The Advantages and Disadvantages of Constructing Free-Trade Zones as an Industrialisation Strategy

Ensayo , 2014 , 23 Páginas , Calificación: 68

Economía de las empresas - Política económica

In pursuit of development, governments of developing countries have adopted different industrialisation strategies over the years. One of such approach to industrialisation is export –oriented manufacturing and the common policy instrument adopted to stimulate commercial export has been the establishment of free trade zones.
This paper tries to find out the possible benefits and disadvantages associated with the creation of free trade zones as a strategy for industrialisation. The first part tries to explain what constitutes free trade zone by various authorities on the subject, the types and origin of free trade zones. The second part identifies the various posits on the impact of free trade zone. The third section identifies some of the benefits and shortcomings of free trade zones as an industrialisation strategy. The final part makes up the conclusion and recommendations.

CONTENT

List of Tables

List of Graphs

Abbreviations

Abstract

Introduction

What is a free trade zone?

Overview of Free Trade Zones

Reasons for Establishing Free Trade Zones (FTZs)

Free Trade Zones and World Trade Organisation Agreement

Arguments on the Impact of Free Trade Zones

Benefits and Costs of Free Trade Zones as Industrialisation Tool

Foreign Direct Investments (FDI) Inflow

Increase in national exports and export diversification

Employment Effect on National Economy

Education/Training Benefits (Human Capital Development)

Linkages to the Domestic Economy

Environmental Regulations and Labour Law

Budgetary Impact on Government

Conclusion and Recommendations

References

List of Tables

Table 1: Top Ten Developing Countries with Free Trade Zones

Table 2: Regional Distribution of Free Trade Zones

Table 3: Evolution of Free Trade Zones

Table 4: Types of zones: ILO’s Evolutionary Typology

Table 5: Direct employment in Free Trade Zones

Table 6: Government revenue and costs from zone development

List of Graphs

Graph 1: The Share of EPZ export in Total Export

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Abstract

In pursuit of development, governments of developing countries have adopted different industrialisation strategies over the years. One of such approach to industrialisation is export –oriented manufacturing and the common policy instrument adopted to stimulate commercial export has been the establishment of free trade zones.

This paper tries to find out the possible benefits and disadvantages associated with the creation of free trade zones as a strategy for industrialisation. The first part tries to explain what constitutes free trade zone by various authorities on the subject, the types and origin of free trade zones. The second part identifies the various posits on the impact of free trade zone. The third section identifies some of the benefits and shortcomings of free trade zones as an industrialisation strategy. The final part makes up the conclusion and recommendations.

Keywords: export, free trade zone, industrialisation, development

Introduction

The export capacity of a country represents an important pathway to development for several reasons. For instance it generates foreign earnings, increases employment and the gross national product of the country. In an attempt to increase national exports, governments create free trade zones (FTZs) to attract foreign investors usually by exploiting their comparative advantage. More than 100 developing and transition economies currently implement some form of free zone policy for the supply of goods and services to foreign markets. These zones are characterised by incentives or privileges that enable investors to maximise profits and allow for all types of trade, industrial or service activities. The main reason for the proliferation in the use of this policy tool is the apparent success of these zones in some countries and the confluence of four trends: a) the increasing prominence of export-oriented growth; b) the increasing emphasis on FDI-oriented growth; c) the transfer of production of labour intensive industries from developed countries to developing countries; and d) the growing international division of labour and global production networks (Engman et al, 2007). Today, different types of zones have been established throughout the world especially in developing countries (see Table 1) to stimulate export growth, spearhead industrialisation and achieve development.

What is a free trade zone?

Free trade zone (FTZ) also known as foreign trade zone in the United States and export processing zone (EPZ) in developing countries have dramatically increased over the last three decades. While some scholars differentiate between free trade zones and export processing zones on the basis that manufactured products in the former are allowed full access to the domestic market and the later offered limited access and mainly for exports, other scholars make no distinction (Yusen, n. d.). Other common terms used include industrial free zone and export free zone in Ireland; maquiladora in Mexico; duty free export processing zone and free export zone in the Republic of Korea; special economic zone in China, investment promotion zone in Sri Lanka; foreign trade zone in India and free zone in the United Arab Emirates (Kusago &Tzannatos, 1998). It has, however, been noted that the different terminologies that have been used over time and space often reflect the specific activities carried out within that particular zone (UNESCAP, 2005). In general, normal trade barriers in the form of tariffs and quotas are eliminated in FTZs and bureaucratic requirements and procedures are lowered to attract new business and foreign investments (WEDC, 2012).

According to the World Customs Organisation (WCO) Revised Kyoto Convention, a free trade zone means a ‘part of the territory of a Contracting party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’ (ICC, 2013). Alternatively, the Encyclopaedia Britannica defines a free trade zone as an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs. O'Malley 1986 has also defined a free trade zone as ‘an enclave within a country into which goods may be imported or from which they may be exported free of taxes, duties and often at least some of the regulations applying elsewhere in the country.’

Although FTZs may be designed and created for different reasons and, as a result, the characteristics that define the concept have been described in many different ways, it appears that a few common characteristics are standard features of the modern FTZs. An example is the incentives generally provided by governments for cooperation within the zone that may include fiscal incentives – exemption from some or all export taxes, duties on imports of raw materials/intermediate goods, profit taxes, VAT, free profit repatriation; direct subsidies like water and electricity rates; indirect subsidies like grants for training and education, free provision of physical infrastructure - transport, telecommunication, production space, residential and commercial facilities; administrative services – fast track customs services; simplified licensing procedures; dedicated legal framework; relaxed regulatory environment - easy foreign ownership procedures, leasing and purchasing land, labour law and environment regulations; and export promotion services in the form of business advisory services, export credit services, sales and marketing support (Assenza, 2010).

In this light, free trade zones are similar to export processing zones as defined by Milberg and Amengual, 2008 as “regulatory ‘spaces in a country’ aimed at attracting export-oriented companies by offering these companies special concessions on taxes, tariffs and regulations.” These similarities are further evident in the International Labour Organization’s definition of export processing zones as ‘industrial zones with special incentives set up to attract foreign investors, in which imported materials undergo some degree of processing before being re-exported again’(ILO, 2007). As reiterated by Engman et al 2007, a frequent reference to EPZs is free trade zones which date back to the 19th century. Moreover, most FTZs located in developing countries have export processing zones programmes to promote industrial and commercial exports. Given the similarity, this paper uses the terms interchangeably to refer to all types of zones or enclaves covered by government policy framework of custom - free manufacturing and services.

Overview of Free Trade Zones

The first FTZ was established in Ireland as the Shannon Industrial Estate in 1959 to promote employment, make use of the small regional airport and generate revenue for the national economy. The success of the FTZ promoted its establishment in other countries. The first Asian zone was created in India in 1965, followed by Taiwan in 1966 and South Korea in the late 1950s and early 1960s. From the 1960s, many developing nations began to implement export-oriented growth strategies to promote industrialisation. Thus, the creation of FTZs became a policy strategy that replaced the import-substitution policy approach (inward-oriented) as they began to focus on increasing exports (outward-oriented) to promote industrialisation and economic development.

In 1975, 79 FTZs existed globally, employing around 800,000 people. The majority of zone enterprises worldwide were engaged in labour-intensive, assembly-oriented activities such as apparel, textiles, electrical and electronic goods. In the past years, EPZs have been implemented at two different developmental stages in developing countries. One set of countries (Mauritius, Dominican Republic, and China) adopted EPZ policies in the early stages of their industrial development, to act as "engine of growth" by encouraging production and export diversification to propel their economies into industrialization. A second set of countries (Tunisia; Malaysia; Indonesia; Honduras) implemented EPZ when they already had strong industrial production and export sectors (de Armas &Sadni-Jallab, 2002).

Today, it is estimated that there are about 3,000 free trade zones in 136 countries accounting for 68 million direct jobs ( see Table 2) and over US$500 billion of direct trade-related value (Akinci & Crittle cited in ICC 2013). Additionally, the purpose, activities and ownership of FTZs has changed overtime. Most FTZs are now established to attract both foreign and domestic companies operating in a variety of activities in both industrial and service sectors. Similarly, the ownership and administration of these zones are not limited to government authorities but private or public-private partnership (Table 3 and 4). Female workers account for 60 – 70 per cent of zone work-force worldwide, a number that has remained consistent since the establishment of such zones. This is due to the fact that, the industries in the zones are mostly electronic, textiles and clothing manufacturing fields dominated by female workers who are usually unskilled or semi-skilled and who would have been out of the labour force without the zone (Amirahmad & Wu 1995). As such, the percentage of female workforce decreases as the activities in the zones diversifies away from simple assembly operations towards more technologically advanced sectors (Taylor, 2014; Madani, 1999). In Malaysian EPZs, for example, 40 per cent of the workers are female, down from 60 per cent two decades ago.

Table 1: Top Ten Developing Countries with Free Trade Zones

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Source: ILO Database, 2007

Table 2: Regional Distribution of Free Trade Zones

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Source: ILO(2007) Available from: http://www.ilo.org/public/english/dialogue/sector/themes/epz/stats.htm

Table 3: Evolution of Free Trade Zones

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Source: Assenza, 2010

TD/TC/WP (2006)39/FINAL

Table 4: Types of zones: ILO’s Evolutionary Typology

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Reasons for Establishing Free Trade Zones (FTZs)

I. To help reduce unemployment and gain foreign exchange earnings.

II. To act as engines for industrialisation and economic growth by attracting foreign direct investments. Many of the Middle East FTZs are designed to attract foreign direct investors.

III. As experimental laboratories for the application of new policy reforms to be applied later to the larger national economy. China’s financial, labour, legal and pricing policies were first tested in their FTZs before being applied to the rest of the economy (Amirahmadi & Wu, 1995).

IV. As a compromise between liberal and protective economic strategy and a gateway to the international community whilst maintaining protective barriers as in the case of Taiwan and Republic of Korea (Amirahmadi & Wu, 1995).

V. To facilitate technology and knowledge transfer through the creation of forward and backward linkages.

Free Trade Zones and World Trade Organisation Agreement

Although the World Trade Organization rules do not explicitly affect FTZs, the measures adopted to attract foreign firms in the zone in practice may conflict with the agreement on Subsidies and Countervailing Measures (SCM) which came into effect on January 1995. This agreement prohibits export subsidies that require beneficiaries to meet certain export targets or use domestic goods as inputs instead of imported goods; or, subsidy that affects other exporters in the domestic market or rival exporters in a third country’s market.

However, least developed and developing countries with GNP per capita less than US$1,000 per year are exempted from the prohibition of export subsidies. They lose their exemption status once their GNP per capita rises to $1,000 for three consecutive years (Assenza, 2010).

While the SCM can affect the use of certain export subsidies, FTZ authorities can still use other incentives like exemption from indirect taxes, border taxes and import charges to attract foreign investors.

Arguments on the Impact of Free Trade Zones

The various debates on the merits of FTZs has been based on its impact on several elements: from social issues, like labour rights (including the effect on women and children), environmental protection and urban planning, to macro-economic issues related to their impact on government revenue, employment, trade and foreign exchange earnings (Engman et al, 2007).

According to Willmore 1985, FTZs help governments to increase national exports at a lower cost, create employment and increase incomes. However, linkages between the domestic industry and the zones are rarely created to promote domestic industries.

In a similar light, Amirahmad & Wu 1995 have stated that FTZs fail when used for promoting technological transfers, the linkage effects, regional development and distort other sectors like agriculture and increase unemployment as rural workers are attracted to these zones. However, in cases where the industry produces capital and intermediate goods, skills are developed.

Alavi & Thompson n. d. have also noted that without the creation of FTZs, most developing countries would have been unable to attract FDIs and benefited from their comparative advantage of labour intensive capacity. Additionally, it allows firms to avoid protective legislations which are products of the political process and rather encourage free trade and economic growth.

Johansson & Nilsson 1997 have identified that FTZs may have an indirect beneficial effect - catalyst effect - as foreign affiliates are attracted to the FTZs, local firms are stimulated to start exporting by showing them how to produce, market, sell and distribute manufactured goods on the world market.

According to Engman et al 2007, FTZs from an economic point of view are a sub-optimal policy because they benefit the few and distort resource allocation. However, it may be useful as a stepping stone to trade liberalisation in certain countries and governments should consider all available policy options by conducting a thorough cost/benefit analysis before implementation.

In a cost-benefit analyses which tried to quantify the net benefits derived from zone programmes in Asia, Jayanthakurmaran 2003 found that static benefits were realised in the form of increased inflow of foreign exchange; land development; improvements in infrastructure; government services; technology improvements and skills development to the domestic market.

Contrary, O'Malley 1986 in a survey found that FTZs make very limited contribution to the economic development of a number of Asian countries and may not justify the costs to the host government in terms of incentives, infrastructure and exploitation of workers.

Benefits and Costs of Free Trade Zones as Industrialisation Tool

FTZ schemes adopted by governments of developing countries are mainly aimed at economic and social development by attracting foreign direct investments, which in turn leads to an increase in export, growth in foreign exchange earnings and the creation of employment opportunities for the domestic work force, who can also benefit from technology upgrade and management know-how.

Foreign Direct Investments (FDI) Inflow

The privileges and exemptions offered by FTZs attract foreign investors into the country even though not all the firms located in the zones recently are all foreign companies; there is evidence that shows significant increase in foreign direct investment in some countries after adopting FTZ policies. The zones created in South Korea and Taiwan were noted as providing substantial foreign investment in the 1960s (Amirahmadi & Wu, 1995). This increase in FDIs in zones in these countries has been attributed to them being the first developing countries to establish export processing zones away from the protectionist restrictions imposed by import substitution policies and took advantage of the industrial relocation from the developed countries in the late 1960s and early 1970s (O'Malley, 1986; Amirahmadi & Wu, 1995). Thus, as the zones increased globally in other developing countries, the ability of their zones to attract more FDI declined as the available pool of mobile foreign investment is much too small to go round. Consequently, countries are forced to create more favourable investment environment to secure their share. In countries like China and Philippines, FDI flows in zones reached 80% in recent years (World Bank, 2007). Also in Mexico, for instance, FDI in maquiladoras doubled from US$ 895 million in 1994 to US$ 2.98 billion in 2000 and as a result the maquiladoras share of FDI to total national FDI improved from 6% to 23% over the same period (Blanco de Armas &Sadni-Jallab, 2002).

However, not all zones are able to directly attract foreign investors. An example is the zones in Senegal, which play a marginal role in attracting FDI into the economy (Assenza, 2010). It must be noted that, the importance of foreign direct investment goes beyond the provision of needed capital (financial and machinery) into the economies of developing countries to stimulate industrialisation. The investments of foreign capital and technology act as a catalyst that demonstrate to domestic firms and employers good practices and in some cases results in joint business ventures encouraging local entrepreneurs in developing countries. Two prime cases are Mauritius and Dominican Republic where local firms were stimulated into export activities. A study of individual, non-traditional, manufacturing industries in 11 developing countries and the conditions behind their successful entry into the global market showed that, in industries where the country in question had little or no previous experience, affiliates of foreign multinational enterprises in the zones provided managerial experience, marketing knowledge and relevant technology that were copied by local firms (Rhee & Belot 1990). According to Madani 1999 however, the demonstrative effect of FDIs in zones are becoming less relevant because of globalisation and regional integration agreements that provide an alternative source to ‘knowledge packages’ and technology transfers.

Notwithstanding the beneficial contribution of FDIs, the expected share of these investments is sometimes over estimated. The cost of infrastructure development, public services and other administrative costs involved in establishing sustainable FTZs can sometimes outweigh the foreign investments in the zones, consequently, diverting national resources from more viable alternatives for industrialisation. Governments of developing countries should, therefore, undertake a careful cost-benefit analysis before operating such zones (Assenza, 2010).

Increase in national exports and export diversification

The establishment of FTZs can lead to a significant increase in national exports and industrialisation in developing countries. Data from various statistical researches indicated a substantial growth in the volume of FTZs gross exports as a share of national exports (Graph 1 shows steady increase of FTZ export as a percentage of national exports in several developing countries). In Mauritius for instance, the level of exports increased from 3% of total exports in 1971 to 68.75% in 1994 (Assenza, 2010). The share of exports of manufactured products in the zones was 177, 7 billion US$, representing 8.3% of total exports of manufactured goods globally in 2003 (Engman et al, 2007). In countries like Malaysia, Vietnam and Kenya, FTZ exports represent 80% of the total national exports (Assenza, 2010). Indonesia, South Korea and Taiwan were also able to manage a high ratio of net to gross export from 49 % to 63% in the mid-1980s (UNESCAP, 2005). Export diversification is another potential advantage of FTZs since many developing countries are disadvantaged by a mono-culture economy and rely on the exports of a limited number of commodities in the primary sector. In an analysis on export diversification from 1991 to 2001 for selected African countries by Cling et al (2001), FTZ-induced industrial manufacturing proved to result in diversification of exports in certain countries. In the analysis, Madagascar was found to have diversified its product base during that 10 year span; the number of products with export value of over US$ 1 million increased from 38% to about 70% (Engman et al, 2007).

Graph 1: The Share of EPZ export in Total Export

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Source: Blanco de Armas & Sadni-Jallab, 2002

However, an increase in the volume of exports in an FTZ operating country is not necessarily directly linked to the creation of the zone but can be related to economic reforms and changes in the global market. Additionally, FTZs that offer fiscal exemptions from some or all exports taxes can encourage firms operating in the zones to source their raw materials and intermediate inputs from known or cheaper international suppliers. Thus, preventing backward linkages and creating balance of trade deficit when sufficient exports are not achieved over a period of time. While some countries have achieved a high level of net exports such as South Korea, others have not been able to close the gap between gross and net exports, for instance Jamaica (Blanco de Armas &Sadni-Jallab, 2002). On the other hand, high gross export volume can also result in high firm profits that can be reinvested into new activities in the host economy to encourage industrialisation.

Foreign Exchange Earnings

One of the primary benefits of creating FTZ is the generation of foreign exchange earnings to enable governments to acquire imports needed for the rest of the economy (Madani, 1999). This helps developing countries to import goods and materials needed to improve the industrialization of domestic firms and increase government revenue for development. Foreign exchange earnings from exports, however, depend on the source of inputs since most FTZ firms are usually involved in the labour intensive part of the production process in garment and electronics sectors. And most of the inputs are imported rather than sourced locally; the foreign exchange effect may be much smaller than the percentage of FTZ exports in total may imply. Benefits are greatest where backward linkages have been developed like in Korea and Chinese Taipei but such effects have been much more limited in other countries.

Employment Effect on National Economy

One of the main objectives for establishing zones by governments is employment generation, which in turn can help increase the income of people and encourage domestic savings and investments into industries. FTZs, for the most part, have led to creation of jobs as shown in Table 2. According to ILO (2003), the total employment in zones excluding China has increased from 4.5 million in 1997 to 13 million by the end of 2002. In the Philippines, employment rose from 39,000 in 1986 to 907,000 in 2003, Costa Rica’s from 11,000 in 1991 to 39,000 in 2005 and the Dominican Republic increased from around 165,000 in 1993 to 190,000 in 2004 ( ILO cited in Engman et al, 2007). On the contrary, in some cases the number of created jobs, in relation to the total labour force of the FTZ country is modest. As noted by Madani (1999), the FTZs in the Philippines in 1997 employed about 180,000 workers, a significant number but amounted to only 0.6% of the 31 million workforce that was growing at an annual rate of 1.4 million workers. This marginality of job creation in absolute terms is confirmed at regional and global level (see Table 5). The relative marginality measured in direct job creation on the other hand does not take into account the indirect employment created, which is estimated to range from 0.25% in Mauritius to 2.0% in Honduras. This means that indirect employment generated by FTZs could potentially amount to 77 million jobs worldwide (World Bank, 2008). Hence, while FTZs do not present a solution to unemployment, it is nonetheless a viable source of employment creation especially if indirect employment is also considered (Engman et al, 2007).

Table5: Direct employment in Free Trade Zones

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Source: FIAS Report (2007, forthcoming).

Additionally, FTZs were established in the hopes that they would offer employment to especially the unemployed males in these countries. But across board, the majority of the jobs in the FTZs are held by women (Madani, 1999). For instance, in the Caribbean FTZs approximately 80% of the workforce is female (Dunn, 1994). In Mexico, in the late 1980s, 54% of the work force in the maquiladoras was female (Summerfield, 1995). In 1995, women constituted 74% of the work force in zones in the Philippines especially in FTZs specializing in garment production. Moreover, women employed in the zones are usually paid lower wages than outside the zones; this has been explained as the results of their lower skills and many might not have sought formal market employment which offer higher salary and other potential benefits (Madani, 1999). A more important contribution of zone employment is the creation of jobs in relation to a situation of high unemployment rate and high levels of poverty. The feminisation of employment in the zones also offers a source of income for families and increases savings potential. Many economists on the contrary have concluded that employment in FTZs means low wages, high work intensity, unsafe working conditions and suppression of labour rights.

Education/Training Benefits (Human Capital Development)

There has no doubt been a great deal of knowledge spill-over effect from the creation of FTZs in developing countries. Rhee’s 1990 survey of zones in Dominican Republic showed a steep labour productivity learning curve for the first three years of a firm’s operation, followed by a noticeable flattening out of the curve (Rhea cited in Madani 1999). Managerial training and skills acquired through employment in FTZ firms can be beneficial in the industrialisation process of the host. By extension, these improved skills and productivity increase the workers’ income earning capacity when transferred to domestic firms outside the zones. Thus, domestic entrepreneurs and workers benefit from observing and copying the traits that make the zone firms successful exporters (Madani 1999). For instance, in Korea 3000 employees received specialised advance training in Japan through personnel exchange between the zone companies and affiliates abroad.

Linkages to the Domestic Economy

As a strategy for industrialisation, one of the direct contributions of the zones to industrialisation is the linkages it creates with domestic companies. It does not only help in the transfer of technology and know-how to local industries but also provide forward and backward linkages in the host economy. The former exists when the outputs are sold to domestic market, while the latter when inputs are purchased from or subcontracted to domestic firms. Indonesia, an often cited example, successfully sourced the garment industry in the zones with domestic fabrics. In 1995 15% of the total raw materials were sourced locally and in Mauritius 41% (Assenza, 2010). This linkage between FTZ firms and local firms facilitates the industrialisation process of developing countries. But then again, the UNCTAD World Investment Report 2002 affirms that there are no significant differences between FTZ and non-FTZ based export-oriented firms in terms of technology transfer because most of the activities in the zones are characterised by low added value with no access to advanced technology (UNCTAD, 2003). In most cases, companies usually maintain their Management, Research and Development Departments within their headquarters in developed countries (Assenza, 2010).

Environmental Regulations and Labour Law

In an attempt to attract foreign companies into their zone, governments of developing countries tend to relax the regulations in the zones. Because the multinational corporations are able to choose between a wide range of developing countries with zones to set up their overseas factories, bidding wars or 'races to the bottom’ sometimes erupt between competing governments which often have weak or non-existent regulatory and/or supervisory presence with regard to safety and health issues in the work environment (Assenza, 2010). Occupational hazards are a subject of concern especially in the electronics and garment industries in some FTZs (Dunn, 1994). These range from allergies and stress from monotonous, repetitive movements to health risks associated with inadequate canteens and washroom capacities; refuse disposal and blocked emergency exits. One example is the 1993 Kader Industrial factory fire in Thailand where 240 workers died because of blocked exits and the practice of storing flammable material on the factory site (Dunn, 1994). Kennett (1990) reports on the FTZ firms contaminating water supplies in the Dominican Republic notes that, while governments recognize the importance of sustainable development, environmental laws are usually fragmented and monitoring institutions lack coordination and tend to have no control over FTZs (Kennett cited in Madani 1999). Though lax regulations might make the host country more attractive to industries that entail environmental pollution, it can consequently result in creating long term health issues for the population. Over the years, however, there has been increased environmental awareness and many private park (zones) operators have been working on environmental protection measures to identify, mitigate and even neutralize negative environmental externalities. For instance, some firms have voluntarily stopped the “acid-wash” processes for jeans because of the consequent water and soil pollution. Others bring in their own consultants from the developed countries to monitor emissions (Madani 1999). These actions to protect the environment can encourage local industries to copy such practices.

Budgetary Impact on Government

The establishment of zones entails the expenditure of huge resources by government and consequently affects the budget of governments especially in public managed zones. The investment in infrastructure, administrative costs, foregone taxes, subsidies and fees on services provided are some of the financial resources lost by governments operating FTZs (see Table 6). This loss of revenue becomes more significant when the zones fail to achieve the purpose for which they were set up. For example, Namibia zones failed in employment creation and Senegal in attracting FDI (Assenza, 2010). In such cases resources that could have been invested in the industrialisation process of the country would have been wasted on zone creation. The potential revenues or cost of operating a zone is dependent on the type of infrastructure and incentives provided by the government to firms in the zone.

Table6: Government revenue and costs from zone development

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Source: FIAS Report (2007, forthcoming)

Conclusion and Recommendations

The establishment of zones represents an attempt by government to industrialise its economy to achieve development. Over 100 developing countries have currently implemented some form of FTZ policy for industrialisation. Evidence show that zones have had mixed impact, whilst in some countries it has led to export growth and diversification; foreign direct investments; employment creation, and foreign exchange generation, in others results have been disappointing. How then is one to assess if free trade zones are feasible for industrialisation?

As an effective tool for industrialisation, linkages must be created with the rest of the economy as this will generate profit for domestic businesses and ensure a continuous interest in the zones. And for linkages to be created depends on the country’s circumstances and structure of the economy. Governments should, therefore, consider all available policy options through a cost-benefit analysis and bear in mind that successful zones depend strongly on external factors like private investment and the international market, which are unpredictable and as such endeavour to minimise upfront cost whenever possible.

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• Universidad: South Bank University London (Faculty of Social Sciences)
• Curso: Msc.Development Studies
• Calificación: 68
• Autor: Christabel Boakye Dankwa (Autor)
• Año de publicación: 2014
• Páginas: 23
• No. de catálogo: V284233
• ISBN (Ebook): 9783656846055
• ISBN (Libro): 9783656846062
• Idioma: Inglés
• Etiqueta: advantages, disadvantages, constructing, free-trade, zones, industrialisation, strategy