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Knowledge problems associated with creating export zones

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Abstract

Although export processing zones (EPZ) have been a part of India’s development strategy since the 1960s, they have not been as successful at promoting exports and job creation as might have been hoped. Most explanations of their shortcomings focus on the poor infrastructure and bureaucratic inefficiencies that typically plague these zones. By focusing on the knowledge problems that government administrators must overcome if they are to design and manage successful EPZs, and highlighting their inevitable difficulties in overcoming these knowledge problems, this paper offers a more fundamental and compelling explanation of the poor performance of Indian EPZs than is traditionally advanced.

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Notes

  1. We will use the EPZ and SEZ interchangeably throughout this article. There are important distinctions between them which we do not want to overlook. SEZs, for instance, have fewer procedural complexities, rely more on private sector development, and offer a better tax and tariff structure than EPZs. But both EPZs and SEZs suffer from the shortcomings that we highlight in this article.

  2. http://planningcommission.nic.in/aboutus/history/about.htm

  3. The definition of small scale has changed over the years. In the late 1960s, investment limit was up to Rs. 1 million, this was revised to up to Rs. 2 million in 1981, and up to Rs. 3.5 million in 1985. In 1997, it was revised to Rs. 6 million.

  4. Data on VEPZ was not comparable for the same period since it became operational only in 1994.

  5. Notification is the process by which the government establishes the legitimate license issued to the unit by publishing the details of the unit in the gazette.

  6. Unlike EPZs, EOUs were not centrally managed by the Ministry of Commerce but were instead under the jurisdiction of a zone development commissioner. In addition, since they were developed by private entrepreneurs, they were not subject to the same controls on expansion that EPZs were. Moreover, they were exempt from customs inspections of every shipment. And, since they were not geographically bound, they could be located in convenient locations with access to markets.

  7. Under this policy, entrepreneurs should be able to obtain all the necessary clearances with one agency rather than through multiple agencies as is the norm in the rest of the country.

  8. SEZ enclaves are supposed to promote manufacturing and commercial activities that lead to more employment and technological transfer into the domestic economy. In addition, by allowing private participation in development, they are supposed to reduce the fiscal burden on the public sector to provide basic infrastructure such as roads.

  9. See Palit and Bhattacharjee (2008) for an evolutionary account of the SEZ policy in India.

  10. Kumar (1989, 183), for instance, calculates the benefit cost of the Kandla EPZ and concludes that “results for KFTZ probably underestimate the costs incurred in the zone. This underestimation of costs arises due to the paucity of cost data for the early years of the zone. Actual figures for annual capital outlay, revenue expenditure and most important, purchases from DTA are simply not available.” Similarly, Warr (1987, 238) measures the social cost of the Bataan EPZ and concludes that “public capital was wasted through the excessive expenditure required to establish an industrial center in an isolated and mountainous coastal area and because a significant part of the expenditure proved to have been unnecessary. This included upgrading the port subsequently not used to servicing the EPZ, and construction of a large modern office building, underutilized when central administrative functions were eventually transferred to Manila”

  11. Consider, for instance, the Bataan EPZ in the Philipphines which produces garments, textiles, industrial products, house wares, and toys (Remedio 1996). It is located 160 km from the capital Manila in a mountainous region with poor access roads. As Warr (1987, 234) empirically shows, “under all combinations of assumptions examined, the [Bataan] zone generates negative net present value. Equivalently, it generates an internal rate of return below the estimated real discount rate.” Similarly, as Wu (1991, 53-55) explains, “Close to two decades after opening, Bataan is languishing. The Bataan EPZ in Philippines has poor transportation links. Its potential fine harbor is under-developed due to the high cost involved and the lack of sufficient throughput to justify its development.”

  12. Kandla had 96 units out of a maximum of 250 in a 700-acre area in 2002. As of July 2008, it had 169 units of which 60 were established before 2000. See Kundra (2000, 239), and http://sezindia.nic.in.

  13. http://www.projectsmonitor.com/detailnews.asp?newsid=10957

  14. The approval boards for EPZs evolved in several stages with some differences in the structure between the different zones (see Kumar 1989, 57)

  15. The BoA is made up of the Development Commissioner, the Director or Deputy Secretary of the Ministry of Commerce and Industry, the Zone Director General of Foreign Trade, the Zone Customs Commissioner, the Zone Income Tax Commissioner, the Zone Director of Banking from the Ministry of Finance, two representatives from the State Government (usually state Ministry of Commerce and Industry officials) and a representative from the developer or unit office as a special invitee.

  16. The two important reasons for rejection are non availability of required infrastructure and low foreign exchange earning potential (rule 18, sub-rule (2) of the SEZ rules)

  17. Once approved, units have to meet these estimated export targets to avoid penalties and continue operations.

  18. Calculated with data from http://sezindia.nic.in projected exports and actual exports for 2007-2008

  19. http://www.thehindubusinessline.com/2000/04/03/stories/140332c4.htm

  20. http://www.business-standard.com/india/storypage.php?autono=217807

  21. Calculated from http://sezindia.nic.in/HTMLS/visiblegains.sez.html. Last accessed 1 Nov 2009

  22. Panagariya (2008, 272) estimates the rejection rate at around 50% as of 2006.

  23. http://sezindia.nic.in. It is not clear what happens to the closed units, since unit level data is unavailable. A survey of individual units may reveal their motivations and is the topic for future research.

  24. Surat, Bhiwandi, Salem-Erode had textiles; Agra, Bhiwandi, Madras leather industry. Some of these clusters such as Agra are 100 years or older.

  25. Liberalization efforts in India have not been as effective as hoped. As Virmani (2005, 28) concludes, the failure of the reform policies lead to non sustainability of higher growth rates. Moreover, as Williamson and Zagha (2002, 28) write, “India could (and can) move faster to put its fiscal house in order, to rid itself of remaining small industry reservations, to liberalize the labor market, to fix the power sector, and to privatize its state-owned industries, without allowing capital account convertibility or thwarting democratic debate. Its failure to move faster in these areas slows growth and unnecessarily perpetuates poverty.”

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  1. Mercatus Center, George Mason University, Arlington, VA, USA

    Triyakshana Seshadri & Virgil Henry Storr

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  1. Triyakshana Seshadri
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Seshadri, T., Storr, V.H. Knowledge problems associated with creating export zones. Rev Austrian Econ 23, 347–366 (2010). https://doi.org/10.1007/s11138-010-0121-5

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