In preparation for integrated regional market: Ecozones seen as trade distribution hubs

MANILA, Philippines - New ways of leveling up the advantages of export processing zones (EPZs), such as by transforming them into trade facilitation centers, can raise their relevance in an increasingly integrated regional market, according to a recent study.

EPZs and special economic zones (SEZs) in the Philippines mainly serve to improve the competitiveness of industries by reducing locators’ operating costs.

They offer fiscal incentives, provide better infrastructure and facilities, streamline customs and business registration procedures, and liberalize foreign exchange policies.

Zones specifically administered by the Philippine Economic Zone Authority (PEZA) have managed to attract foreign direct investments (FDIs), boost export activity, and create employment opportunities.

FDIs approved by PEZA grew by 23 percent yearly on average from 2006 to 2010. This contrasts with a 13-percent decline on average in yearly FDIs approved by the Board of Investments in the same period.

Manufactured exports of PEZA-administered SEZs grew from $19.5 billion in 2001 to $28.9 billion in 2009, rising by five percent yearly on average during the period.

In contrast, manufactured exports from outside the PEZA’s SEZs went down by nine percent yearly on average during the same period, from $9.1 billion to $4.3 billion.

Workers at PEZA-supervised SEZs increased in number by 10 percent yearly on average from 2001 to 2010. The share of PEZA ecozones in total employment nationwide doubled from one percent in 2001 to two percent in 2010.

PEZA manages the public SEZs of Baguio City Economic Zone, Cavite Economic Zone, Mactan Economic Zone, and Pampanga Economic Zone. It also oversees 304 privately operated ecozones.

But the overall performance of SEZs can still be improved, according to a new study released by the Philippine Institute for Development Studies.

“Dynamic economic benefits in terms of domestic investment in ecozones and forward and backward linkages are lacking,” noted study author Rosario Manasan.

She also observed a shift in ecozone investments from garments and textiles to electronics and electrical machinery over the last 30 years.

This concentration on the capital-intensive and imported input-dependent electrical and electrical machinery sector increases the country’s vulnerability to external shocks, she added.

 Moreover, some ecozones have investment costs that outweigh their benefits.

Infrastructure development costs at the Bataan Export Processing Zone have exceeded the benefits derived in terms of workers’ wages, export and foreign exchange earnings, and government revenues.

The Aurora Pacific Economic Zone and Freeport Authority has cost the government some P2.9 billion to invest in an airstrip, port improvements, paving, rehabilitation of the Baler-Casiguran Highway, flood control, and other on-site improvements.

But “there were only 10 approved locators as of April 2013 and only three of them have started doing business.”

Some SEZs and freeports have also become alleged channels for smuggling. The Subic Bay Freeport and Cagayan Special Economic Zone and Freeport have supposedly been used as entry points for duty-free used vehicles into the country.

As such, some analysts argue that SEZs have become irrelevant in the increasingly liberalized trade environment.

But the study notes that regional integration actually offers significant opportunities for economic zones.

SEZs can be reinvented into efficient distribution, production, and trade facilitation hubs to help firms reduce logistics cost and become more internationally competitive.

Eco zones can be used to expand market access by linking up regional suppliers and leveraging economies of scale in production.

“The benefits from SEZs can be maximized if they are well integrated into the local economy instead of being operated as enclaves,” the study states.

It suggests strengthening both backward and forward linkages by ensuring that SEZ rules are flexible enough to accommodate both exporters and non-exporters.

SEZs should also allow a wide range of commercial and manufacturing activities within their premises.

International experience shows that private development of SEZs increases the chance of success, added Manasan.