What’s so Special about Special Economic Zones?

Export processing zones (EPZs) are defined by the World Bank as follows:

fenced-in industrial estates specializing in manufacturing for exports that offer firms free trade conditions and a liberal regulatory environment (World Bank, 1992:7)

Relatively rare in the early 1970s, these zones (also known as Free Trade Zones or free ports, and more specifically as maquilas in Mexico, Special Economic Zones in China, and more pejoratively as “zones of exploitation” by their many critics) EPZs now number roughly 4000.  These zones have always been heavily concentrated in the newly industrializing economies of Asia and in Mexico, but can now be found in 130 countries.  According to the International Labor Organization (ILO) there are now 124 EPZs in China alone. EPZs play a substantial role in the economic plans of all states that utilize them, and can account for a substantial proportion of a host state’s manufacturing employment. In one extreme case, Mauritius, the entire territory of the state is zoned for export processing, effectively rendering the country as a whole an EPZ.

Why are these zones so popular?

It is easy to see why MNCs might find EPZs attractive, but what’s in it for the host states? There are numerous objectives, not always met, but articulated around three basic goals:

  1. to achieve much needed foreign exchange earnings through the promotion of non-traditional exports;
  2. to create jobs (address unemployment or under-employment particularly for female workers)
  3. To attract foreign direct investment (FDI) and (hopefully) create spillovers related to technology and knowledge, creating catalysts for indigenous entrepreneurship (the eventual production and export of genuinely local nontraditional products)

The explosion of these zones has coincided with the increasingly pragmatic, liberalized investment climate from the 1980s forward, pushing most states (and especially developing economies) to court MNCs. Because EPZs are enclaves or special arrangements isolated, geographically and politically, from the greater economy of the state, they are subject to different, fewer, and often far more lax to nonexistent regulatory controls. From the perspective of authoritarian states like China, this allows for substantial but controlled economic liberalization without the potential for spillover democratic reforms in the state/society as a whole.

EPZs are controversial because, in the very poorest states especially, they can appear to present MNCs with pre-bundled, one-stop-shopping-opportunities for worker, environmental, and other forms of exploitation. The sheer preponderance of these zones can put a downward pressure on wages, working conditions, and environmental standards perpetuating a “race to the bottom” as poor states continually compete for mobile MNC capital.  It has been shown, for example, that EPZs can be ranked in a vertical tier, with a tendency for some forms of labour intensive manufacturing to flow down from first tier states (the Asian tigers for examples) to second tier (Indonesia, Malaysia, Philippines, Thailand) and third tier (Bangladesh, China, India, Pakistan, Sri Lanka) if and when working conditions in first and second tier states threaten to improve. One troubling barometer of this downward race is that the percentage of female workers (high in all EPZs) increases substantially as investments move toward the poorest zones:

  • First tier EPZs (HK, S Korea, Singapore, Taiwan) 60% to 70% female on average
  • Second Tier (Indonesia, Malaysia, Philippines, Thailand) 85% female on average
  • Third Tier (Bangladesh, China, India, Pakistan, Sri Lanka) 90% female on average


This said, while the globalization of production can lead some MNCs to transfer production to countries where wages are low and working conditions suspect, the vast majority of FDI continues to flow where the investment climate is most favourable. It must be remembered that states, not MNCs, hold the ultimate responsibility for social policy, and political and economic stability. The suppression of wages and labour conditions in some zones can attract some business, but is often a cover for (or symptom of) political instability and corruption. Over the long term, the most effective and reliable inducement to FDI is political and economic stability. EPZs can obviously offset some of these concerns in the short term but those states and MNCs that choose to pursue “sweatshops” as a path to development may be engaged in an immoral and ultimately self-destructive practice that ignores the reality that, in the longer term, FDI in labour-intensive industries can and should lead to higher wages and better conditions.