Assessment of Achievements and Challenges of Export Processing Zone

Over the past few years, the idea of establishing “export processing zones” (EPZs) has found support among several developing countries. This development is linked to the increasing acceptance of” globalization” and neoliberal policies across the region. Developing countries have tried to stimulate exports of nontraditional manufactures. Efforts have been undertaken to establish the Export Process Zones. Tanzania as one of the developing countries, has been advocating EPZ since 2002. These struggles are evidenced by the enactment of the EPZ Act 2002, amended 2006 and establishment of the zone in 2003. Since its establishment, the EPZ has been striving towards attraction and promotion of investment for export-led industrialization, increase of foreign exchange earnings, creation and increase employment opportunities and promote processing of local raw materials for export (value addition). In spite of the objectives their realization has not been impressing.

This paper aims to asses the achievements and challenges of the 4th phase government on this respect. In undertaking this study case study approach is used in collecting the primary data where the Chief Executive officer was interviewed from the fact that data of this nature of study are strategic and centered on one office. Secondary data were collected through documentary reviews. The study found that EPZ has established industrial parks in 11 regions, creation of infrastructure for Dar es Salaam industrial parks, and the challenges are poor transportation systems connecting industrial parks to the source of raw materials, labour and port access. Port congestion and power instability have also been hampering the efforts. There is little promotion of the incentives and little capitalization of the international agreements. If these are worked on EPZ can deliver the expected results to the Tanzanian Economy.

1.0INTRODUCTION TO STUDY

Export processing zones (EPZs) are not a new phenomenon and, according to the ILO, the first zone was set up in 1929 in Spain. The 1970s saw a boom in EPZs, mostly in low- and middle-income countries of Latin America, the Caribbean, Asia and, to a lesser extent, Africa (Jauch, 2002).

Export Processing Zones (EPZs) are special industrial parks providing duty relief to export oriented firms operating in the zones. They are enclaves within a country where foreign and domestic goods may enter duty free in order to be stored, distributed, combined with other foreign and/or domestic products, or used in manufacturing operations. EPZ have become rather popular trade policy instruments in the last three decades. An EPZ is a trade policy instrument used to promote non-traditional exports (Armas and Sadni-Jallab, 2002).

In Tanzania, EPZ was established under EPZ act 2002. (URT,2002).Currently Tanzania has Eight (8) companies licensed as EPZ Developers Industrial Parks, 6 Single Factory Units),ten (10) companies licensed as EPZ Operators which are five in textiles/garments, one in Mineral processing (jewellery),one in Fruits Processing ,three in reconditioning ,mechanical, electrical and,electronic devices (URT, 2006). The Tanzanian EPZ objectives are such as to attract and promote investment for export-led industrialization, to increase foreign exchange earnings, to create and increase employment opportunities, to attract and encourage transfer of new technology and lastly to promote processing of local raw materials for export(value addition). Although much literature exists as far as export processing zones is concern, little has been written to address challenges and achievements of the objectives of EPZ Tanzania. This research aims at achieving better understanding of the challenges and achievements on objectives of EPZ Tanzania in reference to the fourth phase of the government.

1.2 OBJECTIVE OF THE STUDY

The general objective of this study was to assess the achievements and challenges of the fourth phase government as far as the objectives of EPZ Tanzania are concerned. The researchers will specifically:- a) Examine the attraction and promotion of investment for export-led industrialization of EPZ b)Find out the level of increase of foreign exchange earnings, c)Analyze the extent of employment opportunities created by EPZ. d)Assess the level of attraction and transfer of new technology as result of EPZ e) Reveal the degree of processing of local raw materials for export.

1.3 SIGNIFICANCE OF THE STUDY

The researchers expect that this study will eventually bring better knowledge on the challenges and achievements of EPZ objective in Tanzania. Ultimately the study will in help the nation to know its position on the phenomenon of EPZ hence to take necessary measures to tap the advantages therein. The findings will also help policy makers in this area the policy of EPZ. Specifically, the outcomes of the research will add more to the body of knowledge as well as giving more areas for further studies.

2.0LITERATURE REVIEW

As Kinunda-Rutashobya (2003) reveal,In developing countries,EPZs’ history dates back to the mid of 1960s and 1970s when the first EPZs were established at Kandla,India and Mauritius respectively.Despite their short history,EPZs and other free trade zones have become integrated and comprehensive export strategy. In Tanzania, EPZ was established under EPZ act 2002 (URT, 2002).

2.1 THE CONCEPT OF EPZ

Export processing zones is defined as fenced-in-industrial estates specializing in manufacturing for exports that offer firms free conditions and a liberal regulatory environment (World Bank, 1992)

2.3 PRIMARY ROLE AND CONTRIBUTION OF EPZ

They are special enclaves, outside a nation’s customs barriers. The firms inside them are mostly foreign and enjoy favored treatment with respect to imports of intermediate goods, taxation and infrastructure. They are as well free from industrial regulations applying elsewhere in the country. The privileges are subject to the conditions that almost all of the output is exported and that all imported intermediate goods are used within the zones or else re-exported. The World Bank identifies an overall consensus on the primary goals of an export processing zone notably; providing foreign exchange earnings by promoting non-traditional exports, provide jobs to alleviate unemployment or underemployment problems in the host country; assist in income creation, attracting foreign direct investment (FDI) to the host country and n the case of a successful EPZ foreign direct investment would be accompanied by technological transfer, knowledge spill-over and demonstration effects that would act as catalysts for domestic entrepreneurs to engage in production of non-traditional products (Gerbracht, 2007). EPZs have helped many countries reduce their reliance on traditional exports and attract direct foreign investment. A major lesson, however, of the international experience with EPZs is that such a mechanism, even if well administered, is no substitute for good economic policies.2 By no means do EPZs represent a panacea; a general policy framework conducive to growth and development is seen as essential. (Negrete, 2005)

2.4 WHY DO COUNTRIES GO FOR EPZ
Traditionally, there are four main benefits in establishing EPZ that is provide foreign exchange earnings by promoting non-traditional exports, provide jobs to alleviate unemployment or under-employment problems in the host country, attract foreign direct investment (FDI) to the host country and lead to technologic transfers, knowledge spillover and demonstration effects that could act as catalysts for domestic entrepreneurs to engage in production of non-traditional products (Blanco de Armas and Sadni-Jallab, 2002). The Potential Gains from EPZ are increased foreign exchange earning, increased gross export, job creation and income creation, average wage in EPZ higher than average wage outside the zone good source of labor training and learning by doing, management and supervisory training, catalyst effect and provides efficient industrial structure in countries that may not possess one. (World Bank,1999) EPZs have impact with respect to employment, technology transfer, and foreign exchange earnings. Cost/benefit analyses must be dynamic, extending over the life of the EPZ, and should not be treated in isolation but rather as part of a complete government industrial policy (McIntyre, Narula, Trevino, 1996)

2.5 NEGATIVE PERCEPTION OF THE CONCEPT

The arguments against using EPZs as a part of economic policy are well known. They include: the second best, and distortionary, nature of EPZs; lack of necessity if a drawback mechanism exists; difficulty in administration; possible smuggling; and “unfair” competition for domestic production. In practice, most of these arguments collapse, or are substantially mitigated, in the face of counter-arguments and possible offsetting arrangements. The main reason for not pursuing EPZ generally relates to protectionism, or the fear of competition by established producers in a protected domestic market (Tyler and Negrete, 2009).

2.6 EMRICAL LITERATURE REVIEW

Rutashobya(2003) explored the potentiality of export processing free zones(EPZs) for Economic Development in Africa lessons from Maritius. In her study she disclosed the contributoon of EPZs to SADC countries in terms of employment, economic health particularly imbalance of trade.The study didn’t focus in details the Tanzanian environment the status of the Tanzania EPZ which is now disclosed by this study.Moreover, on the aspect of time factor by 2003 Tanzania had done little on the concept of EPZ and thus the paper discloses the current status of the EPZ.

2.7 THEORETICAL FRAMEWORK
Cave and Jones Model identifies International trade theory treats factors of production (capital, labour, land) as immobile internationally but mobile domestically. (Warr, 1989). Commodities are considered mobile across the boundaries.They have developed a model on international mobility of capital goods. The processing activity within the zone produces 3 final traded goods using 3 kinds of inputs: traded intermediate inputs, capital goods and labor. With this theory Tanzania EPZ can be assessed.Endogenous Growth Economic Models have been elaborated stressing learning by doing, spillover effects, knowledge-based human capital accumulation, R&D activities, new product introduction embodying new technologies, quality improvements and quality ladders, scale factors.( Barro and Sala-i-Martin, 2004) economic growth becomes endogenous, depending upon the willingness to save, R&D investments, the level of the production function, and technology choices. Importantly, government economic policies and institutions are seen as playing a role. Focus is on the nature of technological progress, which is incorporated into the model. It is no longer considered exogenous but indeed can be affected by economic policies. Human capital formation, in turn is influenced by education policies and investments, can accelerate technological progress, and accordingly, economic growth.

3.0 METHODOLOGY OF THE STUDY

This study applied case approach in order to provide in-depth findings about the achievements and challenges of EPZ in Tanzania. Purposive approach was used to select a sample of two senior officers of EPZ who had relevant information about EPZ Tanzania trend. Structured and unstructured interview was the method used to collect primary data while document review was used to collect secondary data. Two EPZs senior officers were interviewed while documents reviewed were employment level report, and actual sales turnover report. The researchers analyzed the data obtained qualitatively.

4.0 FINDINGS AND DISCUSSION

It was the interest of the researchers to reveal the achievements and challenges EPZ Tanzania have been faced in the fourth phase of URT government. To be able to do so the researcher the researchers had the following objectives; examine the attraction and promotion of investment for export-led industrialization of EPZ, find out the level of increase of foreign exchange earnings, analyze the extent of employment opportunities created by EPZ, assess the level of attraction and transfer of new technology as result of EPZ, reveal the degree of processing of local raw materials for export.

4.1 ATTRACTION AND PROMOTION OF INVESTMENT FOR EXPORT- LED INDUSTRIALIZATION

It was the interest of the study to examine the efforts of EPZ Tanzania in the process of attracting and promoting investment for export-led industrialization. Through the interview conducted, the study found that EPZ Tanzania tries her best to attract and promote investment for export-led industrialization. EPZ Tanzania involves in various global investment forums conducted in different places in America, Europe, Asia and Africa. “Show case African Products” in Zimbabwe is one of the investment forums which EPZ Tanzania is attending. EPZ Tanzania plans to attend also another investment forum in China called “ExpoShanghai Product” later this year. During investment forums, Tanzanian representatives conduct business to business meetings with potential investors to lure them to come and invest in Tanzania. These efforts have been yielding fruits as there are about 24 investors who have invested so far. However these efforts have been facing some challenges such as power rationing in the country, poor infrastructures such as roads, water, and railways. These infrastructures could help to link EPZ factories and locals source of raw materials, seaports and air ports. The study also reveals that there are customs related challenges which discourage the present and future investors. TRA have not been honoring some of the incentives stipulated in the EPZA Act 2002.

4.2 FOREING EXCHANGE EARNINGS BY EPZS

An increasing trend has been observed since 2006 in terms of sales turnover the EPZs contribute to total foreign exchange. According to vision 2025 it is expected to account for 25% of the total exports. Low contribution still is observed to the total Foreign earnings. Efforts are needed to boost up exports via the EPZs in terms of attracting and promotion of export led industries. Implications are reflected in the issues of lack of awareness by various firms as it was raised in one of the challenges raised by the EPZs status report. However a distinction can be made on exports depending on origin. From the above statistics the graph below has been deduced. From the graph it is observed that the total exports are increasing an increasing rate while the EPZ turnover seems to increase at a constant rate. Thus in export promotion a country need to consider them industry wise rather than taking it into totality wise. The government promotion towards exports should be sector/industry wise so as to really diagnosis the problems facing the sector.

Local firms are observed to contribute more in the foreign exchange and little is observed from the foreign firms. Still awareness among the foreign firms seems to be a big challenge facing the Authority where aggressive strategies have to be designed and implemented to tape opportunities from foreign firms. EPZ foreign exchange by industry category has been as well examined.

It is observed that the Refurbishment sector has contributed 59%, followed by manufacturing sector 16%, textile 11%, agro-processing 9%, mining sector 6% of the total earnings in the years mentioned above. Generally it is observed Foreign exchange earnings under the EPZ still are crimping, efforts are needed to change the process.

4.3 MOBILIZATION OF LOCAL RAW MATERIALS

It was revealed through the interview the EPZ senior officials most of the firms in the EPZ are importing raw materials from abroad and adding value for exportation. Little is exploited from the local raw materials. This is common in the textile industries under EPZ as they import most raw materials from abroad. In achieving this objective sectoral consensus has to be attained from various stakeholders that are involved. This is a cross cutting issue where experts in the agriculture sector, infrastructure, industry and trade and EPZ have to come up with strategic decisions aimed at mobilizing raw materials. Tanzania is well endowed with natural resources where they can be tapped profitably under the EPZ. With the new concept of Economic Development Zone most of the raw materials will be tapped as it caters for the expanded scope of natural resources.

Tanzania EPZs have achieved the job creation goal. EPZA has 26 companies licensed (Appendix A) of which 18 of them are EPZ operators and the remaining are the EPZ developers. They include, African pride, Vector Health Ltd, Tsubasa Re new cars, SAAFI Ltd, Unnat Fruits Ltd, Net Health Ltd, Kisongo EPZ, etc. With regard to employment creation a total number of 5821 have been employed in EPZ companies. In a developing nation like Tanzania with relatively high levels of unemployment, the EPZ represents and efficient mechanism for reducing the socio-economic burden of large pools of unemployed people.

EPZ has significant positive effects on the host economy with regard to employment and wages which are ultimately taxed; therefore wages has a multiplier effect. Value adding imports are also important in job creation. For example Tsubasa Company Ltd import used cars as raw materials, modify them and then re exporting them. Despite of the efforts, these activities are taking place on too small scale to make a macro economic difference. An interview with the Director General revealed that EPZ offices itself has created 13 jobs since its genesis despite the challenge of lacking expatriates in the export promotion and EPZ area. Large percent of employment (62.4%5) is from textile companies and 29.2% for agro processing.

Ownership analysis reveals that large number of employments was created by foreign firms within the EPZ, followed by local firms and small number of jobs resulted from partnerships.

4.5 TECHNOLOGY TRANSFER

As one among the objectives of establishment of EPZ, technology has found its way in EPZ industrial park, some of these technologies include; garment making like in African Pride Ltd, candle manufacturing, fruit canning done by Unnat fruits Ltd, cars renewal done by Tsubasa Ltd.

5.0 RECOMMENDATIONS
Though EPZ Tanzania tries her best to attract and promote investors, poor infrastructures and customs related problems facing EPZ pose the biggest challenge on their efforts. These challenges discourage the investors to come and invest in the country. This study recommends to the government to put more efforts on improving infrastructures. TRA is reminded to stick to the EPZ Act and comply with tax incentives stipulated. Export value and employment opportunities are adversely related. Mechanisms should be designed to ensure each export creates more employment. Ever since it is an EPZ increase in exports should go hand in hand with the employment rate. This is evidenced by the Refurbishments sector that has a lead in export value and least in employment level. Capacity building is observed as a challenge because professionals from different areas have little knowledge about EPZ.

It should ensure that recruitment of staffs and their training are adequate. Foreign earnings by EPZ still not satisfactory as exhibited above more attraction and promotion of the Export Processing Zones should be done by the Authority so make the earnings increase at an increasing rate. On mobilization of local raw materials has been observed as the cross cutting issue, the Authority should identify the concerned stakeholders and come up with the feasible and proactive approach to tap opportunities from the local raw materials. Moreover, the concept of Economic Development Zone should be put into practice. Little is done in terms of technology transfer as observed; efforts have to be done in increasing joint ventures, partnership and foreign direct investments as they are highly linked with technology transfer.

REFERENCES

Barro. R.J and Sala-i-Martin,X (2004) Economic Growth.Cambridge: MIT Press,
2nd Edn. Blanco de Armas, E and Sadni-Jallab, M (2002). A Review of the Role and Impact of Export Processing Zones in World Trade: the Case of Mexico

Export Processing Zone (2009) The current status of Epzs in Tanzania Report Gerbracht, B D. (2007). Export processing zones and free trade agreements: lessons from the North American Agreement on Labor Cooperation.(National Security: Detention, War Powers, and Anti-Proliferation)Transnational Law & Contemporary Problems Madani, D (1999), “A Review of the Role and Impact of Export Processing Zones,” World Bank Policy Research Working Paper No. 2238, p. 108 McIntyre, John R., Narula Rajneesh, Trevino Len J., 1996, “The Role of Export Processing Zones for Host Countries and Multinationals: A Mutually Beneficial Relationship?”, The International Trade Journal, Volume X, Number 4, Winter 1996. accessed at http://www.merit.unu.edu/about/profile.php?id=42&stage=2 on 15/02.2010 Negrete, A.C.A (2005) “Zonas de Processamento de Exportações Como Política Industrial: A Experiência Internacional,” Dissertação de Mestrado, Faculdade de Ciências Econômicas, Universidade do Estado do Rio de Janeiro. Rutashobya(2003). Exploring the potentialities of export processing free zones (EPZs) for economic development in Africa: Lessons from Mauritius in Management Decision.Vol 41/3 p.226-232.

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