Economic zones in the crosshairs


Ben D. Kritz

THE tragic fire at the House Technology Industries factory in the Cavite Export Processing Zone (CEPZ) in the town of Rosario and the city of General Trias, Cavite has cast a harsh spotlight on the existence of “economic zones” in the Philippines. It is unfortunate that it took a disaster to do so, but it may be to the country’s ultimate advantage to reassess the trade and economic management model.

House Technology Industries is a Japanese company that manufactures a variety of building materials for export to Japan. It is the biggest company in the CEPZ, and employs nearly 11,000 workers, about 4,300 direct employees and the rest, contractual workers supplied by several agencies. |

The fire, which started on Wednesday afternoon and was apparently still burning when this was written on Friday, virtually destroyed the factory, a loss estimated to be about P5 billion, and injured about 100 workers. There have been no fatalities reported so far, there probably will be—several workers were taken to hospitals in very critical condition with third-degree burns over 70 to 90 percent of their bodies, injuries that not many people can survive.

It is the second time in four years that House Technology Industries suffered a fire at the CEPZ facility; in both cases, the initial assessment was that the factory basically met safety standards and it was largely bad luck that a serious fire broke out. The investigation into this week’s blaze, however, is only just starting, and may reach a slightly different conclusion.

The fire has given something for labor activists critical of the standards and oversight of economic zones in general to rally around. Unsafe working conditions and loose regulation of companies under the jurisdiction of the Philippine Economic Zone Authority (PEZA), they claim, is ultimately responsible for the disaster; foreign companies are given far too much autonomy in the zones, and are exploiting workers, sometimes with tragic results.

Cavite Governor Jesus Crispin Remulla implied a bit of frustration when interviewed about the disaster, which resulted in his declaring a state of calamity in Cavite, largely because so much of the province’s firefighting, rescue, and medical resources were occupied by it. Although he said that the company would be investigated for possibly safety lapses, he pointed out that the CEPZ was not under the jurisdiction of the provincial or local governments (General Trias and Rosario, Cavite), which, although he didn’t say it, hinted that the power to do anything about any violations might be limited.

The underlying message of the labor advocates’ criticism is that special economic zones, wherein companies are more loosely controlled, exact far too high a human cost for the supposed economic benefits they bring the country. That is a debatable assertion, but even on economic grounds, special zones like the CEPZ may not contribute as much to the country’s growth as policymakers claim.

In a World Bank study for the OECD in 1999, the value of export processing zones to developing economies was judged to be generally less than advertised, and that a far better alternative would be to simply liberalize the economy.

As the report pointed out, there are three basic goals for an export processing zone: To boost foreign currency earnings by production of “non-traditional” exports; to provide jobs; and to attract foreign direct investment leading to technology and knowledge transfer, which, in turn, can be used to expand the native business sector.
Based on the experiences of countries up to that time, the report concluded that EPZ’s generally did achieve the goals of boosting foreign currency earnings and creating jobs, but that in the areas of technology and knowledge transfer fell short of their goals. In addition, net foreign earnings often do not make up for the costs to the country to accommodate an EPZ, or if they do, the return is not great enough to really justify the effort, particularly when lost potential revenues from taxes that are foregone as incentives for locators are taken into account.

The report found that technology transfer depended on the industrial capacity of the host country. In developed countries like South Korea and Taiwan, technology transfer was a positive factor; in less-developed countries—such as the Philippines, which has a small native industrial base and poor infrastructure—the advantage was lost due to a lack of absorptive capacity. In terms of knowledge transfer, the effect is largely overestimated; because most of the jobs created are low- or semi-skilled jobs, about the only benefit besides wages earned is training the local workforce in industrial work discipline and routine, the report said.

For very poor nations, an export processing zone’s relatively mundane benefits represent a huge advance, the report concluded, but for economies like the Philippines that are more developed, the returns from hosting an EPZ may not justify the inputs expended to create it and attract locators. In the wake of the CEPZ disaster, the role and impact of special economic zones is certainly worth revisiting.


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