The economics of export processing zones revisited

The accumulation of empirical evidence that outward-oriented developing countries have generally performed better than inward-oriented ones in terms of growth, industrialisation, job creation and other macroeconomic indicators provides an essential lesson for both policy-makers and development economists worldwide. The acknowledged importance of trade and non-traditional exports for development
and rapid economic expansion in South-East Asia has inspired many developing countries to encourage export-oriented activities. Various instruments to promote non-traditional exports exist; this article will focus on the so-called export processing zones (EPZs).’
EPZs have long been a controversial issue among economists. The theoretical literature has most often argued that EPZs are welfare-reducing for the host country, but the extraordinary growth performance in, for example, China’s free trade areas, Mauritius’ EPZ and the Macao EPZ has stimulated a new interest and suggests that economic theory may lag behind in explaining the economic
growth possibilities connected with EPZs. Some of the existing theoretical approaches, such as the neo-classical, have effectively assumed away the reasons for the EPZs, while others, in turn, have overlooked possible beneficial effects from their establishment. One such important effect may be the curufytic role of EPZs for the host country. In distorted, low-income economies lacking industrial capability, EPZs may initiate export-led industrialisation by bringing
a critical mass of knowledge to the country. Furthermore, EPZs may also have a catalytic effect on some of the multinational corporations entering the zones, especially inexperienced mncs. Several of the mncs emanating from developing countries, for example, started their foreign production venture by investing in Ems.