a feasibility study of introducing free economic zones to zimbabwe
DESCRIPTION
A concise approach, with relevant and suffice information on free trade zones as well as past Zim Experience by L.J Hanyire .TRANSCRIPT
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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)
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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