have been performed on EPZ’s throughout the world, some nations appear to have benefited significantly from the introduction of EPZ’s such as China, Bangladesh, South Korea, and Indonesia, Malaysia, Philippines, Taiwan, Vietnam etc. It has also found that some have not performed as well, such as India, Pakistan, Sri Lanka where the high cost of infrastructure outweighed the benefits. Studies have concluded that countries with a surplus of cheap labour can use EPZ’s to increase employment and generate foreign investment. 

   Electronics and garments are the major exports from EPZs and can be clearly linked to FDI, thus data for these key products highlight recent trends. Currently, 

  • EPZs in Malaysia and Mexico are the two main producers of television receivers. Television assembly in Malaysia reached its peak in 1995 with exports worth US$2.3 billion, or 10 per cent of world exports. Starting from a low base in 1990, Mexican TV production accounted for 1999 for almost one-quarter of world exports. 
  • With the successful implementation of EPZs China, Taiwan, Malaysia and Mexico dominated the telecommunications equipment business. During 2007, 600 million mobile phones were made in China which accounted for over 25 percent of the global production
  • Malaysia and the Philippines have a combined share of 10 per cent of the world exports of transistors and valves. 
  • Bangladeshi exports of garments earn approximately $22 billion/year. 93% of export goes to the EU and US. Bangladesh is the 3rd largest exporter of clothing and other apparel to the US and 60% of cloth of Europe are sourced from Bangladesh.
  • In 2010 Intel has started its biggest chip plant in Vietnam, which produced 60% of global cheap. 60% of USB flash drives are produced in Malaysia, Taiwan and Vietnam. 
  • EPZ exports of auto parts in Mexico (UNCTAD (2001), CD-ROM) provide another example of the diversification and expansion of exports away from garments and pure assembly products.

Evolution of EPZs in India:

The economic policy of the 1960s which were geared towards selective import liberalization and export promotion marked the development of EPZ’s in the country. The first EPZ in India which was also the first in Asia was set up at Kandla in 1965. The proposal for setting up the Kandla free trade zone was mooted in 1961, to facilitate the development of the Kutch region, to ensure greater utilization of Kandla port and to create employment opportunities in the Kandla. 

  The second EPZ in the country, the Santa Cruz Electronics Export Processing Zone (SEEPZ), was set up in Mumbai in 1974. This EPZ was developed specifically for processing electronics goods and was expected to generate employment opportunities and facilitate the technology transfer. SEEPZ was initially planned as a single product zone for processing electronics goods but by 1986 it was made a two product zone providing for gems and jewellery complex as well. 

  Four more zones were set up in the mid-eighties at Noida (NEPZ), Chennai (MEPZ), Cochin (CEPZ, Kerala), and Falta (FEPZ, West Bengal) and the seventh EPZ in the country was commissioned at Vishakhapatnam (VEPZ, Andhra Pradesh) in 1994. 

   Initially, the Central Government was solely responsible for establishing EPZ, but this policy was amended in 1994 to enable state governments, autonomous agencies and the private sectors to participate in the development agencies and operation of EPZs. Following the implementation of this policy, one EPZ was developed by the private sector in Surat. A joint sector EPZ (now SEZ) has been approved for Greater Noida (UP). In terms of export performance, employment generation and FDI inflow EPZs failed in India but considering the need for better export performance and infrastructure building, the central government came up with SEZ policy in 2000 and In 2000, all the EPZs were converted into SEZs. 

Figure: Initial EPZs of India

Initial Export Processing Zones of India:

Name of EPZsLocationYear of EstablishmentArea in  Sq.km
Kandla Free Trade Zone (KAFTZ),Kandla, Gujarat  1965  2.99
Santa Cruz Electronic Export Processing Zone (SEEPZ),S. Cruz, Maharashtra1974  0.38
Cochin Export Processing Zone (CEPZ),Cochin, Kerala    19940.40
Falta Export Processing Zone (FEPZ),Falta,West Bengal  1994  1.12
Madras Export Processing Zone (MEPZ),Madras, Tamil Nadu  1994  1.04
Noida Export Processing Zone (NEPZ),Noida, Uttar Pradesh1994  1.22
Visakhapatnam Export Processing Zone (VEPZ),Visakhapatnam, Andhra Pradesh19941.43
Source: Wikipedia

While the Santa Cruz Electronics Export Processing Zone (SEEPZ) is meant exclusively for the exports of electronics and gems and jewelry, all other zones are multi-product zones. 100% foreign equity is welcome in EOUs and EPZs.

Objectives of Govt. of India:

 The main objective of the SEZ scheme according to the finance and commerce ministries is to create duty –free zones with world-class infrastructure, an internationally competitive production environment and fast track clearance system for attracting private investments, especially foreign direct investment (FDI) for setting up the export-oriented unit. The broad objectives of the SEZ policy are: 

  1. Attract Foreign Direct Investment (FDI).
  2. Earn foreign exchange and contribute to exchange rate stability.
  3. Boost the export sector, particularly non-traditional exports.
  4. Create jobs and raise the standard of living.
  5. Transfer new skills and expertise to local human resources.
  6. Create backward & forward linkages to increase the output and raise the standard of local enterprise that supply goods and services to the zone. 
  7. Introduce new technology.
  8. Develop backward regions by locating such zones in these areas and attracting industries. 
  9. Provide a stimulus to the economy.
  10. Test key policy reforms in these ‘pilot areas’.

The procedure of Setting up EPZ Unit in India:

The EPZ units in India can be set up by the state governments in either public or private sector or even under the joint venture of both. The EPZ units in India are 100 percent export-oriented and the government of India along with the respective state governments have granted certain incentives for the units that are set up in the export processing zones.

Some of the incentives are;

  1. The EPZ units in India are entitled to obtain machinery, raw materials, components, consumables, and many more from indigenous or imported resources.

ii. The EPZ units are free of all kinds of excise or customs duties.

iii. The products manufactured by such units have to be 100 percent export-oriented and the units must have the NFEP (Net foreign exchange as a percentage of exports) as per Exim policy.

iv. All the exports made by the EPZ units in India are to be authorized by the development commissioner as per the export-import policy.

v. The entrepreneurs can choose their own locations but the manufacturing activities remain custom guaranteed.

vi. Fresh proposals or applications for setting up EPZ in India are duly revised by the development commissioner.

vii. Each of the units in EPZ in India offers infrastructural developments such as fertile land, adequate power and water supply, properly designed buildings for factories, roads, customs clearance, and a well-maintained drainage system.

  • EPZ and Tax Incentives in India:
  1. The farms of EPZ enjoy 100% exemption from income tax for a period of five years and after that 50% income tax exemption for a period of two years.
  2. 100% foreign direct investments (FDI) are allowed in the manufacturing sectors.
  3. There is the facility to hold foreign exchange receipts up to 70% in the account of Exchange Earners Foreign Currency.  
  4. 100% FDI is allowed on the import of raw material, capital goods, and consumables spares.
  5. The exported  products are free of levies, custom or excise duty, and all other taxes including the sales tax.

Three-tier management system in EPZs in India:

  1. Tier one is started with the Ministry of Commerce headed by the Commerce Secretary, which drafts and implements policies and reviews the performance of each EPZ.
  1. Tier two is headed by the Board of Approval (BOA), which is responsible for examination of proposals for opening up of new enterprises in the zone and which is headed by a person of the level of Additional Secretary.
  2. The Development Commissioner, who is the chief executive of the Export Processing Zone. The Development Commissioner has the power to supervise the day-to-day function of the zone. The Development Commissioner also looks after the administration, approval of investment, and enforces various regulatory provisions.

Analysis of the EPZs performance in India:

      Study shows that initially EPZs also witnessed high growth but gradually it started declining. In the early seventies, the growth rate of EPZs touched 77% but gradually it started coming down and declined to 7% in 1999-00. India had a very slow expansion in the initial phases of EPZ policy. Expansion in the zones started picking up in the 1980s in terms of employment but total investment remained low till the late 1980s. In the 1990s, investment also started increasing but not in satisfactory level. The share of FDI in total investment increased slowly from 12% in 1989 to slightly over 18% in 2000.

    Studies show that even small countries like Philippines has created 1.1 million jobs through these economic zones (KPMG Report, 2004) but despite being the first country to have EPZ in Asia, India failed to achieve a high employment rate. Dysfunctional policies, regulations, lack of single window clearance facilities, poor attitude of the officials, centralized governance, stringent labour laws, poor physical and financial infrastructure, all accounted for an undesirable investment climate and thus EPZ failed to create employment. Realising it In 2000, all the EPZs were converted into SEZs, and with new rules and incentives it was expected that FDI will pour in but a more detailed study of Noida SEZ shows a mere 0.4% growth in FDI investment after six years while in Chennai it just went up by 2.3%.

Difference between EPZ and SEZ in India:

           SEZs are a larger variant of EPZs. Both have a delineated area and permit duty free import of capital goods and raw materials; both aim to attract foreign investment for setting up export-oriented units by providing developed infrastructure. However, the objective of SEZs is much larger. While EPZs are industrial estates, SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecommunications hospitals, hotels, educational institutions, leisure and entertainment units, residential/industrial/commercial complexes, water supply sanitation and sewerage system and any other facility required for development of the zone. The scope of activities that can be undertaken in the SEZs is much wider and their linkages with the domestic economy are stronger. Resultantly they have a diversified industrial base. Their role is not export promotion but also regional development. Although the objectives of SEZ policy are quite similar to the objectives of EPZ policy in early eighties but there is significant difference between these two policies in terms of tax benefits and rules and regulations.

FeaturesEPZ in IndiaSEZ in India
FunctionEPZs appear to focus more on manufacturing and trading less on service.SEZs are generally open to all types of activities including manufacturing, trading and service.
Tax exemptionCompanies in EPZs were exempted from corporate tax for a block of 5 years in first 8 years of operations.Companies in SEZs enjoy a 5 year corporate tax holiday, followed by 50% exemption for 2 more years
Retention of foreign exchange earningsRetain 70% foreign exchange earnings in Exchange Earner Foreign Currency Account (EEFC).Retain 100% foreign exchange earnings in Exchange Earner Foreign Currency Account (EEFC).
Duty free imported raw materialAllowed, but duty free materials are to be utilized within 1 year.Allowed. These duty free materials are to be utilized within 5 years
Certifications of importsImports require attestation of Development Commissioner.Imports on self certification basis.
Customs inspectionRoutine customs inspections of import/export cargo.No routine examination of import/export cargo by Customs.
FDI approval processForeign investment promotion board approval is required for FDI.100% FDI investment through automatic route available for manufacturing companies.
Export performance (EP) & Net Foreign Exchange Earning as % of exports (NFEP) requirements.Minimum EP and NFEP required. (varies across industries and states)No minimum EP required. Positive NFEP required (varies across industries and states)
Duty recovery in case of failure to achieve positive NFEPFull duty recovery is imposed.Duty recovery is in proportion to shortfall.

Source: SEZ Authority, Ministry of Commerce and Industry, Government of India Available at sezindia.nic.in.

Advantage of an export processing zones:

Some common advantages of EPZs are;

  • It helps to boost the manufacturing sector the country and thus leading to the creation of job.
  • It helps to boost the GDP and individual income of a particular economy.
  • It helps to attract company to the particular country.
  • On the whole export processing zones help in welfare and development of a particular economy.

Criticism:

  1. Many a times companies dumb their goods in the domestic market which can lead to price wars and thus hampering the health of the domestic producer
  2. Many companies also tend to dump their waste in the host country which can pollute environment of the country.
  3. The International Labor Rights Forum (ILRF) have found that in some developing nations the majority of the workers in the EPZ’s are female and comprise as much as ninety percent of the cheap labor pool.
  4. Many economists have concluded that employment in EPZ’s means low wages, high work intensity, unsafe working conditions and suppression of labor rights. It is often true that the wages in EPZ’ s are higher than those available in rural areas of the same country, especially for women, it is not always the case that wages in EPZ’s are higher than those for comparable work outside the EPZ’s.
  5. Many governments that have created EPZ’s have acted against labour movement activities within EPZ’s. The various restrictions on labour movements that governments have taken include a total or partial ban on trade union activities, restriction of the scope of collective bargaining, and banning trade union organizers.
  6. Most recently in Bangladesh, the government’s policy of banning unions has only softened after the building collapse that killed over 1100 workers.
  7. Unsafe working conditions are a negative factor that is often associated with EPZ’s. Workers are expected to work long hours in physically dangerous conditions, including excessive noise and heat, unsafe manufacturing  equipment, and uninspected buildings. With no access to union representation, there is little that is done to change the situation in some factories.
  8. As more and more EPZ’s are created, there is an incentive to keep costs as low as possible to be competitive against other developing nations. This means that the workers continue to suffer the consequences of unsafe working conditions.
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