What are Export Processing Zones (EPZs)?

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An export processing zone, or EPZ, is an area set up to enhance commercial and industrial exports by encouraging economic growth through investment from foreign entities. Incentives such as tax exemptions and a barrier-free environment are the main attractions of an EPZ.  

The main goals and benefits of an EPZ are growth from foreign exchange earnings through nontraditional exports, creation of jobs to assist in income generation and develop labor skillsets, the attraction of direct foreign investment, and fostering of transfer of technology.

The History of Export Processing Zones

Export Processing Zones first appeared in the 19th century in the form of free trade zones at ports located in Singapore, Hong Kong, and Gibraltar. Formally implemented in the 1930s, EPZs encourage foreign investment in a country. 

By the 1970s, export processing zones gained popularity to the point where many countries used the mechanism to boost their economy through investment from more advanced nations. In 2006, approximately 130 countries founded over 3,500 EPZs. Some of these zones were so extensive that residential neighborhoods were actually established within the zone, such as in Chinese Special Economic Zones.

EPZs have now evolved to the point where they can include resorts, designated finance zones, technological parks, and centers dedicated to logistics.

Features of the Export Processing Zone

Although export processing zones are located in different geographic regions, they do share some commonalities:  

1. Companies based in an EPZ tend to benefit from tax concessions that are generally long-term in nature.
2. Imports of materials and goods for export are duty-free.
3. While parts of countries that do not contain EPZs can remain underdeveloped in terms of technology and infrastructure, EPZs are fitted with advanced communication facilities and enhanced infrastructure. These zones also provide subsidies for utilities and rent to their occupants. 
4. EPZ zones can accommodate both domestic and foreign firms; they even offer the opportunity for joint venture operations.
5. The zones are typically located in the vicinity of ports of air and sea, therefore making the import and export process more convenient.
6. Companies do not require as much government approval for practices as firms outside of the zone, with labor laws being more flexible.

Differentiating factors of EPZs are related to the management and quality of goods, services provided, and facilities. EPZs can be managed either publicly or privately.

Disadvantages of Export Processing Zones

There are significant benefits associated with the establishment of an EPZ, with countries such as China, Indonesia, and South Korea boasting great benefits. However, countries like the Philippines have faced poor performance from EPZs. In this example, the cost of establishment of the facilities has outweighed the gains in profits. Other disadvantages include:

1. Labor that is skewed mainly toward the female population leaving the problem of unemployment of the male population unresolved.
2. In some situations, employees work excessive hours in unsafe conditions such as extreme heat, around faulty machinery, and in buildings that are not routinely inspected and maintained. 
3. Wages are typically low, often below that of the required country minimum wage.
4. Most employees have to accept the previously mentioned working conditions as trade unions, and labor movements are not allowed. 
5. Due to the competitive nature of EPZs, workers often cannot expect any improvement in conditions as operating costs are purposely kept low to attract investors.

Image Credit: MAGNIFIER / Shutterstock