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MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF BANKING AND FINANCE

THE FEASIBILITY OF INTRODUCING FREE ECONOMIC ZONES IN ZIMBABWE

HANYIRE LUCKMORE

STUDENT NUMBER: R114962F

SUPERVISOR: DR N. NKOMAZANA

This dissertation is submitted in partial fulfilment of the requirements of the Bachelor of

Commerce Honours Degree in Banking and Finance Honours Degree at

Midlands State University

OCTOBER 2015

Gweru: Zimbabwe

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APPROVAL FORM

The undersigned certify that they have supervised the student Luckmore Hanyire. Dissertation

entitled: The feasibility study of introducing free economic zones in Zimbabwe submitted in

partial fulfilment of the requirements of the Bachelor of Commerce (Honours) degree in Banking

and Finance at Midlands State University.

.................................................... ....................................................

SUPERVISOR DATE

.................................................... ....................................................

CHAIRPERSON DATE

.................................................... ....................................................

EXTERNAL EXAMINER DATE

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RELEASE FORM

NAME OF STUDENT HANYIRE LUCKMORE

DISSERTATION TITLE A feasibility study for the introduction of

Free Economic Zones in Zimbabwe

YEAR THIS DEGREE GRANTED 2015

Permission is hereby granted to the Midlands

States University library to produce single

copies of this dissertation and to lend or sell

such copies for private, scholarly or scientific

research purposes only. The author does not

reserve other publication rights and neither

dissertation nor may extensive extracts from it

be printed or otherwise reproduced without

the authors written permission.

SIGNED --------------------------------------------------

PERMANENT ADRESS 17814/5 Mbizo

Kwekwe

OCTOBER 2015

DATE --------------------------------------------------

CELL +263773 165 170

+263732 165 170

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DEDICATION

To my mom and our dad and to all those who aim higher keep on trying your effort will be

rewarded.

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ACKNOWLEDGEMENTS

I wish to express my gratitude to those who generously helped me colour this mosaic piece with

the tiles of their knowledge, I have taken literal license; but any factual errors are my

responsibility alone. My grateful thanks go to the following:

First and notable, I would like to thank Jesus Christ, my deliverer, for giving me the opportunity

and determination to carry out and complete this study

In addition, I would like to thank Dr Nkomazana, my supervisor for allowing me to study under

him and for his guidance, assistance and intuition that made this study possible. His reviews and

comments on the drafts of this study were invaluable.

I would also want to thank Tanaka Hungwe and Simon Nyamuvurudza for the encouragements

and support during the hard times.

To all those I have omitted, your efforts and support have not gone unnoticed, I thank you very

much and may God greatly bless you. Thank you all for the sacrifices you made in making this

journey towards my academic excellence a success.

To all those who participated in the project, May God richly bless you.

To those not mentioned it will be you tomorrow.

May God bless you all.

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ABSTRACT

The rational of the study sought to do a feasibility of introducing FEZ in Zimbabwe. FEZ as a new

concept to rebalance the economy to an export led economy has been criticized by a number of

researchers as not fit for developing countries but those against were outclassed by those in support

of FEZ. The literature review was also used to provide information on the relationships of FEZ

and the economy. The research managed to clearly scrutinize the FEZ concept and to obtain this

the research used primary data obtained from the questionnaires that were given to corporate senior

managers and the personal interviews. Research instruments used were questionnaires that were

given to Research and Development personnel and personal interviews. The sample consisted of

10 research respondents but only 7 respondents managed to participate in the study. STATA 13

was used to analyse both primary and secondary data and the results were presented using tables

and percentages for clear understanding. Questionnaires were tested for reliability.The study

showed that the policies, systems are not investor friendly meaning there is need for a complete

panel beating which will be of great importance to the economy. The study found out that FEZ

introduction is very feasible in Zimbabwe if and only if the success factors of FEZs are considered

in the establishment process. This study recommends that restructuring and coming up with new

policies is necessary to revamp the economy through boosting exports and attracting FDI. It is also

necessary for organizations to build or uphold their operational systems as well as equipping staff

with all necessary skills to produce world class quality. Finally, it is recommended that further

research be undertaken, in order to establish the feasibility of introducing FEZ in Zimbabwe and

in other developing countries.

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TABLE OF CONTENTS

APPROVAL FORM ........................................................................................................................ i

RELEASE FORM ........................................................................................................................... ii

DEDICATION ............................................................................................................................... iii

ACKNOWLEDGEMENTS ........................................................................................................... iv

ABSTRACT .................................................................................................................................... v

LIST OF ACRONYMS .................................................................................................................. x

LIST OF TABLES ........................................................................................................................ xii

LIST OF FIGURES ..................................................................................................................... xiii

LIST OF APPENDICES .............................................................................................................. xiv

CHAPTER ONE: INTRODUCTION ............................................................................................. 1

1.1 Introduction ........................................................................................................................... 1

1.2 Background to the Study ....................................................................................................... 1

1.2.1 Zimbabwean economy developments from 1990 to the multi-currency regime ............ 2

1.3 Problem Statement ................................................................................................................ 5

1.4 Research Objectives .............................................................................................................. 5

1.5 Research questions ................................................................................................................ 6

1.6 Assumptions .......................................................................................................................... 6

1.7 Significance of the Study ...................................................................................................... 6

1.8 Limitations ............................................................................................................................ 7

1.9 Delimitations ......................................................................................................................... 7

1.10 Definition of Terms ............................................................................................................. 7

1.11 Organization of the Study ................................................................................................... 7

CHAPTER 2: LITERATURE REVIEW ........................................................................................ 9

2.2 Theoretical literature review ................................................................................................. 9

2.2.1 Concept of FEZs ............................................................................................................. 9

2.2.1.2 Internationally used definitions ................................................................................... 9

2.2.5 Models of FEZs ............................................................................................................ 26

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2.3 Empirical literature Review ................................................................................................ 27

2.3.1 Export Development and Export .................................................................................. 27

2.3.8 Investment Promotion................................................................................................... 30

2.3.12 Adequacy of infrastructure ......................................................................................... 32

2.4 Economic outlook ............................................................................................................ 33

2.4 Summary ............................................................................................................................. 33

CHAPTER THREE: RESEARCH METHODOLOGY ............................................................... 34

3.1 Introduction ......................................................................................................................... 34

3.2 Research Design .................................................................................................................. 34

3.3 Research Population ............................................................................................................ 34

3.4 Research Sample ................................................................................................................. 34

3.5 Data Collection Methods and Instruments .......................................................................... 35

............................................................................................................................................... 35

3.5.1 Primary Data Collection ............................................................................................... 35

3.5.2 Secondary Data Collection ........................................................................................... 37

3.6 Data Presentation and Analysis Plan ................................................................................... 38

3.7 Summary ............................................................................................................................. 38

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS .............................................. 39

4.1. Introduction ........................................................................................................................ 39

4.2 Analysis of Response Rates ................................................................................................ 39

4.2.1 Questionnaire Response Rate ....................................................................................... 39

4.2.2 Interview response rate ................................................................................................. 40

4.3 Reliability Test .................................................................................................................... 40

4.3 Data Presentation and Analysis ........................................................................................... 41

4.3.1 Duration in the Current Employment ........................................................................... 41

4.3.2 Exports after the adoption of the multi-currency regime ............................................. 42

4.3.3 FEZ fertile grounds availability .................................................................................... 43

4.3.4 Skills and robust system to meet export standards ....................................................... 45

4.3.5 Visibility of firms operating within/outside the FEZs .................................................. 46

4.3.6 Relationship between FEZ and economic growth ........................................................ 47

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4.3.7 Impact of FEZ on FDI .................................................................................................. 48

4.3.7. Impact of FEZ on revenue ........................................................................................... 49

4.3.8 Impact of FEZ on Human development ....................................................................... 50

4.3.9 Impact of FEZ on employment creation ....................................................................... 51

4.3.10 Zimbabwe capacity to accommodate the business and sophistication in the zone area

............................................................................................................................................... 53

4.3.11 Challenges associated with FEZs ............................................................................... 53

4.3.12 The Legal and Regulatory Environment .................................................................... 56

4.3.13 Summation of the impact of all factors ...................................................................... 57

4.4 Summary ............................................................................................................................. 58

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .................. 59

5.1 Introduction ......................................................................................................................... 59

5.2 Summary of the study ......................................................................................................... 59

5.3 Conclusions ......................................................................................................................... 59

5.4 Recommendations ............................................................................................................... 61

5.4.1 Governments need to revisit policies .......................................................................... 61

5.4.2 Improved national relations with other countries ......................................................... 61

5.4.3 There is need for great infrastructural development ..................................................... 61

5.4.4 Effective land reform needs .......................................................................................... 61

5.4.5 Tight laws and regulations to constrain illicit dealings ................................................ 62

5.4.6 Embark on heavy promotional strategies ..................................................................... 62

5.4.7 The need for perfect names as a way of encouraging investors ................................... 62

5.5 Suggestions for future research ........................................................................................... 62

REFERRENCES ........................................................................................................................... 64

APPENDICES .............................................................................................................................. 67

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LIST OF ACRONYMS

AML Anti Money Laundering

BACOSSI Basic Commodity Supply Side Intervention Facility

CFT Controlling Financing of Terrorists

CZI Confederation of Zimbabwe Industries

ESAP Economic Structural Adjustment Program.

FATF Financial Action Task Force

FDI Foreign Direct Investment.

FEZ Free Economic Zone

EPZ Export Processing Zone

EPZA Export Processing Zone Authority

GAZ Giant Awakening Zone (hypothetical)

GDP Gross Domestic Product.

GNP Gross National Product.

ILO International Labour Organisation

IMF International Monetary Fund.

IIP Index of Industrial Production.

IDC Industrial Development Cooperation

MDC Movement for Democratic Change

MNCs Multinational Corporations.

MNEs Multinational Enterprises.

PSF Productive Sector Facility

RBZ Reserve Bank of Zimbabwe.

R &D Research and Development

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SEZ Special Export Zone

SME Small to Medium Enterprise

SSA Sub-Saharan Africa.

UNCTAD United Nations Conference on Trade and Development.

UNIDO United Nations Industrial Development Organisation

UNDP United Nations Development Programme

WDI World Development Indicator.

WEPZA World Export Processing Authority

ZAZ Zim Asset Zone (Hypothetical)

ZIA Zimbabwe Investment Authority.

ZIDP Zimbabwe Industrial Development Programme

ZIMPREST Zimbabwe Programme for Economic and Social Transformation.

ZIMSTATS Zimbabwe National Statistical Agency

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LIST OF TABLES

Table 1.1: Maize, wheat and soya bean production trends from 1999 to 2008. ............................. 1

Table 2.1 .The evolution of terminology ...................................................................................... 10

Table 2.2 shows the whole package of incentives provided to investors. .................................... 22

Table 4.1: Response Rate for Questionnaires ............................................................................... 39

Table 4.2: Interview Response Rate ............................................................................................. 40

Table 4.3: Reliability Test Results ................................................................................................ 41

Table 4.4: Duration in the Current Position .................................................................................. 42

Table 4.5: Exports made up to the current date ............................................................................ 43

Table 4.7: Impact of FEZ on FDI ................................................................................................. 49

Table 4.8: Impact of FEZ on revenue ........................................................................................... 50

Table 4.9: Effects of FEZ on the social environment ................................................................... 55

Table 4.10: Summation of all variables ....................................................................................................... 57

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LIST OF FIGURES

Figure 2.1 Territorial and regime types of FEZs .......................................................................... 12

Figure 2.3 FEZs typological diversity based on industrial structure and evolutionary stage ....... 14

Figure 2.3FEZs typological diversity and the evolution based on locations and industrial

structure......................................................................................................................................... 15

Figure 3.1: Research Instruments Used ........................................................................................ 35

Figure 4.1: FEZ fertile grounds .................................................................................................... 44

Figure 4.2: Skills and robust systems to export quality ................................................................ 45

Figure 4.3: Visibility of firms ....................................................................................................... 46

Figure 4.4: FEZ and human development..................................................................................... 51

Figure 4.5: Employment creation ................................................................................................. 52

Figure 4.6: Capacity to accommodate zone business ................................................................... 53

Figure 4.7: Illicit dealings ............................................................................................................. 54

Figure 4.8: The Need for sound policies that encourage FEZ ...................................................... 56

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LIST OF APPENDICES

APPENDIX A: COVER LETTER ............................................................................................... 67

APPENDIX B: QUESTIONAIRRE ............................................................................................. 68

APPENDIX C: INTERVIEW GUIDE ......................................................................................... 71

APPENDIX D: MEAN AND VARIANCE OF THE DURATION ............................................. 72

APPENDIX D: RELIABILITY TEST RESULTS ....................................................................... 73

APPENDIX E: FACTOR ANALYSIS ......................................................................................... 74

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CHAPTER ONE: INTRODUCTION

1.1 Introduction

The study serves to assess the feasibility of the introduction of free economic zones in Zimbabwe. One of

the supplementary noteworthy trends allied with the increasing intercontinental integration of the

economies of developing countries has been the proliferation of free economic and export processing

zones (EPZ). The chapter will mainly look at background to the study, problem statement, objectives,

research questions, scope, significance, delimitations and the limitations of the study.

1.2 Background to the Study

The FEZ model has grown in terms of size and number of FEZs across the globe. The need for accelerated

development in developing countries has brought this to action but the FEZ model is as old as western

civilizations, having existed in the Phoenician city of Tyra and at 300 BC in the Greek Island of Delos,

which as a result became one of the wealthiest islands in the world for nearly a century (Haywood, 2000)

During that time free trade zones under the Roman Empire were set up along commercial routes. Being a

marginal element in a mercantile economy, FEZ were used for storing duty free goods before they were

re-exported. Their use continued in the British Empire (Singapore, Gilbraltar and Hong kong) (Martioz

and Szymanski, 1996). The 20th century ended leaving free trade zones, used also for production hence

industrial revolution, colonial expansion and the internalization of liberal economies.

The establishment of the Shannon FEZ was meant to save jobs of 1500 employees at the Shannon airport.

Their jobs were at risk because of technological advances in aviation which made it unnecessary for

transatlantic flights to refine at Shannon (Shoesmith, 1986). The threat posed by the transatlantic jet

resulted in the airport being turned into a duty free production zone for goods with a high value added.

The plan managed to surpass all expectations with nearly 440 jobs being created in the first year. Ten

years later the zone employed an additional 4750 people giving a new life to the airport whose staff grew

from 1250 in 1960 to 2200 in 1975. Other nations seeing this, they jumped aboard and by 1970 more than

10 countries had set up FEZs. In Asia, the first zone was created in Kandla, near Bombay and in the year

1986, there were already 175 spread across countries. Since then FEZs have spread worldwide mainly in

developing countries (Martioz and Szymanski, 1996).

The world Economic Processing zone Authoritys ( WEPZ) 1997 edition of the international directory of

free zones contains information of 847 zones in 102 nations for which some are EPZ and many facilitate

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both trade and export manufacturing ( Bolin, 1999). According to ILOs figures, the numbers of FEZs has

gone from 79 in 25 countries in 1975 to 3000 in 116 in 2002 ( ICFTU,2003).

1.2.1 Zimbabwean economy developments from 1990 to the multi-currency regime

In the year 1990, Zimbabwe embarked upon export led economic structural reforms that were designed to

create a deregulated market driven economy by 1995. Economic reforms were intended to improve

economic growth and employment creation through the attainment of higher levels of investment and

external trade (Mlambo, 2000). One of these reforms was trade liberalisation which was a major

component of the economic reforms. Economic Structural Adjustment Program (ESAP) was envisaged to

last for five years, that is, from 1990 to 1995 in which the economy was expected to grow to prosperity

and the manufacturing sector was expected to expand rapidly and creation of more job opportunities

(Mlambo, 2000.p110). ESAP sought to achieve an economic rejuvenation by implementing the following:

Liberalising the economy to allow foreign direct investment and competition ( UNDP Zimbabwe,

2010 and Hawkins and Ndebele, 2009)

Dismantling import controls through removal of tariffs

The programme failed to sail through because of the 1991/92 and 1994/95 droughts, the dismantling of

the tariff regime and the liberalisation (opening up the economy to foreign competition). The droughts

destroyed the agricultural sector upon which the manufacturing sector depended heavily on for inputs and

foreign exchange. According to Riddell (1990) Zimbabwes manufacturing and agricultural sectors are

heavily interdependent in such a way that by 1980, agriculture accounted for 60% of the inputs used in

manufacturing while agriculture consumed 44% of the manufacturing sectors output.

After such an unexpected experience, the government was left with no option but to abandon ESAP in

1996 and adopted the Zimbabwe Programme for Economic and Social Transformation (ZIMPREST). This

was meant to overcome the existing challenges as well as addressing the ills that were conceived by ESAP.

ZIMPREST was also supported by the revised industrial policy document which mainly emphasised on

indigenisation through the promotion of SMEs. ZIMPREST failed because of two developments which

are the birth of the opposition party Movement for Democratic Change (MDC) and the fast track land

redistribution program (Moyo, 2008). The effect of this was a decline in agricultural output which in turn

starved the manufacturing sector of inputs since the two are inter dependent. Zimbabwes agricultural

sector supplied 60% of the manufacturing sector inputs and that 95% of the 60% was from the

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manufacturing sector inputs and that 95% of the 60% was from commercial farms which were

redistributed.

After the 2002- 2005 elections, the country was isolated by the international community and the World

Bank also announced that it would not extend loans to Zimbabwe (Besada and Moyo, 2008). The

developments drastically affected the agricultural sector which starved the manufacturing sector as shown

by the table below.

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Table 1.1: Maize, wheat and soya bean production trends from 1999 to 2008.

Maize Wheat Soya bean

Year Area Output(t) Yield

Kg/ha

Area Output(t) Yield

Kg/ha

Area Output(t) Yield

Kg/ha

1999 1477940 1606538 1087 47438 260909 5500 52931 120685 2280

2000 1373117 1619651 1180 42551 229775 5400 60650 135417 2233

2001 1239988 1526328 1231 37269 197526 5300 64009 140793 2200

2002 1327368 604758 455 39000 195000 5000 51282 84441 1647

2003 1352368 1058786 783 40809 122427 5000 25390 41197 1623

2004 1493810 1686151 1129 70585 247048 3000 25390 85827 1731

2005 1729867 915366 529 65454 229089 3500 49572 56730 1355

2006 1712999 1484839 867 67207 241924 3600 47137 70273 1491

2007 1445800 952600 659 60000 180000 3000 69900 112300 1607

2008 1724844 435160 250 51000 132600 2600 72311 48320 670

Source: ZIDP, 2012.

Between the years 2006 and 2008 manufacturing sector declined by 73, 3% and Gross Domestic Product

(GDP) reduced by 11% in 2008.

In 1997 EPZs were conceived in Zimbabwe whose aim was to promote exports and employment creation

(UNDP, 2010). The EPZs was managed by the Export Processing Zone Authority, the formation of the

Zimbabwe Investment Authority through the ZIA act repealed the EPZA act, which was the legal

instrument governing the operations of the EPZA. With an employment of 37000 and $172 million worth

of investments the programmes performance was deemed unsatisfactory and issuing of licenses to

applicants ceased in 2006 (UNDP, Ibid). The EPZ incentives which were used under the four instruments

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of the finance act were the Income tax act, customs exercise act, capital gains act and the value added act.

The reasons of failure included shrinking manufacturing base by 20% each year from 2003 resulted in

high unemployment levels 1.4 million to 998 000 in 2004 (Raftopalos, 2009) caused by political

instability at that time. The government through the RBZ started support facilities which included

Productive Sector Facility (PSF) in 2004, Basic Commodities Supply Side Intervention Facility

(BACOSSI), 2007. All these were meant to boost the industry but nothing changed.

The government adopted the multi-currency system in 2009 which made a positive turn around on the

economy as we began seeing companies importing goods for resale. A survey by CZI (2009)

acknowledged the significance of the multi-currency regime in stimulating manufacturing sectors

performance. The sector grew by 110% in 2009 compared to the decline rate of 28% in 2007. This reduced

the rate of company closures but couldnt eliminate them and currently the de-industrialisation crisis is

spreading everywhere in the country.

1.3 Problem Statement

Due to the shrinking country production and rejection of some of the countrys products on international

markets most companies have ceased production and have been depending heavily on imports. The

country up to this date is a net importer which means the value of imports is exceeding that of exports.

This may lead us to questions, are they any ways that can change the countrys status of being a net

importer to being a net exporter and are they any other strategies that can be employed to increase the

level of exports as well as attracting FDI? This will bring us to the feasibility study of introducing free

economic zones in Zimbabwe.

1.4 Research Objectives

The primary objective of the study is to establish the feasibility of introducing free economic zones in

Zimbabwe. To achieve the primary objective, certain specific secondary objectives were identified.

These included:

to determine the benefits to the country as a whole of free economic zone

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to establish how the concept of free economic zones can be applied in third world countries like

Zimbabwe

to establish the challenges and possible solutions to the challenges associated with free economic

zones

to identify how government regulations can be used as enablers for the implementation of FEZs

1.5 Research questions

Is it possible for FEZs to be used as a strategy to resuscitate the economy of Zimbabwe?

How can the concept of FEZs be applied to third world countries like Zimbabwe to revamp the

economy?

How can government regulations be used as enablers for the implementation of FEZs

What are the possible challenges associated with FEZs and what can be done to solve them?

1.6 Assumptions

There were a number of assumptions that were made in carrying out this study. These are as follows:

The political environment is appropriate for FEZs to be implemented.

Information collected from respondents is accurate and can be relied upon.

The findings of the research are representative of all the stakeholders in the financial sector.

The research assumes that no change will occur at the strategies being implemented by the

government and the industries up to the completion of the study

1.7 Significance of the Study

This study is of importance to various stakeholders including the government, relevant authorities, legal

practitioners, regulatory bodies and manufacturing companies, investment firms and also the university.

As the study seeks to look at all plausible areas around FEZs which involve the trade policies, investment

policies and success factors that may be considered to having a successful FEZ, the government as a policy

maker will benefit a lot from this study since it unveils all relevant information on FEZs. The study we

also impart knowledge to manufacturing firm management on how they can utilise the FEZs and the

benefits associated with FEZs to their operations.

The regulatory bodies will be assisted in the consideration of how the concept of FEZs can be

implemented in the economy and what regulations to set so that they wont be illicit dealings as

well as making sure that the businesses environment in the country is favourable. To the university,

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this study can be used by fellow researchers if accepted using findings as foundations to further

study this matter of interest. Other instruments that are involved in the enhancement of economic

growth can be used in the modelling for hypothesis, for instance trade, growth (GNP and GDP),

technology and knowledge transfers.

1.8 Limitations

There are substantial impediments and constraints the researcher was subject to in carrying out the study

and these impacted somehow on the objectivity and dependability of the results. These constraints include

limited resources to collect data from a broader area of respondents and among the companies picked,

some are not exporters while some have ceased exporting. This is because of reduced number of industries

in the country.

1.9 Delimitations

The research addressed to the challenges being faced by the Zimbabwean economy hence the feasibility

study of free economic zones to the country. As broad as the coverage of the topic much emphasis was

put on factors with direct impact on FEZs as well as the economy and some of the areas that include

geographical locations and the construction of zones were just summarised in the concept of free trade

zones. The study focused on banks in Zimbabwe, ministry of industries and economic development and

companies from the manufacturing and technology spaces all headquartered in Harare and the ministry of

industries where the researcher was conducting the surveys.

1.10 Definition of Terms

In the course of research, the following terms were defined in order to narrow their broader universal

meanings.

Multi-currency- refers to the use of American dollar and the South African rand in Zimbabwe

Free economic zones- all sorts of free trade zones be it export processing zones, industrial free zones, tax

free zones, trade free zones, Maquiladoras, technological free zones amongst other names.

1.11 Organization of the Study

This chapter presented the topic that is the feasibility of introducing free economic zones in Zimbabwe. It

gave a brief background of FEZs and issues around the FEZs in Zimbabwe and the problem statement.

Objectives of the study under research was also given and some questions to be answered during the

research. The scope of the study, significance and assumptions were also outlined. Chapter two will review

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the theoretical and empirical evidence put forward by different authors in relation to FEZs. The techniques

used to gather data in undertaking the research will be outlined in Chapter three. Chapter four will include

the findings of the research and data is going to be presented using graphs, tables and charts. The summary

of the research, conclusions and recommendations and suggestions for future research will be drawn in

the final chapter.

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CHAPTER 2: LITERATURE REVIEW

2.1 Introduction

The objective of this chapter is to give the detailed theoretical and empirical evidence on the concept of

FEZs and other information surrounding FEZs. A detailed history of FEZs is provided and it also shows

other contributions from different authors on FEZs. The chapter highlights and analyse comments and

evaluate their aids towards the topic Feasibility of free trade zones. It also give a brief of performance

where different cases of FEZs from other African countries are well described. The cases picked are

different in the sense that there is one successful FEZ while the other one is an unsuccessful FEZ. The

benefits, regulation, and potential caveats are also explained in this chapter. A detailed summary will be

given at the end of the chapter on FEZs.

2.2 Theoretical literature review

Theoretical literature in this research reviews what FEZs are all about. This literature also provide an

understanding on how the FEZs work and the history of performance of established FEZs in different

countries.

2.2.1 Concept of FEZs

This part of the chapter give a detailed summary on how FEZ work.

2.2.1.2 Internationally used definitions

UNIDO defined FEZ as a fairly small, geographically detached area inside the host country, the tenacity

of which is to entice export-oriented businesses, by offering them exclusively favorable investment and

trade conditions as compared to the local economy of the host country. In particular, the EPZ provide for

the importation of goods to be used in the production of exports on a bonded duty free basis (UNIDO,

1980).

EPZ are industrial estates which form enclaves within the national customs territory and are usually

situated near an international port and/or airport. The entire production of such zones is normally exported.

Imports of raw materials, intermediate products, equipment and machinery required for export production

are not subject to customs duty (UNCTAD, 1985: 10).

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An EPZ could be defined here as a clearly delineated industrial estate which constitutes a free trade

enclave in the customs and trade regime of a country, and where foreign manufacturing firms producing

mainly for export benefit from a certain number of fiscal and financial incentives (ILO/UNCTC, 1988: 4).

An EPZ is an industrial estate, usually a fenced-in area of 10 to 300 hectares that specializes in

manufacturing for export. It offers firms free trade conditions and a liberal regulatory environment (World

Bank 1992: 7).

EPZ are all government authorized areas such as free ports, free trade zones, custom free zones, industrial

free zones or foreign trade or any other type of zone, as the Council may from time to time decide to

include (Statutes of the WEPZA, ID/W.6/266/6, 28thFebruary 1978), (Kusago and Tzannatos, 1998.

The definitions provided by the organizations mentioned above are specific and they dont accommodate

other types of FEZs. A broader definition is going to be used in this study to accommodate all the FEZs

used around the globe. The broader one defines FEZs as deemed exceptions to national tariff/ fiscal policy,

upon their existence FEZs will come up with better production conditions, laxer legal provisions and trade

facilities.

2.2.1.3 Terminology in FEZs

FEZs have become widely used trade policy instruments across countries since their modern revival in

the late 1950s especially in developing countries. SEZs, FEZs, EPZs, TFZs, IFZs, enterprise zones,

specialized zones, logistic zones, Maquiladoras, all these are names assumed by free economic zones. Due

to extensive discussions in literature FEZ have been given such whole host names. The names given to

the FEZs refer to differences in their industrial specialization for example technology, services, logistics,

characteristics such as geographic form (concentrated or widely spread) and lastly the business type.

Among the commonly used names, we have the special economic zones (China), free trade zones and free

economic zones (Kusago and Tzannatos, 1998). The below shows the evolution of terminology used

across the globe and the country that uses that special type of term.

Table 2.1 .The evolution of terminology

Free trade zone Traditional name since (1982, ILO) and one

currently being built in Nigeria

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Foreign trade zone Individual authors (R.S Toman 1964) India

(1983)

Free zone UNCTAD (1973), USAID (1982), United

Arab Emirates (1983)

Industrial free zone UNIDO (1971), Ireland (pre -1970)

Maquiladoras Mexico early (1970s)

Export free zone Ireland 1975, UNIDO (1976)

Duty free export processing zone Republic of Korea (1975)

Export processing free zone Harvard University (1977), ILO (1983),

Economist (1979)

Free production zone Sternberg Institute (1977)

Tax free zone Individual authors (W.H. and D.B. Diamond,

1980)

Special economic zone China (1971)

Investment promotion zone Sri Lanka (1981)

Free economic Zone Individual author (H. Grubel, 1982)

Free export zone Republic of Korea (1983)

Free export processing zone OECD (1984)

12 | P a g e

Privileged export zone Individual author (N.N. Sachitanand, 1984)

Industrial export processing zone Individual author (P Ryan 1985)

Source: Kusago and Tzannatos, 1998

2.2.1.4 Types of FEZs

The diagram shows the types of FEZs and tries to differentiate them by their specific characteristics and

specifications

Figure 2.1 Territorial and regime types of FEZs

Source: Meng Guangwen (2005)

The horizontal arrows are showing the link between FEZs and other sub types while vertical arrows

show the regime type as a special case of territorial type of FEZ

Territorial have a special defined territory with infrastructure of high quality and administration

facilities staffed with better trained people than elsewhere in that country which cannot be granted

by a regime FEZ (Guangwen, 2005). Due to its specialization territorial avoids technical difficulty

of organizing and allocating various fiscal, monetary privileges of the FEZ regime to larger numbers

of corporates. Basically there are two sub-types of territorial FEZs depending on the linkages with

domestic economy.

FREE EC

ON

OM

IC ZO

NE

ENCLAVE TYPE

REGIME TYPE

TERRITORIAL TYPE

OPEN TYPE

BONDED

FACTORY

DUTY FREE SHOP

HIGH TECH

ENTERPRISE

SPECIAL ECONOMIC

ZONE

FREE FINANCIAL ZONE

FREE TOURISM ZONE

EXPORT PROCESSING

ZONE

FREE TRADE ZONE

FREE PORT

SPECIAL ECONOMIC

ZONE

13 | P a g e

The policy of customs supervision differentiate them as open and an enclave type. An open type

has no closed customs supervision which implies that it is not strictly defined or separated from the

domestic economy than the enclave type. Example of an open type include SEZs, SIPs, and Free

financial zones (Guangwen, 2005). The enclave type has a closed supervision carried out to ensure

less or no direct linkages with the local economy which means it is strictly defined. Examples of

enclave types include FPs, FTZs and EPZs.

Some of the zones are both enclave and open at the same time for example SEZs. This means that

they have a part which is open and the other part which is closed.

2.2.1.5 Regime type

The regime type grants benefits to companies located anywhere in the host country as long as they

meet the requirements /suit the criteria of the FEZ. This type is strictly a regime type not a zone

thus it is a special type of a territorial type. This type allows for a strong network linkage with the

local economy and gives the foreign firms to choose the optimal location for their activities

(Guangwen, 2005). Regime types are subdivided into bonded export oriented factory, bonded

warehouse and high tech enterprise. Territorial do not have linkages but they are fewer than in the

regime type which also implies that the regime type can coexist with and evolve from the territory

type. An instance can be that of LDCs, as the goals and roles of FEZs shifted, many of the incentives

were applied to areas outside the zones (Haywood, 2000). Taiwan is one of the examples where

incentives such as export benefits have been granted to bonded factories which are not

geographically restricted.

2.2.1.6 Typological classifications of territorial zones

Territorial zones can be further classified into business specialties for example trade, manufacture,

service, cross border, science based. These classes are based on the importance of the industrial

sector, the evolutionary stage and location.

14 | P a g e

Figure 2.2 FEZs typological diversity based on industrial structure and evolutionary stage

Source: development with other numerous sources from: 1) UNCTC Current Studies (1990):The Role of

Free Economic Zones in the USSR and Eastern Europe, United Nations, New York, p. 2; 23; 2) Kreye,

TRADE BASED FEZ

FIRST GENERATION

MANUFACTURE BASED FEZ

SECOND GENERATION

SERVICE BASED FEZ

THIRD GENERATION

Free port

Free city/state

Bound house zone

Customs bounded Warehouse

Customs free zone

Customs zone

Duty free zone

Tax free trade zone

Tax free zone

Free trade zone

Foreign trade zone

Free border zone

Transit Zone

Transshipment

zones

Free frantier zone

Duty free exp. processing zone

Export free zone

Export processing zone

Free export-processing zone

Free export zone

Free production zone

Industrial exp.-processing zone

Industrial free zone

Investment promotion zone

Joint enterprise zone

Free enterprise zone

Zone of joint entrepreneurs hip

Privileged export zone

Maquiladoras

Import processing zone

Agricultural export processing

zone

Free agricultural zone

Economic &technological

development zone

Free professional zone

Free service zone

Free banking zone

Free insurance zone

Free red light zone

Free gambling zone

Free medical zone

Free tourist zone

COMPREHENSIVE FEZ

FIFTH GENERATION

SCIENCE BASED FEZ

FOURTH GENERATION

Growth triangle

Cross-border economic

cooperation zone

World Economic

Integration

CROSS BORDER FEZ

SIXTH GENERATION

Cross-National Regional

Economic Integration

Incubator

Research park/area

Research triangle

Technology park

Science park/Scientific

park

High-tech park

Science-based park

Science & technology park

Science-based industrial

park

Tech-development park

New and high

technologic

development zone

Science

city/Science town

Free zone

Free economic zone

Special economic Zone

Comprehensive free port

Comprehensive free trade zone

15 | P a g e

O., Heinrich, J., Frbel, F. (1987), Export Processing Countries: Results of a New Survey, Working Paper

No. 43, International Labor Office, Geneva, p. 7, 15

Horizontal arrows show the evolution of the key types of FEZ. Vertical arrows show the relationship of

subordination of FEZ. The FEZ in square frames are sub types.

Figure 2.3FEZs typological diversity and the evolution based on locations and industrial structure

Source: Meng Guangwen (2005)

Horizontal arrows show the ties and evolutionary direction of typologies based on the location and

sectorial structure of FEZs, the vertical arrows show the typology of FEZs based on macro middle and

micro location and the ties between the two systems based on the location and sectorial structure. At the

first glance FEZs have no common location pattern. You can find them in the coastal region or in the

Typo

logy b

ased o

n th

e macro

, mid

-size and

micro

locatio

ns

Typo

logy b

ased o

n in

du

strial secto

rs

PORT FEZ URBAN FEZ SEPARATED FEZ

Trade-based FEZ

Manufacture -based FEZ

Comprehensive FEZ

Comprehensive FEZ

Service- based FEZ

Science- based FEZ

Service- based

FEZ

Trade-based

FEZ

INTRA-NATIONAL FEZ

COASTAL FEZ INLAND FEZ

Cro

ss -bo

rder FEZ

Cro

ss-Natio

n R

egion

al Econ

om

ic Inte

gration

Growth triangle

Cross-border economic co-

operational zone

16 | P a g e

interior thus urban or rural locations or in a cross border region between two or more countries. With this

one can conclude that accessibility of FEZs should be very high in order for it to perfectly link with the

international markets.

Some FEZs are based on the criteria of macro location (coastal, inland, cross border). Others can also be

based on mid-size location, micro location where we have urban and ports. FEZs can evolve from intra-

national to cross border FEZs and inter to cross border national REI (Guangwen, 2005).

2.2.1.7 Incentives of FEZs

According to Kusago and Tzannantos (2001) FEZ incentives are divided into two categories namely hard

and soft ones. Hard incentives are those that are physical (tangible/ visible) in nature for instance provision

for infrastructure and services (roads, power supply, transport facilities) that facilitate and augment

production. Soft incentives are the intangible ones, tax allowances such as generous and long term tax

holidays, free flow of currency, full repatriation of profits, flexibility in labour laws in the zone than in

the domestic markets and other special trade concessions (Madani, 2001).

2.2.1.8 Benefits of FEZs

The existence of FEZs in an economy is more beneficial to the host country and also other countries

trading in the zone. Since it will be a more robust industrial sector of some sought below are some of the

benefits to the host country and everyone in it (Madani, 2001).

Create utilization of local materials

Increased foreign exchange earnings

Additional capital equipment

Liquidity

Additional tax revenue collects

Job and income creation

Average wage in the zone is higher than the average wage outside the zone

Brings about management and supervisor training

Catalyst effect

Efficient industrial structures

Technology spill over

17 | P a g e

2.2.1.9 Potential caveats to benefits above

The benefits above may come with its own potential caveats that may affect the zone and the economy

negatively (Madani, 2001). Among the caveats, some possible caveats to the benefits aforementioned

are stated below. Note that they are some of the benefits with no caveats for instance managerial

training, catalyst effect/ demonstration effect and technological spill-over.

Overstated foreign exchange earnings that maybe real on paper but untrue in real values

Net imports not as impressive because of high import content of exports

Lack of job security due to prone to demand shocks

Forgone tariff revenues and taxes

Opportunity cost of public investment related to the zone maybe higher

Environmental damage and pollution

Labor and work safety issues due to lax regulation ( Mandani, 2001)

2.2.1.10 Potential static benefits

Earnings from foreign exchange and export increase are two main benefits of FEZs. An increase in

exports does not represent economic progress especially if the import bills increase at a correspondent

rate. Actually what really matters is not the absolute volume of exports but it is the difference between

export earnings and import costs (Shoesmith, 1986). According to Mandani, 1999 FEZs provide

foreign exchange earnings that have the capacity to allow low income economies to slacken the foreign

exchange constraints regarding their import needs for the rest of the economy and provides the

government with development funds. Mandani, (1999) explains that the inflow of foreign exchange

can be allocated to policies supporting the development of the local economy public investment and

also to allow for a more graduated adjustment for countries undergoing ESAPs. On the same note, the

hotel level of exports and imports of the zone are the determinants of the impact of FEZ on foreign

exchange.

Tekere, 2000 argued that because FEZ rely on imported raw materials and capital goods in the long

term the inflow of foreign exchange from exports would be at a minimal level. He went on to decline

that, the failure of firms to remain profitable in the export business will then results in a negative net

impact on foreign reserves. Kusego and Tzannatos, (1998) asserted that FEZ workers are paid in

foreign currency indirectly and from an economic perspective, this is similar to the direct export of

18 | P a g e

labor. With the above assertion, the hiring of new workers help increase the foreign exchange earnings

of the host country in the form of wage payments. FEZs can be preferable to immigration given the

social effects in the host country and in the country of origin of the foreign firms that accompany

dislocation of labor.

2.2.1.11 Vulnerabilities

The proliferation of FEZs has spread remarkably across the globe in these recent years such that there

are now 3000 FEZs 135 countries with profits totalling billions of dollars. In addition to boosting

economic opportunity, the incentives package provided in FEZs can result in a reduction in finance

and trade controls and enforcement, creating room for MLs and TFs. The same characteristics that

makes FEZs attractive to formal businesses also attracts abuse from illicit dealers. FEZs have

weaknesses depending on the way they have been setup and how they are being run. These weaknesses

creates opportunities to illicit dealers which will leave the domestic economy exposed to risks

emanating from the FEZ. A summary of weaknesses is provided below.

Inadequate anti money laundering and combating financing of terrorism safeguards

These begin from the policies set by the zone management or the policymakers up to the

infrastructural setups. Inadequate safeguards will undoubtedly leave the economy exposed.

Relaxing oversight by competent domestic authorities

Relaxing in a serious environment is very risky especially in the zone. Having a pilot view on

everything is not good for the zones authorities. Closer inspection is the most recommended way of

operating when in the inspection department. Taking this part for granted will pave a way for these

illicit dealers to transport illegal goods or even commit fraudulent activities and also tax evasion.

Weak procedures to inspect goods and register legal entities

This does not only allow for illicit dealers to operate at their will but also shuns foreign investors for

they will be fearing for their investments.

Lack of cooperation and coordination between customs authorities and zone management

19 | P a g e

Poor coordination creates a series of bottlenecks and red tapes in all activities of the zone, this will

hinder the production of every company located in the zone and the new entrances.

The World Customs Organization which is the only global standard setter of free trade zones has also

developed reference tools for the development of FEZs. The FATF TBML typologies and best practice

papers published in 2008 and 2006 presented areas of continued improvement thus red flag indicators

and best practices relevant to FEZs.

The misuse of FEZs affect both jurisdictions with zones and with not. This is because FEZs connect

legal entities to the international markets. A number of zones are located in regional financial centers

linking the international trade hubs with access to global centers of finance. With the varying zones

from country to country there are high chances that an individual jurisdiction the operators, regulators

and requirements maybe different. As there are no set standard approaches within zones it can be a

global snapshot. As the customs areas are set to encourage trade and FDI, FEZs phases are subject to

unique laws and regulation.

The features set provide optimal environment for legitimate business but also do the same for illicit

dealers. The existence of vulnerabilities in systems makes it easy for ML to tape in.

Relaxed oversight and lack of transparency

Lack of oversight on all high volume containers create room for illicit dealings. MLs and TFs make

use of high volume containers because they know that the inspection of those containers is very

tedious. This calls for strict and very close inspection and transparency on all inspections.

Vulnerable types of goods

Cigarettes, alcohol and other tariff items are more vulnerable to smuggling and contraband due to the

increased revenue generated by not paying tax. The tax for such goods is very high and by evading,

the tax shield that was supposed to go to the authorities will be added to the profits. Luxury goods and

other goods most of them used in violation of IPR are also vulnerable. IPR violations are difficult to

detect and are difficult to substantiate at the time of the cargo inspection. To avoid too much

inspections, smugglers make use of repackaging, re-labelling and export the goods. This is done to cut

the links from origination. Carousel VAT and electronic items are also vulnerable to smuggling.

20 | P a g e

Electronic items constitute high volume of trade so with the high demand and supply, they are left

vulnerable. Other strategies used by the illicit dealers is redeeming tax illicitly and the higher the

volumes of the goods, the higher the refund.

2.2.1.12 Regulation

There are a set of regulatory bodies that govern FEZs in different countries. Depending on which side

of the globe the country is, zones are governed by some of the bodies given below.

The FATF is an independent inter-governmental body that develop policies to protect the global

financial system against money laundering and terrorist financing. Recommendations given by FATF

are standard for defining regulatory measures and criminal justice that should be implemented to curb

challenges faced (Durham, 2003). These recommendations also include international cooperation and

preventive measures to be taken by stakeholders affected by these illicit dealings. Examples of such

we have financial institutions, real estate and lawyers. The introduction of FEZs to the international

community has also brought ML and TF. The favorable incentives of FEZs can result in a reduction

in finance and trade controls and enforcement thereby creating room for ML and FT. this is because

the same characteristics that makes FEZs attractive to formal businesses also attracts abuse by illicit

dealers. The FATF recommendations are regarded as the global AML and CFT standards.

Country customs play a very vital role in maintaining order in the zone area. They are the ones who

are responsible for searching of vessels and make sure that every documentation required to enter the

zone has been provided. They also take the standards suggested by the FATF, WEPZA and other

international bodies to practice (Mohammed and Omade, 2011).

The World Banks role is to work hand in hand with the FATF since it is the bank of the whole world.

Its inquisitive wide network helps the FATF recommendations to be descended to the right parties at

the right time. The conventions like the Kyoto and WEPZA help customs to do their jobs efficiently

and effectively through the provision of guidelines.

2.2.2 Traditional concept of FEZs

The traditional concept of FEZs outlines the main areas that were set to be covered by the FEZ.

Objectives

Promotion of exports

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Promotion of FDI

Policy features

Duty free area 70%-80% export requirement

Manufacturing oriented: Neglected services, intermediaries and logistics

Tax holidays

Limited or no selection or performance criteria

Development approach

Limited or no demand analysis

Public sector develops, manages and regulates

Public subsidies of services and facilities

Political influence on site selection

2.2.3 Performance and evaluation of FEZs

Many countries have established free economic zones while some are considering forming FEZs. Two

FEZs with opposite experiences will be briefly reviewed making the comparison highlighting the material

importance of the institutional and policy environment as well as the incentives.

2.2.3.1 Dakar FEZ, Senegal

The FEZ was established in 1974 and is considered by many experts as an example of an unsuccessful

zone. Its operations began in 1976 but failed to achieve its goals in creating employment and FDI

attraction. The employment rate grew rapidly to 1200 in1986 and dropped back down to 600 in 1990.

Firms operating in the zone managed to export a meagre 4million of FCFA (US 14.7million) out of the

zone despite a stable political environment and favourable financial promotions. Its fiscal benefits

matched those of its neighbours and competitors. They included duty exemption, no tax on machinery,

tax free corporate income and dividends and unrestricted repatriation of capital and profits.

The failure if this zone was because of a series of problems. First of all, bureaucratic delays which ended

up demoralizing potential investors. The investment flows averaging 100000nand minimum employment

of 150 workers discouraged many national and foreign entrepreneurs. Due to government mandated labour

market rigidities, hiring and firing became very difficult. Considering the fact that wages should be backed

22 | P a g e

by returns, the Dakar FEZ had a different case. Their salaries and wages were competitive with other

countries like Egypt, Tunisia and China but the productivity was very low compared to the same countries.

Factory rental space was very limited which implies that investors were required to lease and build their

own factories hence forth discouraging FDI through imposition of increased risks. Moyo (2013) claims

that costs of utilities and transportation are rather high in Senegal (ranging 25% of the cost of the final

exported goods)

2.2.3.2 Mauritius

The Mauritius FEZ is one of the most successful FEZ in Africa. Having its FEZ law being passed in 1971

which was in response to the failure of import substitution policies and the concern about ever growing

population and mono commodity export (sugar). The incentive of the FEZ included exemption from excise

and duties on productive machinery and parts , raw materials and other productive components ; free

repatriation of profits, capital, dividend from FEZ firm and also received preferential interest rates .

Initially the firms in the zone were not subject to corporate tax for 10years and income tax on dividends

for 5 years. The law was amended later and now they are paying 15% corporate tax but there is a

compensatory increase of income tax exemptions on dividends from 5 to 10 years. There are conducive

hiring and firing laws and all goods produced should be exported.

Table 2.2 shows the whole package of incentives provided to investors.

Country Year Tax Tariff Other Incentive

Namibia 1995 Exemption from corporate taxes

(normally 35%) sales taxes duties

forever.

Liberal customs regulations

exemptions on customs

duties,

transfer, stamp and imports

, (for exports out of SACU)

forever

Liberal labor laws (national law

revised to prohibit strikes and

lockouts); conditional reimbursement

of up to 75% of EPZ personnel

training costs.

Togo 1990 10 year tax holiday after which the

rate is 15%; no dividend taxes for 10

year; tax on salaries is reduced from

7% to 2%; firms can open foreign

exchange accounts or transfer funds

abroad without any hindrance;

preferential tariffs also apply on port

No tariff or import duty Firms given ample freedom with

regards to hiring, firing and

grievances. Government intervened

mid-1996 to strengthen labor

protection; in 1990 labor costs

averaged US 40c.

23 | P a g e

charges, electricity and

telecommunication services; no

restriction on level of foreign

ownership

Kenya 1990 10 year tax holiday; 25% tax for the

next 10 years; no withholding taxes

for 10 years; VAT exemptions

Import duty exemptions

and no foreign exchange

controls

No labor regulations

Mauritius 1971 Free repatriation of capital, profits

and dividends from EPZ firms.

Preferential interest rates. Initially:

no corporate tax for 10 years, no

payment of income tax on

dividends for a periods of 5 years;

Law revised: now must pay 15%

corporate tax over the lifetime of the

company; compensating increase of

income tax exemptions on

dividends

from 5 to 10 years

exemptions from excise

and duties

on productive machinery

and parts,

raw materials and

components

Favourable labor laws for termination

of employment over time

Senegal 1974 exemptions from taxes on corporate

income and dividends; unrestricted

repatriation of capital and profits

Exemptions from customs

duties on machinery, semi-

finished goods and finished

goods

Government mandated restrictions on

hiring and firing of workers

Guatemala 12 years income tax

Exemption

No duties, levies or quotas

on imports and exports

Free repatriation of profits

Source: Mauritius: Alter (1991), Curimjee (1990). Namibia: world Bank (Namibia desk officer);

Namib Times, Nov 7, 1995, pg. 18. Offshore Outlook, volume 3, issue 290, March 1995.Togo: Africa

Analysis. 1990. Togos Open Door to Hong Kong, No. 91, February. Seshie, D. 1996. Togo: La

Franchise est-elle Payante? In Jeune Afrique Economies (France), no. 220, pg. 60-62.

Kenya: World Bank reports no. 13886 and 14698, and Mark Ochengs article export-processing

zones draw lukewarm investor response in the April 1991 of African Business. Senegal: Information

on Senegal EPZ was gathered from three sources: Background paper on the 1992 World Bank paper:

Export.

24 | P a g e

The FEZ is considered a success because they managed to meet their primary goals which are

employment creation, export diversification, gross and net export increase, FDI attraction and being

on the receiving end of the demonstration effect and human capital build up. In the 1970-80s FDI did

not play any vital role (Alter, 1991), but now it has become the most influential tool in development

of FEZs. 1988 statistics shows 25% being accounted by FDI of all the FEZ total investment. Today

foreign firms now control an estimate of 45% of the FEZ sector, largely concentrating in garment

production. The firms are taking advantage of the abundant educated labor. By 1976, 84 firms had

started production and in 1983, 129 firms employed 23424 workers. The number increased to 90861

workers being hired by 586 firms. By 1995 the number dropped to 481 companies with 80466 workers

which is 17.10% of the entire national labour force.

The labour market has been tight since 1980 and was estimated to be 1.6% causing salaries to increase.

These wage increases are somehow putting Mauritius FEZ at a competitive disadvantage and some

foreign firms are now moving out of the country to relocate elsewhere where there are labour costs.

An example can be the 1991 wage levels of the garment workers which was at $1.28 per hour while

in China was at $0.25 per hour. Beside the wage part, firms do not only consider that but they look

also at other factors such as political stability, policies infrastructure amongst others. The overall net

exports of the country have been increasing ever since the zones establishment which resulted in the

share of FEZ in gross exports growing steadily.

In 1986 the zone gross exports constituted 54%of total exports while in 1992 it reached 63% and

in1995, 67%. This increase resulted in the net exports to exports ratio increasing from 22% in 1985 to

40%in 1995. With the statistics above, there is an element of backward linkage of the zone to the

domestic economy. This is because the exports of domestic economy are also increasing at an

increasing rate Rhee (1990). Cuhrimjee, 1990 argues that there is extreme inter link between zone

firms and the local economy. Alder, 2003 suggest that the FEZs overall performance is not

independent of the rest of its host economy. He went on to say during 1978-82 when the economy was

facing both internal and external difficulties, FEZ growth slowed and later recovered with the whole

economy.

The coming together or fall application of the success factors has brought success to the Mauritian

FEZ. Everything is favourable from the incentive package, educated pool of labour, stable government

25 | P a g e

and provide stream lined services. The country is continually benefiting and amongst its benefits

included the ECI arrangement (LOME) and Multi-Fibre Arrangement. Good timing upon the

establishment of the zone, an economically attractive environment and also considering non- existence

of competition are some of the factors behind its success.

2.2.4 Success factors and importance of FEZs

Strong government commitment and support of the government to pilot market oriented economic

reforms. They are a set of approaches that are key to the success of every FEZ, there is the gradualist

approach which put more emphasis on stabilizing the macro-environment, Decentralization which talks

about sound business environment and the administration and lastly the administration systems for

instance one stop shops.

Land reforms

There should be favourable laws governing the land reforms within the zone. Examples of favourable laws

include land leases 20-25 years to investors and making use of the land auction systems

Investment incentives and institutional autonomy

Fiscal and non-fiscal incentives, Preferential policies, Flexibility in hiring workers, Policies should be

inviting so as to encourage investments from diasporas and FDI.

FDIs and Diasporas

Skills, technology and capital are brought into the country by these parties. Technology is in the form of

technology learning, innovation, upgrading and strong links thus creating base for innovative cultures.

Benchmarks, objectives and competition in the zone by the zone firms should be at their optimal to ensure

boosted activities and full capacity utilization within the zone which will in turn help attain the main goals

of the FEZ establishment.

Location advantages

26 | P a g e

Location plays a vital role in the success of the FEZ. The best location of FEZ should be the one which

expose the FEZ to international trade and where other countries can easily access the goods and services

being manufactured and offered in the zone.

2.2.5 Models of FEZs

FEZs models differentiated by the type of the leadership controlling them. These are at times called

institutional features, institutional features play a crucial role in determining the success of a FEZ. A

number of FEZs in Africa have failed because of their institutional features.

2.2.5.1 Zone Authority owned model

In this model the zone authority operates and regulates the zone

2.2.5.2 Government owned model

This is where the government has funded everything in the zone and with that they assume control of the

zone. The services and facilities offered in this type of zone are typically subsidized services and facilities.

2.2.5.3 Zone authority in collaboration with government bodies model

This model is a hybrid of some sort in the sense that there are two separate parties coming together to

build one thing. In this model, depending on the agreement of the parties power sharing varies from zone

to zone but most of them are characterized by the zone authority exerting little power.

2.2.5.4 Separate customs area model

This one is different from all other models in the sense that it is recognized by the Kyoto convention.

2.2.2.4 Theories of economic growth

Foreign direct investment is not the only catalyst to economic growth, different studies have been

done that shows that this is not the only variable that is needed in a country for economic

development, other factors like spill overs, technology, human capital and inflation have major

impacts on economic growth. Theories have been done in order to spell out other factors that

enhance economic growth and to act as a pillar for the studies above:

2.2.2.5 Neo-Classical Theory by Solow (1970)

This theory suggests that increasing the capital base will lead to decreasing marginal returns. This

therefore implies that increasing capital has impermanent and restricted impact on increasing the

economic growth. As the capital increases, the economy upholds a sturdy rate of growth (Durham,

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2003). For one to increase the growth there is need to increase labour productivity, size of the

workforce or improve technology. For there to be economic growth there should be an increase in

all factors that affects the growth thus employing all factors of production. Growth hinges on

increasing the stock of capital goods to expand productive capacity, higher savings that is delaying

consumption to fund increased apportionment of resources towards investment, net investment and

the necessity for adequate saving to fund investments. There is also need for capital widening (this

is when capital stock rises at a rate which keeps leap with labour force growth) and Capital

deepening which is when capital stock grows faster than labour force which is considered more

important.

Quality of capital goods these are affected by the research and development and Innovation. A

combination of capital deepening & technological improvement explains major trends in economic

growth:

Prediction - Adding more capital goods to a fixed amount of labour will lead to diminishing

returns to capital.

Increased capital accumulation drives the rate of return on capital down.

Eventually, the rate of return may be so low that no further net capital accumulation takes

place.

Technological advancement is presumed to be exogenous i.e. lies outside the growth model. This theory

was fused by Caves (1971), in his study on foreign direct investments on economic growth when he

postulated that technological proficiency derived from investment in research and development (R&D),

are expected to be strongly correlated with diversity proficiencies.

2.3 Empirical literature Review

A number of studies on FEZs have been carried out in various countries using several methodologies to

come up with conclusions. Empirical studies in this research covers contributions by several authors in

different countries under the topic of FEZs.

2.3.1 Export Development and Export

UNIDO, (1980) in the study, Export Processing zone (EPZ) in developing countries. The main objective

of this study is to review the development of EPZs by comparing and studying different stages of growth

of EPZs in Asia. It then examines the objectives of the host country in establishing its EPZ, while doing

28 | P a g e

so; the study assesses the impact of the EPZs in terms of their economic and social consequences

in the host country. The main findings of this study were: 1. EPZs have succeeded in attracting foreign

direct investment, 2. In the long term, success of EPZs relies on the education and human resources

policies in the host country, 3. Qualifying the employees and transfer of technology are primarily limited

to the nature of the production process used by the investors and the lack of complex production

processes).

As opposed by Tekere (2000) in his study, Export led growth strategies. The main aim of his research is

to review the role of establishing FEZs in Africa (Developing countries). The study points out that most

established FEZs in developing countries have been unsuccessful in reaching the goals of establishing

successful FEZs due to the lack of government commitment in the FEZ program that will lead to setbacks

of the FEZs set objectives, government bureaucracy, the high cost of infrastructure development of the

FEZs, the poor management and inadequate promotion of FEZs, the poor selection of location that led

it a failure to attract investments, the lack to continue with further trade reforms. The study

concludes that FEZs are not a viable strategy for economic development in African countries and he

further alluded that FEZs are no longer viewed as a solution towards the development of exports for

African in view of trade liberalization policies, regional trade integration, and new multilateral trade

regime.

2.3.2 The Impact of Export Processing Zone Development on Employment Creation in Kenya.

Caleb Mireri (2000), in his study to scrutinize the practise of EPZ in Kenya which was done by making

comparisons of the circumstances of labours inside and outside the EPZ. According to this study, there

are negative results from establishing the EPZ such as the insecurity of the workers due to the variability

in the number of companies operating in the EPZ and employees inside the EPZ could be worse off

than those who work outside the zones with respect to the wages paid inside and outside the EPZ.

Furthermore the situation becomes shoddier in the zones because companies will intentionally block trade

union activity hence safe guarding their position and in the end, the study shows other problems

concerning the employees such as the lack of opportunities for training and promotion, racial

discrimination, risks of industrial accidents and pollution.

2.3.3 Special Economic Zones (SEZ) In Developing And / Or Transition Economics: A Policy

Proposal

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Sehweinberger, (2003), tries to analyse the main function of FEZs in the host country with respect to taxes

and his main finding was that the introduction of FEZs should be accompanied by appropriate tax policies

that will lead to government revenue. The revenue attained may be used to fund other investments in

infrastructure or other public goods.

2.3.4 Type of Tax Concessions for Attracting Foreign Direct Investment in Free Economic Zones.

Chang, (2004), tries to measure the disposable contemporary value of free economic zones (FZEs) which

mainly do a comparison of the tax incentive effects with inflation and without inflation. He then analysed

the effects of incentives offered to the foreign investors in the FZEs. The study concludes that imposing a

lower commercial tax rate or tax holidays in the FEZ can be desirable. The study also shows that using

depreciation as a tax concession when inflation is zero, guarantees a higher net present value to the

investor rather than when using an investment tax allowance and accelerated depreciation

2.3.5 Impact of Special Economic Zone on Human Development and Poverty Reduction: An Indian

Experience

Raheem (2011) in his paper : Impact of SEZs on human development and poverty reduction, examines

impact of special economic zones on human development and poverty reduction in India. The

study concludes that the employment creation has thus far been the most significant channel, through

which SEZ have impacted on human development and poverty reduction in India. Indias FEZs are

manufacturing intensive not assembly intensive in terms of their operations. They mainly concentrate on

value addition hence the generation of employment is rather vast. Albeit their contribution to general

employment has been limited, their contribution to employment generation is of significance at regional

level.

However due to the inertia, their ability to engross additional labour has been diminishing. This is being

caused by the shrinking in the export demand and the only way to reverse the effect is by carrying out

heavy promotional strategies that can help attract fresh investment in the zone. The link between poverty

and employment lies in the degree to which revenue bred from employment permits labours and their