Role of free economic zones in the economy

The Export Processing Zones (EPZs) or special economic zones (SEZ) can be summarised as a unit bearing clusters of specially designed zones of aggressive economic activity for the promotion of export.
The main concept of the Export Processing Zones was conceived in the early 20th century to attract Foreign Direct Investment and induce technology transfers, and enhance foreign exchange earnings besides generating employment opportunities EPZs can also be defined "as an area enjoying special government support with respect to fiscal incentives, tax rebates and other exclusive benefits for the growth of export".
EPZs encompass pre-defined infrastructural facilities and regulations pertaining to establishment of such zones and environmental stipulations, respectively. SEZ as compared to an EPZ is a broader concept with a lenient regime to facilitate economic growth through the use of reduced tariffs and more efficient customs controls. With the above said goals the idea of establishing zones as EPZs, special economic zones (SEZs), free trade zones (FTZs), enterprised zones, single entity enterprises have attained a wider canvas around the world.
The reasons for the creation of free ports were not solely economic. Political priorities to strengthen a country's strategic position and dwarf the economic interests of their competitors were often achieved through the development of free ports. One of the first versions of a free port on record was the Roman Empire's ancient port of Delos.
The port was used as an economic weapon by the Romans against the nearby competitor port of Rhodes. The competition induced from the retraction of fees levied by the Roman port, encouraged trade to shift quickly from Rhodes. The legacy of free ports can be seen today. One familiar example is the 'duty free' zone at modern airports where consumers can buy tax-free goods. 'Bonded warehouses', where traded goods can be stored for re-export without attracting taxes, were also born from the model of free ports.
The impact of free ports has been extensive in the economic rise of modern nations. By establishing Hong Kong and Singapore as free ports, both rose from small colonial villages into economic powerhouses and hubs for regional trade. Perhaps the best known contemporary free trade zone is the Shekou Industrial Zone in China, which prompted the economic development of Shenzhen. The zone, modelled on Hong Kong, relaxed regulation and taxation and took Shenzhen from a city contributing half a per cent of the exports of the Guangdong Province to 19 per cent within five years.
In recent times, the first export processing zone (EPZ) was set up in 1959 at Shannon, in Ireland followed by Puerto Rico in 1962. Since then, 135 countries, many of them emerging markets, have developed over 3,000 zones. Their development has helped to improve global trade relations and has created over 70 million jobs and hundreds of billions of dollars in trade revenue.
Among the most growing zones around the world is China's special economic zones (SEZs) and Jabel-e-Ali free trade zone (JAFZA). In China, the name initially given to such zones was special economic zones but lately they were also using names like science and technology parks, industrial parks and development zones.
China has been the most successful in implementing SEZs, and bringing them the most profitable status in their operations. Most of China's SEZs are very large and specialise in a focused range of products and services - those most conducive to a mass-production environment; notably labour-intensive, assembly-oriented products. China's Shenzhen Village is very well-known for transforming a small fishing village into a booming urban metropolitan area; home to an export-oriented economy that brings in over US $30 billion in foreign direct investment ("FDI") annually. The SEZ economic policies could be briefly defined as;
1. Special tax incentives for foreign investments in the SEZs.
2. Greater independence on international trade activities.
3. Economic characteristics are represented as "four principles" namely, (a) construction primarily relies on attracting and utilising foreign capital; (b) primary economic forms are Sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises; (c) products are primarily export-oriented; and (d) economic activities are primarily driven by market forces.
Global corporations are provided with an incentive to invest in the development and infrastructure of a foreign country, through the use of a tax-friendly environment reducing a company's tax liabilities to have a direct positive benefit on earnings, allowing the investing company to profit from its foreign investment within the SEZ. Most of the benefits that investors look for in an SEZ are economic benefits such as tax holidays, reduced tax-rates, and duty-free imports. Some of these benefits are permanent and last as long as the investor does business in the SEZ, but other economic benefits are reduced over time. For instance, India's new SEZ Act allows for a corporate income tax holiday that is gradually reduced from 100% tax abatement to 0% over 15 years, but Namibia has promoted its SEZ using a 100%, 99-year tax abatement. Not all benefits are financial, however. Procedural benefits like quicker customs processing and reduced regulatory requirements on labour and environmental policies also lure corporations to SEZs.
Free trade zone is one of the most expansive types of special economic zone. Jabel-e-Ali free trade zone being the best example of a flourishing FTZ. An FTZ is a geographically fenced-in, tax-free area that provides warehousing, storage, distribution facilities for trade, shipping, and import/export operations in a reduced regulatory environment, meaning there by that they generally have less stringent customs controls and sometimes fewer labour and environmental controls. These zones generally focus on the tangible operations of international trade.
JAFZA is the world's largest and fastest growing zones established in 1985,over the last four years, JAFZA have grown as one of the fastest growing free zones in the world, with over 60% customer base growth and has increased its revenue at an average of 34% year-on-year, contributed to Dubai's GDP at 25% on a year-to-year basis, sustained more than 160,000 jobs in the UAE through its companies and accounted for more than 50% of Dubai's total exports. It also accounts for 25% of all container through the Jebel Ali Port and 12% of all air freight at the Dubai International Airport, besides accounting for 20% of all FDI inflow into the UAE.
Export processing zones are similar to FTZs in that they encompass large land estates that focus on foreign exports, but do not provide the same degree of tax benefits or regulatory leniency. Instead they provide a functional advantage to investors seeking to capitalise on the economies of scale that a geographic concentration of production and manufacturing can bring to a trade region. These zones are beneficial to a host country, if they are successful, because the host country does not have to provide reduced tariffs or regulations but it still benefits from increased trade to the region.
In Pakistan export processing zones were established in the year 1980 through an ordinance, to accelerate the growth of the country's export, and attract foreign investment. There are different regimes in the EPZ concept;
With funding from the government of Pakistan the first project at Karachi (KEPZ) was developed under Public Sector Development Programme (PSDP).
Under Joint Venture: EPZ at Sialkot was developed through joint venture between the EPZA and Punjab Small Industries Corporation (PSIC). Another EPZ at Risalpur was established by Sarhad Development Authority (SDA) under arrangement with EPZA in Khyber Pakhtunkhwa.
EXCLUSIVE PROJECT DECLARED AS EPZ:
a. Tuwairqi Steel Mills Limited (TSML), a subsidiary of Saudi Arabia's AL-Tuwairqi Holdings, has been established on an area of 220 acres. It is located at Port Qasim Karachi. Government of Pakistan has granted the status of EPZ to the TSML along with the option to export 100% of its production to the Tariff Area apart from the ATH plant and neighbouring Gulf countries.
b. The mining projects at Saindak and Duddar were granted status of exclusive EPZs by the government of Pakistan. Land to the mining projects was leased by the Federal Ministry of Petroleum and Natural Resources and the government of Balochistan for specific period and purposes. These EPZs were notified under the cabinet decision.
The EPZA is contributing to the economy by increasing foreign investment, the generation of employment and setting up of industries. The Export Processing Zones Authority (EPZA) has done a tremendous job as the Authority has shown a record growth of 24% percent between July 2010 and February 2011, as compared to same period of the preceding year.
CONCLUSION One way to improve EPZ performance is to develop a better understanding of the EPZ strategy. The EPZ as a policy, according to our conceptualisation, should be located at the intersection of three sectoral/spatial policies, namely free trade zone, industrial policy and growth centered strategy. The fact that the industrial policy is embedded in the EPZ is indicated by its use to promote export industries. The usefulness of EPZ should also be defined against several considerations.
--- First, EPZ can play an important role in the economic growth of developing countries if established at an appropriate stage of the country's economic evolution. An EPZ can, not only promote export growth, but can also serve as experiment station for a new policy instrument and it can facilitate the transition from a closed economy to a more open one.
--- Secondly, EPZ should be an integral part of a national industrialisation policy.
--- Thirdly the structure of the zone can be diverse and therefore may evolve over time. The new developments in recent years include the granting of EPZ privileges to firms producing manufacture exports, regardless of their location-an EPZ regime and the extension of the EPZ territory as well as economic activities similar to China's SEZs. Such diverse structures the EPZ employ which can be built to the specific needs, conditions, and objectives of host developing countries.
--- Fourthly to reduce the costs of building and managing EPZs, the government can seek the co-operation of private entrepreneurs. Private Investors or Companies would be responsible for the investment and infrastructure, side development and factory building, reducing the burden on the host government's budget. This will make the EPZ strategy even more attractive and feasible. Moreover, the host countries need to find a proper balance in offering the package of fiscal incentives to foreign firms in the zones.
--- Finally, the establishment of EPZs must combine with a larger policy for rural industrialisation and regional development. As in the case of China's SEZs, there needs to be efforts to diversify the economies of the surroundings regions. Government initiatives are needed to encourage economic co-operation between the firms inside and outside the zones and deliberated redistribution policies are needed in order to infuse transfer of technology and growth of indigenous industries. This can lead to the growth and development of local production capability and later to the reduction of imported inputs besides uplift of rural economy. ([email protected])