Export-oriented industrialization in Africa : lessons from export processing zones in Malawi

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(2) Export-Oriented Industrialization In Africa: Lessons from Export Processing Zones In Malawi by THOKOZANI TARISAI NJIMA. A dissertation submitted in fulfilment for the Degree of Master of Philosophy in Industrial Policy. at the College of Business and Economics UNIVERSITY OF JOHANNESBURG. Supervisor: Prof S. Ashman. 2017.

(3) i. DECLARATION. I certify that the minor dissertation submitted by me for the degree Master of Philosophy (Industrial Policy) at the University of Johannesburg is my independent work and has not been submitted by me for a degree at another university. THOKOZANI TARISAI NJIMA (Name in block letters – no signature).

(4) ii. Acknowledgements. I am indebted to my supervisor, Professor Samantha Ashman, whose guidance and support have enabled me to produce this paper. To my beautiful Princess, Kella, I say thank you!! In readiness for your arrival, I had to complete this research project as early as possible. And, most importantly, I owe my greatest gratitude to God Almighty for the wisdom bestowed upon me. Thoko.

(5) iii. Abstract “Malawi promulgated the Export Processing Zones (EPZ) programme in 1995 in order to address the country’s industrial development and trade underperformance. Under the programme, export processing firms (EPFs) enjoy fiscal incentives provided by government in exchange for the EPFs’ contribution to the general economy. From 2007, the fiscal incentives package has been reviewed and a major change was enforced in 2011 when EPFs started paying 30% corporate tax. This paper explores the effectiveness of Malawi’s EPZ programme as an export-oriented industrialization strategy since the reviewed incentives regime. I utilize cross-sectional data for 2006 and 2015 in order to identify the effects of the programme on foreign direct investment (FDI) attraction, export development, the generation of foreign exchange earnings, employment creation, technology and skills transfer, and linkages with the domestic industry. I find no evidence of any direct impact of the reviewed incentives regime on the performance of the EPFs, but evidence that it negatively affects the ability of the programme to attract FDI. Nevertheless, I find evidence that the underperformance of Malawi’s EPZ programme is mainly due to the production and institutional challenges prevalent within the entire manufacturing sector and the premature de-industrialization of the textile and garments industry. The programme, therefore, has not had the intended impact on the country’s economy in terms of structural change.. Keywords: export-oriented industrialization, export processing zones (EPZs), export processing firms (EPFs), reviewed tax incentives regime, Malawi.”.

(6) iv Contents 1. INTRODUCTION ............................................................................................................................................ 1 2.. BACKGROUND TO THE EPZ PROGRAMME IN MALAWI ................................................................................ 3. 3.. LITERATURE REVIEW..................................................................................................................................... 5 3.1 3.1.1. Export Promotion and EPZs ............................................................................................................. 5. 3.1.2. Export Processing Zones and Industrialization .................................................................................. 6. 3.1.3. Criticisms of EPZs and the Debate on EPZs’ Effectiveness for Industrialization .............................. 9. 3.3. 5.. 6.. The Economic Arguments for EPZs ............................................................................................... 13. 3.3.2. The Conceptual Framework............................................................................................................. 18 Conclusion .......................................................................................................................................... 19. PROBLEM STATEMENT ............................................................................................................................... 21 4.1. Research Question ............................................................................................................................... 21. 4.2. Significance of the Study ...................................................................................................................... 21. RESEARCH METHODOLOGY ........................................................................................................................ 22 5.1. Research Design .................................................................................................................................. 22. 5.2. Statement of Limitations ...................................................................................................................... 23. RESULTS ...................................................................................................................................................... 24 6.1. FDI Attraction..................................................................................................................................... 24. 6.2. Export Development ........................................................................................................................... 27. 6.3. Foreign Exchange Earnings ................................................................................................................. 32. 6.4. Employment Creation.......................................................................................................................... 34. 6.5. FDI Catalysts and Spillover Effects ..................................................................................................... 35. 6.5.1. Linkages with Domestic Industry ..................................................................................................... 36. 6.5.2. Technology and Skills Transfer and Spillovers ................................................................................. 36. 6.6 7.. Empirical Review ................................................................................................................................. 13. 3.3.1. 3.4 4.. Theoretical Review ................................................................................................................................ 5. Summary of Research Findings ............................................................................................................ 38. DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS ......................................................................... 39 7.1. Discussions of the Research Findings .................................................................................................. 40. 7.2. Implications ......................................................................................................................................... 44. 7.3. Conclusion .......................................................................................................................................... 44. 7.4. Recommendations ............................................................................................................................... 45. Appendix I. Structure and Administration of the EPZ Programme in Malawi .............................................. 47. Appendix II. Interviews, 2016-2017 ................................................................................................................ 48. Appendix III. EPFs Questionnaire ..................................................................................................................... 49.

(7) v Bibliography ........................................................................................................................................................ 52. List of Figures 1. Theoretical Framework: EPZ as an Industrialization Tool….…………………………9 2. Conceptual Framework: Effectiveness of EPZ as an Industrialization Tool …………20 3. Conceptual Framework: Impact of a Reviewed Incentives Regime on EPZ Programme ………………………………………………………………………………………...20 4. Malawi’s Private Foreign Investments in Comparison with the Sub-Saharan African (SSA) Region and Other Low-income Countries, 2014 ………………………………………25 5. Value Addition among Malawi’s Top 10 Exports, 2006 and 2015 ……………………..29 6. Malawi’s Trade Balance in US$’000, 2006-2015 ……………………………………….33. List of Tables 1. Number of Export Processing Firms in Malawi, 1996-2016……………………………4 2. EPZs Traditional Objectives and Key Interventions Used……………………………..8 3. Potential Gains and Caveats for EPZs and Relevance to Malawi EPZ Programme……12 4. Impact of EPZs on Exports by 2004…………………………………………………..16 5. Estimates of the Development of EPZs………………………………………………18 6. Fiscal and Non-fiscal Incentives and Preferential Policies for FDI Attraction………....24 7. Sectoral Investment Levels in Malawi, 2015………………………….………………...26 8. Malawi’s Gross Exports in Thousand US Dollars, 2006-2015………………………….28 9. Malawi’s Top 10 Export Products in 2006, 2011, and 2015……………………………29 10. Export Performance of EPZ Programme in Malawi…………………………………..30 11. Generation of Foreign Exchange Earnings, 2009-2015………………………………...32 12. Time Trend of Malawi’s Balance of Payments...………………………………………..33.

(8) 1. 1. INTRODUCTION. Over the past three decades, the performance of Malawi’s industrial development and trade has not been impressive. This is evident from several trends in the manufacturing sector: the sector’s contribution to gross domestic product (GDP) is almost constant and very low;1 the export base is narrow; manufactured exports represent a low percentage and manufactured imports a large percentage; and the growth of high-tech exports, as a percentage of manufactured exports, has been negligible (Njima, 2013). In the quest to turn things around, Malawi promulgated the Export Processing Zones (EPZ) programme in 1995 as one of the tools it would employ to attain exportoriented industrialization. In exchange for special incentives, sound policy regimes adequate physical industrial and trade infrastructure, and strong institutional support offered to (mostly foreign) investors, EPZ programme host countries expect to benefit in terms of foreign direct investment (FDI) inflows, generation of foreign exchange earnings, development of exports, creation of jobs, transfer of technology and skills, and creation of strong linkages with the domestic economy. However, despite seeking similar benefits from the EPZ programme, the Government of Malawi (GoM) does not provide any special physical trade and industrial infrastructure and institutional support to the EPZ companies. Unlike most EPZ programmes around the globe, Malawi’s export processing firms (EPFs) are not “fenced in”. Maintaining an EPZ status, but without being constrained within industrial estates, the programme constitutes single factories located across the country. Subsequently, exports processing firms (EPFs) make use of the same infrastructure and institutional support that serve non-EPFs. It is against this background then that the offering of special incentives serves as the key intervention to attract investment for export processing in Malawi.. 1. It has been hovering within the range of 4 to 14% (Malawi Annual Economic Reports, 1982-2015).

(9) 2. From 2007, the EPFs have been experiencing an unpredictable, and less attractive, incentive regime in which, among other things, they started paying 30% corporate tax. Although the immediate consequences of this regime can be deduced from the number of EPFs that have so far left the EPZ programme, the exact impact of this change on EPFs’ performance is not yet known and hence creates an information gap that needs to be filled. Thus, this study seeks to do so by exploring the impact of the changed incentives regime on the effectiveness of the EPZ programme as an exportoriented industrialization strategy. In this paper, I ask the question “How effective has Malawi’s EPZ programme, as an export-oriented industrialization strategy, been since the reviewed incentives regime from 2007?” I utilize the cross-sectional data for 2006 and 2015 which I collected from the seven EPFs that have processed exports before 2007 and are still operating under the EPZ programme. Also, I complement the primary data with secondary data generated from online databases such as TradeMap and the World Bank’s development indicators (WDIs), inter alia. The studied performance indicators are (i) foreign direct investment (FDI) attraction, (ii) export development, (iii) the generation of foreign exchange earnings, (iv) employment creation, (v) technology and skills transfer, and (vi) linkages with the domestic industry. I find no evidence of any direct impact of the reviewed incentives regime on the performance of the EPFs, but evidence that it negatively affects the ability of the programme to attract FDI. The remainder of this study is presented as follows. Section 2 provides a background to the EPZ programme in Malawi and summarizes how it is structured and administered. Section 3 not only reviews literature on the main EPZ-related debates but it also provides an overview of the theoretical and conceptual frameworks that argue that EPZs can be an effective strategy for industrialization. Section 4 defines the research problem, while Section 5 outlines the research methodology. Sections 6 and 7 give results of my analysis and conclusions, respectively. I conclude that although EPZs are found to be an effective strategy for industrialization in other countries (especially in Asia), Malawi’s EPZ programme has performed poorly mainly due to the production.

(10) 3. and institutional challenges prevalent within the entire manufacturing sector. Also, the premature deindustrialization of the textile and garments industry has had a substantial negative effect on the growth of the programme. Malawi’s EPZ programme, therefore, has not had the intended structural change impact on the country’s economy.. 2. BACKGROUND TO THE EPZ PROGRAMME IN MALAWI. In Malawi, import substitution industrialization (ISI) lasted from 1964 to 1979 (Kumwenda, 2011), while from 1980 to 1994, development thinking shifted towards export-oriented industrialization (EOI) (Chatima, 2007). Specifically, Malawi used export promotion as its trade strategy2 from 1990 (Chirwa, 2002). And from 1994 to the present, the government of Malawi embraced trade liberalization, with most trade policies favouring export-oriented manufacturing – hence the promulgation of the EPZ programme in 1995 as the country’s outward-oriented strategy. The EPZ programme in Malawi is regulated by Section 21 of the Export Processing Zones Act, No. 11 of 1995. The Ministry of Industry and Trade (MoIT), assisted by the EPZ Monitoring and Evaluation Committee (see Appendix I), administers the EPZ regime. When established, the programme intended not only to promote export diversification away from the traditional industries such as tobacco, tea, coffee, and cotton but also to attract foreign direct investment (FDI), to generate foreign exchange earnings, and to create employment and linkages with domestic industry. Malawi’s export processing firms (EPFs) are not zoned in one designated area as in a typical EPZ programme. Instead, the investors are allowed to locate their bonded entities3 anywhere across the country. The EPZ status is valid for a five-year period and may, thereafter, be renewed biennially. Fitting the more traditional definition of EPZs (Armas and Sadni-Jallab, 2007), Malawi’s EPZ programme’s regulations allow 0% domestic sales. And, incentives-wise, the 1995 EPZ Act admits. Malawi recently adopted a stand-alone industrial policy (which has replaced the Integrated Trade and Industrial Policy). For this reason, both trade and industrial policy issues had mostly been referred to trade policy. 3 Although investors are at liberty to choose any location for their factories, no items may leave or enter the premises without the knowledge of the Malawi Revenue Authority. 2.

(11) 4. the following types of goods into the EPZ without payment of any customs duty, exercise duty, or surtax: “(i) goods of any description which would be directly used for the manufacture of other goods, and (ii) goods manufactured in any part of the principal customs area which are meant for exports.” For a list of goods not scheduled for duty exemption, please see Appendix I. The first 40 EPFs were registered in 1996 and the textile and apparel industry dominated the regime, representing 55% (Nkhoma, 2007). But within a decade, 59% of the EPFs (mostly from the textile and apparel sector) had abandoned their EPZ status (ibid.). In 2011, three more firms opted not to renew their EPZs status after the government introduced the 30% corporate tax on EPFs in order to finance the country’s Zero Deficit Budget (MoIT, 2015). So, with few additions and with some leaving the EPZ regime, there are currently seven agro-processing, two textile and apparel, two wood and wood products, and two exotic leather EPFs operating under the regime (see Table 1. below). Table 1: Number of EPFs in Malawi, 1996-2016 1 2 3 4 5 6. Year/Sector Textile & Apparel Agro-processing Horticulture Mining Wood and Wood Products Exotic Leather TOTAL. 1996 22 6 7 4 1 0 40. 2006 8 6 1 1 1 0 17. Source: MoIT (2016) and Nkhoma (2007). 2015 2 6 0 0 2 1 11. 2016 2 7 0 0 2 2 13.

(12) 5 3. LITERATURE REVIEW. 3.1 Theoretical Review The goal of this section is to provide an overview of the theoretical frameworks that advocate export-oriented industrialization (EOI) through EPZs by examining a variety of literature on the concepts of export promotion and EPZs, EPZs and industrialization, and other issues concerning the effectiveness of EPZs as a policy tool for industrialization. The extant literature shows that the period between the late 1970s and early 1980s saw a turn in development thinking from import substitution industrialization (ISI) towards EOI (Martin, 2011). Subsequently, EPZs gained popularity as a development and export-oriented growth policy tool (Engman et al., 2007). Perhaps, the explanation for the popularity of EPZs can be partly extracted from Amirahmadi and Wu’s (1995) claim that the former are influential when a country is shifting from ISI to EOI. So, before discussing the EPZs, it is imperative to first briefly review literature on the concept of export promotion and how EPZs are viewed as an export promotion tool. 3.1.1. Export Promotion and EPZs. The above-mentioned paradigmatic shift in development thinking from ISI to EOI (mostly associated with state-led and market-led development, respectively) is greatly linked to the critique of the former by proponents of neo-classical economic theory and/or the Washington Consensus, namely, certain scholars; non-developmental policy practitioners; western governments; international organisations such as the World Trade Organization (WTO), OECD etc.; and the Bretton Woods Institutions – the World Bank and the International Monetary Fund (Martin, 2011). Essentially, the ISI policies are criticized because they hinder the operation of markets and lead to an economically inefficient form of industrialization (Weiss, 1988). As a result, they advocate for developing countries’ replacement of ISI with EOI policies..

(13) 6. According to the supporters of EOI such as the World Bank (2011 & 1993), Bhagwati (1988), Donges (1976), and Little et al. (1970), inter alia, economic growth and competitiveness are highest where EOI is pursued and lower where countries attempt to protect their domestic industries through various industrial policy tools. It is not surprising, therefore, that despite being an export promotion strategy, EPZs are viewed not as the first-best policy but as a transitory step towards trade liberalization on a national basis – this is because they benefit the few and distort resource allocation (World Bank, 2011 & 1992; OECD, 2007; and Madani, 1998). Supporters’ take is that EPZs should not only be looked at as a policy instrument for export development, but also one for import reform and regulatory liberalization. Thus, as host countries make other parts of their economies competitive by providing streamlined administrative services (and better governance),4 general fiscal concessions to firms (see Table 6 above), and relaxed legal and regulatory requirements,5 the ultimate goal should be to make such import reform and regulatory liberalization benefits available to the entire economy. 3.1.2. Export Processing Zones and Industrialization. EPZs emerged in the period 1950–1975 and first became widely adopted between 1975 and 1985 (Gibbon et al., 2008). While it is difficult to cite exact figures on the popularity of the EPZs,6 the consensus is that economic zones have grown rapidly in the past four decades (Zeng, 2015; Farole, 2011; Gibbon et al., 2008; and Engman et al., 2007). For instance, the ILO’s database reported 176 economic zones in 47 countries in 1986, and by 2006 the zones had increased to 3,500 and spread to 83 more countries (see Table 5 below). Specifically, there were at least 86 fenced EPZs in 26 developing countries in 1992 (World Bank, 1992) and by 2007, a further 104 governments had adopted EPZs as their policy tool for development and export-oriented growth (OECD, 2007).. “These include provision of single window or one-stop shop government services to ensure a business environment free of corruption and red tape, fast-tracked customs services, simplified or abolished licensing procedures, and a dedicated legal framework and court (Fakir et al., 2013; and Engman et al., 2007).” 5 “These include the requirements on foreign ownership, labour and environmental laws and regulations, foreign exchange regimes, and rules on the lease or purchase of land (Engman et al., 2007).” 6 While some authors give figures for economic zones in general, others do provide the specific statistics on EPZs. Also, the differences in how EPZs are operated around the globe compound the difficulty in establishing the exact number of EPZs. So, it was assumed that there were between 200 and 850 EPZs worldwide by 2006 (Jauch, 2002). 4.

(14) 7. EPZs’ earlier boom mostly occurred in low- and middle-income countries in Latin America, the Caribbean, Asia and, to a lesser extent, Africa – Sub-Saharan Africa, to be precise (Jauch, 2002), where the phenomenon was adopted only recently, with most programmes promulgated in the 1990s (Farole, 2011). One may well ask then, “What are EPZs and how do they contribute to the host country’s industrialization”? EPZs are one of the modern types of free economic zone that offer special incentives, adequate physical industrial and trade infrastructure7, and strong institutional support8 as key interventions to attract (mostly foreign) investment for export processing (see Table 2). Generally, a variety of terminologies are used interchangeably through most of the literature when discussing EPZs. While those operated in a relatively smaller scope are termed free trade zones, maquiladoras, industrial parks, free ports, and enterprise zones, the broader implementations are mostly called special economic zones, economic and technology development zones, high-tech zones, science and innovation parks, and many more. Likewise, EPZs are set up and operate differently across the world. Some are “fenced-in”, and others are single factories (not constrained in industrial estates) with an EPZ status – and they can be located anywhere in the host country (export processing firms or units) (Jauch, 2002). Elsewhere, EPZs are situated within industrial parks or multifacility/specialized/special economic zones (Madani, 1998). Mauritius, like other smaller economies, runs a country-wide EPZ programme (Engman et al., 2007). Table 2: Traditional Objectives of EPZs and Key Interventions Used9 Why Countries Use EPZs (Key Objectives of EPZs)  Increase FDI  Generate foreign exchange earnings  Increase value added exports  Create jobs  Technology and skills transfer  Create backward linkages with the domestic economy. Key Interventions  Incentives  “Appropriate” policy regime  Physical trade and Industrial infrastructure  Market and promote designated zones and host regions  Institutional support. Source: UNECA, Souleymane Abdallah, “Institutional Aspects of Industrial Policy in Africa”, 2016.. 7. This does not apply to Malawi EPZ Programme because the EPFs are not fenced in, and as a result they make use of the same industrial and trade infrastructure that serves the non-EPFs. 8 “These include streamlined administrative services (listed above), and export promotion services such as business advisory services, sales and marketing support, finance, and export credit services (Engman et al., 2007).” 9 The traditional objectives of EPZs and the key interventions considered by the EPZ host countries are common amongst themselves..

(15) 8. Export performance-wise, while some countries allow firms to sell a percentage of their output domestically (Dominican Republic in 2007, 20%; Mexico in 1998, 20-40%) (Armas & Sadni-Jallab, 2007; and Madani, 1998), others have a 100% export clause in their EPZs regulations – therefore fitting the more traditional definition of EPZs (Armas & Sadni-Jallab, 2007). Conversely, the Manaus EPZ (Brazil) is permitted unlimited sales to the domestic market (Madani, 1998). Nonetheless, despite the aforementioned differences in EPZs’ characteristics, there is an overall consensus on the reasons why countries use EPZs (see Table 2 above). EPZs, it is argued, offer benefits to the host country. Traditionally, countries employ EPZ schemes for their industrialization process, particularly as a way to increase productive investments through FDI (mostly in the manufacturing sector); to generate foreign exchange earnings by diversifying and expanding their exports basket; and to create employment to lessen un- or under-employment and informality problems. These schemes also allow them to benefit from spillover effects such as the creation of backward linkages between the EPZs and the domestic industry; training, skills, and know-how acquired by local people employed in the zones and locally owned firms (see Table 2. above & Figure 1 below). Indirectly, the EPZs benefit the host countries through “learning by foreign investors and buyers about the economy as a source of manufactured exports; upgrading of the capabilities of local suppliers and officials in response to exacting foreign demands; and having demonstration effects by showing the benefits of a more open approach to trade and of an outwardoriented supply response for economies with an inward-oriented tradition” (World Bank, 1992: 6)..

(16) 9. Figure 1: A Theoretical Framework of an EPZ as a Tool for Industrialization Incentives, Policy Regime, Physical Trade & Industrial Infrastructure, Institutional Support The EPZ costs. Local and Foreign Investors Management, technology, marketing skills, & international connections. Enter or Expand Manufactured Exports Initiate & nurse non-traditional exportoriented production into maturity. Foreign Exchange Earnings EPZ Objective/Direct Benefit. Employment EPZ Objective/Direct Benefit. Spillover Effects EPZ Objective/Indirect Benefit. Catalyst/Demonstration Effects EPZ Objective/Indirect Benefit. EXPORT-ORIENTED INDUSTRIALIZATION Source: World Bank, “Export Processing Zones”, 1992 with author’s conceptualization.. 3.1.3. Criticisms of EPZs and the Debate on EPZs’ Effectiveness for Industrialization. In this section, I outline the theoretical debate and empirical evidence on the impact of EPZs on industrialization around the world. Literature on the benefits the EPZs actually provide to the host countries , which dates back as early as five decades ago, contains mixed viewpoints. Initially, the neoclassical theorists, which generally support export promotion, suggested that EPZs have a negative impact on industrializing countries because they tend to increase inefficiencies by “distorting production from its comparative advantage” (Hamada, 1974).10 It is thus suggested that instead of contributing to economic growth, the EPZs essentially reduce the welfare of the countries. The subsequent view of the neo-classical economists reversed this, arguing that EPZs do, ceteris paribus, provide positive benefits. Devereux and Chien (1995) suggest a trend where countries that create EPZs tend to open up other parts of their economy by reducing import tariffs, government intervention, and restrictions on FDI with the aim of becoming more competitive.. “The neo-classical school is based on the Hecksher-Ohlin two goods – two factors – two countries framework. Hamada’s findings depend critically on the factor intensity of the two sectors. Assuming the small country has a comparative advantage in labour intensive industries and protects its capital intensive sector, the EPZs reduce the country’s welfare.”. 10.

(17) 10. Additionally, sharing similar sentiments with the World Bank (1992), Keck & Low (2004) argue that EPZs have the potential of producing a protectionist bias and prevention of full liberalization of the host country’s economy in the long run. They all imply that the benefit of EPZs should be to act as a catalyst in transitioning the host country towards neo-classical economic reforms and nothing else. Also, Warr (1989), who is in favour of the cost-benefit method (discussed below) to assess the impact of the zones, finds a flaw with the initial neo-classical view which ignores the footloose nature of EPZ firms by arguing that: This literature has drawn upon the classical Hecksher-Ohlin model of production. Insofar as the model treats capital as being internationally immobile, it fails to capture the international mobility of capital goods – which is central to the functioning of EPZs. The main conclusion of most of this literature – that EPZs necessarily reduce the welfare of the countries – is thus largely irrelevant for EPZs as they actually operate (1989:66). The second economic school – the new classicals (the new growth theorists) – presents a similar assessment of the impact of EPZs to that of the second wave of neo-classicals. However, the former attempts to take into account the zones’ spillovers onto the host nations, a dimension the neoclassical approach clearly ignores. New Growth Theory attempts to capture more abstract externalities of EPZs not only in terms of their impact on manufactured exports, but also of their potential to act as a catalyst in making domestic firms more productive and competitive by demonstrating better production methods and training of local workers and managers (Johansson & Nilsson, 1997). Through a case study on Malaysian exports, they (1997) claim a positive correlation between the host country’s EPZ exports and the non-EPZ exports. These researchers suggest that “EPZs may contribute to economic development by the bringing of export know-how to the host country, thereby reducing the idea gap present in many developing countries” (ibid.: 2123). Even considering the aforementioned correlation, it is still arguable whether an increase in host country exports can be tied with certainty to EPZs and not attributed to other factors. Martin (2011) agrees with the possibility of some catalyst effect on host country exports due to the establishment of EPZs but argues that the increase in host country exports could be caused by other factors such as international demand for products, exchange rates, firm competitiveness, political stability, or.

(18) 11. macroeconomic policies. It can be assumed, therefore, that this limitation of New Growth Theory pushes many researchers to the third and last economic school – the cost-benefit analysis – when evaluating the effectiveness of EPZs on host countries’ industrialization process.11 Cost-benefit analysis, which is the approach used in the bulk of literature on assessments of the impact of EPZs, encompasses a variety of factors to determine the net contribution of EPZs to the welfare of an industrializing country: i.e. its economic growth. Carried out mostly using the case study approach, the assessments are done based on host countries’ costs to build and maintain EPZs versus experiences in realising their expectations on the EPZs – i.e. the potential gains/benefits or objectives of EPZs12. Even though the literature does not criticize the cost-benefit analysis per se, Madani (1999), Kaplinsky (1993) and others caution about the presence of caveats to some of the potential gains from the EPZs and that zones may become “enclaves” (see Table 3 and economic arguments for. EPZs below). Additionally, Madani warns that while costs may be more readily observable, the scope of the benefits may not be. Still, Zeng (2010), Jayanthakumaran (2003), Chen (1993) and Warr (1989), inter alia, analyse EPZs in East Asian countries such as South Korea, Malaysia, Indonesia, the Philippines, Sri Lanka, and China using this method. Similar studies have also been done in Latin America and the Caribbean (see Monge-Gonzalez, 2005; Amas & Sadni-Jallab, 2002; Rueda & Loudes, 2000; Carrillo et al., 2000; CEPAL, 1998; Manuel, 1996; Bermudez, 1996; and Kaplinsky, 1993; etc.), and the Sub-Saharan Africa region (see Zeng, 2015; Gondwe, 2012; Zeng, 2012a; Farole, 2011; Martin, 2011; Nkhoma, 2007; and Jauch, 2002). Basing on this EPZ performance assessment method, the results are quite mixed, with some countries, on the one hand, such as China, Singapore, Malaysia, Korea, Mauritius, and Jordan, being very successful (Zeng, 2015). Thus, they have been successful in attracting FDI, creating jobs, and generating exports, and demonstrate marginally positive cost-benefit effect (ibid.: 3). On the other hand, with the partial exception of Ghana and Kenya and possibly Madagascar and Lesotho, the vast The new growth approach is yet to make substantial empirical inroads. How much benefits an EPZ Programme brings the host country entails then how effective the scheme is as an exportoriented industrialization strategy. 11. 12.

(19) 12. majority of Sub-Saharan African EPZs have generally underperformed, and therefore have not had the intended structural change impact on the host countries’ economies (Zeng, 2015; Farole, 2011; and Jauch, 2002). “Table 3: Potential Gains and Caveats for EPZs and the Relevance to Malawi’s EPZ Programme “Potential Gains from an EPZ. Increased foreign exchange earnings Increased gross exports Job creation/income generation Good source of labour training and learning by doing. Assists countries in developing an industrial labour source Management and supervisory training Catalyst effect/demonstration effect Average wage in EPZ higher than average wage outside the zone Provides efficient industrial structure in countries that may not possess one.. Caveats to the Gains. These gains may be overstated. Net exports are not as impressive because of high import content of exports Lack of job security, prone to demand shocks True, but skills are generally low-tech. Gains Relevant with Malawi EPZ’s Stated Objectives Yes Yes. May not exist True, but difficult to capture There is a large variance around this mean.. Forgone taxes, tariff revenues and opportunity cost of public investments related to the zone may be high. Sources: World Bank, Dorsati Madani, “A Review of the Role and Impact of EPZs”, 1998 and Malawi EPZ Regulations, 1995.13””. Yes Yes Yes Yes No No. The last important theoretical debate briefly reviewed in this study concerns the contentious topic of EPZ-induced employment.14 Firstly, those that adhere strictly to neo-classical economic principles view the EPZ-induced employment as vital, because it contributes to broader development objectives by affording workers in EPZ entities expertise and income. Although they acknowledge concerns about the fluid nature of capital investments, particularly in textiles and footwear in EPZs, their take is still that the overall job creation in EPZs is better than the alternative of not creating any employment at all (World Bank, 1995). This remains the dominant view of the World Bank, neo-classical scholars, and EPZ host governments. Secondly, the reformist view to EPZ-induced employment is that EPZs do not currently provide employment that furthers development objectives, a situation that is only reversible if specific labour regulations are implemented and enforced with regard to workers’ welfare (Martin, 2011). This Recent literature has not evolved as indicated in UNCTAD (2015), Zeng (2015 and 2012a), Fakir et al (2013), Gondwe (2012), Farole (2011), World Bank (2001) and many more. 14 “As much as there are other, equally important EPZ-related arguments, such as EPZ impact on labour rights and protection, human rights, gender issues, the environment, and branding of products, inter alia, such debate goes beyond the scope of this study and will not be pursued further at this stage.” 13.

(20) 13. involves the development and enforcement of national and international regulations by the host governments (Martin, 2011), as lack of labour laws in the zones leads to appalling working conditions (Klein, 1999). The reformists do not take issue with the creation of EPZs per se, but rather advocate for “decent” work for EPZ workers. They include the ILO, some trade unions active in EPZs, and human rights organizations. Lastly, according to Martin (2011: 45), “the radical view of EPZ employment calls for the abandonment of EPZs in favour of alternative employment creation strategies that focus more on local industries (a renewed focus on domestic industry) instead of chasing FDI and producing manufactures for distant export markets” (own emphasis). The radicals such as Jauch (2002) argue that the nature of their operations means EPZs cannot provide decent employment and working conditions. They claim that any attempt to improve working conditions in a substantive manner would drive EPZ firms to a lower wage jurisdiction. Furthermore, Jauch (2002) observes that the types of jobs created in the zones are of poor quality and not necessarily new.. 3.3. Empirical Review. The goal of this subsection is to conceptualize how the researcher intends to assess Malawi’s EPZ programme by generating a conceptual framework from the empirics and literature on why EPZs are set up. 3.3.1. The Economic Arguments for EPZs. As indicated above, the main arguments for setting up an EPZ are the potential to attract FDI; generating foreign exchange earnings, employment or income; export expansion and diversification; linkages with the domestic manufacturing sector; and to transfer technology and skills. This section aims to review the debates on these parameters, assessing how EPZs contribute to the objectives aimed at when they were being established. Here, the parameters are not ranked in any order of importance because EPZs have been promulgated with one or more of these goals in mind..

(21) 14. However, it is important to clarify that some parameters attract more debate than other by default. As a result, the section does not give equal weighting or space to each of these. Structure-wise, with the exception of employment, all the variables are directly related to foreign direct investment (FDI) in one way or another. It is for this reason these are discussed under one sub-heading. i.. Foreign Direct Investment (FDI). Attracting FDI: Collaboration with foreign investors to supplement the host country’s insufficient export manufacturing is one feasible way a developing country can promote its export-led industrialization (World Bank, 1992). Foreign investors contribute significantly towards export development. Generally, the contribution comes not only in the form of capital, marketing and technical know-how, and access to established international market connections, but also the managerial capacity to combine these factors with local resources (ibid.: 13). But as Amirahmadi and Wu (1995) point out, despite the fact that EPZs provide a gateway to FDI, the FDI flows are limited and competition among developing countries has been increasing. It is against this background then that countries appear to be left with no other option but to create even more favourable investment environments and/or establish new EPZs with even more attractive “incentives in order to secure their share of FDI” (ibid.: 832). This is evident even in countries where incentives are already very high and the business environment is competitive, like in the case of Korea (UNIDO, 1988). Still, EPZs’ efficacy in the promotion of foreign investment is at best mixed, with China being the most outstanding performer (Amirahmadi & Wu, 1995). The main arguments for EPZs as far as FDI inflows are concerned revolve around the role of the latter in the host country’s industrialization process. According to Armas & Sadni-Jallab (2002) and Madani (1998), countries derive both short-term and long-term benefits from FDI in EPZs. On the one hand, the short-term benefits, which include employment, foreign exchange earnings, and export (the static EPZ benefits), are the most formal benefits and are easily quantifiable, and are therefore the most often studied. On the other hand, long-term benefits – comprising technology.

(22) 15. and skill transfers and backward linkages with the host economy (dynamic EPZ benefits) – are difficult to quantify and are therefore the least studied. Because the last two static benefits and all the dynamic EPZ gains are closely interlinked with FDI, only the EPZ-induced employment literature will be discussed separately (in the following sub-section). Also, since the research on the quantifiable EPZ parameters is vast, the remaining constructs under FDI sub-section have longer paragraphs than the rest.. Generating foreign exchange earnings: The most common economic argument for EPZs is the EPZ-induced generation of foreign exchange earnings through FDI and exports (Engman et al., 2007). And, data on EPZ-related foreign exchange earnings through exports is available for some countries. For instance, Bangladeshi EPZs’ share of total foreign exchange earnings through exports rose from 0.02% in 1983-1984 to 18% in 2004-2005 (Hossain, 2005). So the economic argument for EPZs in this case is that the EPZ-associated foreign exchange earnings “may ease some of the constraints that industrializing countries face, allowing them to source inputs and other import needs for the whole economy” (Engman et al., 2007). However, other researchers counter-argue that the reality on the ground might not be that simple as not all earnings are repatriated back into the host economy (Madani, 1998). And most importantly, foreign exchange earnings from exports hinges heavily on the source of inputs, with greatest benefits where strong backward linkages have been developed like in Korea and Taiwan (Engman et al., 2007). Such effects, however, have been much more limited in most Sub-Saharan African countries (ibid.: 27).. Developing exports: One reason why leading experts initially supported EPZs with enthusiasm is that early work on EPZ impacts showed substantial growth in gross exports (Madani, 1998). World Bank’s FIAS (2008) indicates that EPZs account for 8.3% of total exports of manufactured goods in countries with EPZ programmes (see Table 5 below). According to Engman et al. (2007), the effects can be larger in smaller economies with limited production capacity. The example given is that of Mauritius, which saw more than a thousand-fold increase in exports between 1971 and 1986. Accordingly, the share of exports produced in Mauritius’ EPZs skyrocketed from 3% to 53% of.

(23) 16. total exports. Similarly, substantial increases were registered in Indonesia, South Korea, and Taiwan in the mid-1980s (UNESCAP, 2005); Costa Rica and the Dominican Republic from the 1990s to mid-2000s (Cling & Letilly, 2001); and Bangladesh from the early 1980s to mid-2000s (Fakir et al., 2013; and Hossain, 2005). In Fakir et al.’s own words, “this annual trend of EPZ export earnings growth has been more than six times higher than the total national export earnings, signalling that zone programmes are outperforming the domestic economy” (2013: 95). “Table 4: Impact of EPZs on Exports by 2004 “EPZ Host Global Asia/Pacific Americas Central/East Europe & Central Asia Middle East & North Africa Sub-Saharan Africa. EPZ Exports of Manufactured Goods (US$ billion) 177.7 84.5 44.0 14.5. Percentage of Total Exports of Manufactured Goods (percent) 8.3 11.0 5.3 6.8. 28.7. 16.7. 2.4. 19.5. Source: FIAS, 2008”. Another reason why industrializing countries use EPZs is export diversification. Imbs and Wacziarg (2003) claim that countries diversify over most of the course of their development path, and that diversification is positively correlated with development up to a certain level of income per capita, after which the sectoral production becomes more concentrated and less diversified – i.e. increased sectoral specialization and the U-shaped pattern associated with the production of manufactured goods. Klinger and Lederman (2004) support this observation by claiming that the number of new export products also follows an inverted U-curve in income. Since diversification is not a natural process (Rodrik, 2004), many developing countries employ EPZs to stimulate diversification in their economies. And perhaps this explains why countries at different levels of income expect varying benefits when they turn to EPZs as a development strategy. Armas and Sadni-Jallab (2002) indicate that countries that use EPZs in the early stages of their industrial development (such as Mauritius, the Dominican Republic, and China) expect the EPZs to provide the engine of growth to propel their economies into industrialization. And, most importantly, production and export diversification is sought. The second set of countries (like Tunisia, Malaysia, Indonesia, and Honduras) comprises.

(24) 17. those that turn to EPZs when they already have strong industrial production and export sectors – their goal is to promote not export diversification, but exports in a few prioritized sectors. The extant literature portrays some successful stories where EPZs have managed to turn things around by transforming either mono-culture economies (that relied on exports of a limited number of commodities in the primary sector) or less diversified economies into those with a substantial, diversified industrial/export base. For instance, Cling et al. (2005) measure the extent to which EPZinduced industrial manufacturing resulted in export diversification for a few African countries between 1991 and 2001. The best performer is Madagascar, with an addition of over US$ 1 millionworthy new export products (i.e. from its initial 38 to 42 products). Ghana and Mauritius also experienced some EPZ-induced export diversification. Similarly, according to Engman et al. (2007), in some parts of the world the same trend is registered where either the share of traditional exports to total exports declines (Costa Rica), or where a non-traditional sector, such as the electronics sector, takes the major share of a country’s exports as a result of its success in attracting considerable FDI in that particular sector (Philippines).. FDI catalysts and spillover effects (technology transfer, knowledge spillover, and backward linkages): The new growth theorists describe the long-term benefits of FDI15 as the abstract externalities of EPZs. They are enjoyed through the creation of linkages with the domestic economy not only as catalyst for entrepreneurship and investment but also as the vessel for technology transfer, knowledge spillover, and backward linkages. Because it is difficult to demonstrate such FDI effects, literature is scarce. ii.. Employment Effect on Host Country’s Economy. To a large extent, job creation is an indispensable aspect of EPZs as an effective industrial strategy, which in turn can play a significant role in poverty alleviation. This is relevant especially where unemployment or informal sector activity is high. Even so, literature on EPZ-induced employment 15 “These impacts are difficult to quantify, but it is also difficult to distinguish the effects of EPZs from those of other factors influencing the same variables (Madani, 2007). This problem is compounded by the fact that EPZs differ considerably among themselves, as already indicated. Also, there is a general lack of good time-series data on impacts, even in respect of direct/static effects, apart from a few EPZs mainly in larger Asian countries.”.

(25) 18. provides mixed views. This is unsurprising because zones have proved to be a source of controversy due to the labour and social issues involved, which attract debates among academia, media, international organizations, and civil society organizations.16 Still, for the most part, EPZs have led to the creation of jobs, as indicated by the ILO’s database (see Table 5 below). Boyenge (2007) indicates that, globally (minus China), jobs created in the EPZs increased by more than 32 times between 1975 and 2006. To be specific, by 2006, some 66 million jobs existed in 3,500 EPZs located in 130 countries, and about 60% of these jobs were in China alone. Conversely, in some cases the number of jobs created in EPZs, proportional to the total labour force of the host countries, has been modest. Madani (2007) gives an example of the EPZs in the Philippines, which provided 180,000 jobs in 1997 against the total labour force of 31 million (only 0.6%) – this force was growing at an annual rate of 1.4 million workers. FIAS (2008) also confirms the marginality of this job creation in absolute terms at regional and global level. In a point of fact, Sub-Saharan African EPZs’ direct employment contributes an even smaller share of total employment – only 0.2%. The region for which EPZs claim the biggest share of total employment is Asia/Pacific (2.3%) followed by the Middle East and North Africa (1.5%), and the Americas (1.2%). “”Table 5: Estimates of the Development of Export Processing Zones” “Parameter Number of countries with EPZs Number of EPZs EPZ-induced Employment (millions) - of which China - of which other countries with figures available. 1975. 1986. 1997. 2002. 2006. 25. 47. 93. 116. 130. 79 N/A. 176 N/A. 845 22.5. 3,000 43. 3,500 66. N/A 0.8. N/A 1.9. 18 4.5. 30 13. 40 26. Source: International Labour Organization, Jean-Pierre Singa Boyenge, “ILO database on export processing zones”, 2007: 1.”. 3.3.2. The Conceptual Framework. Founded on the given theoretical framework (see Figure 1 above), this subsection provides the researcher’s ideas on how the research problem has to be explored (see Figures 2 and 3 below). The objective of this discussion is not to analyse the voluminous and varied literature on this subject because much of it falls outside the scope of the research question and requires a much broader and lengthier discussion to do the subject justice. Instead, this section only addresses the discussion on EPZs’ job-creation contribution to the host economies. 16.

(26) 19. The conceptual framework is based on six variables against which the effectiveness of any EPZ programme as an export-oriented industrialization strategy is assessed. These are: the attraction of FDI; the expansion and diversification of the exports basket; the generation of foreign exchange earnings; the creation of employment; the transfers of technology and skills; and the promotion of linkages with the domestic economy. Thus, as far as the research question on the effectiveness of the EPZ programme in Malawi is concerned, Figure 2 shows that the success or failure of an EPZ depends on the fulfilment of the aforementioned variables (its contribution to the objectives aimed at when Malawi’s EPZ programme was set up). Lastly, Figure 3 below provides the conceptualized relationship between the provision of fiscal incentives to EPFs and the latter’s performance. The researcher conceptualizes the EPZ programme as a carrot-and-stick strategy. The incentives provided to the EPFs take the form of a carrot, which in turn is subject to Figure 2’s six sticks, which are the performance requirements in terms of FDI attraction; export basket expansion and diversification; foreign exchange earnings generation; employment creation; technology and skills transfers; and promotion of linkages with the domestic economy. The researcher, therefore, seeks to investigate if incentives have any impact on the performance of EPZs. Thus, pre-incentives-review performance (2006) has been assessed against post-incentives-review performance (2015).. 3.4. Conclusion. Despite not performing to most host countries’ expectations, EPZs remain a popular industrial policy tool among the industrializing countries. The main debates concerning this overwhelmingly case-study-dominated literature are not only about whether EPZs indeed bring about industrialization, but also which potential economic gains can be attributed to the EPZs and how such potential benefits can be assessed. Mostly, the impact of EPZs on industrializing countries is assessed by determining whether the zones provide a net benefit to their welfare. EPZs provide both traditional/static effects and non-traditional/dynamic benefits to their host countries. The former, which are easier to quantify and therefore studied often, comprise increasing and.

(27) 20. diversifying exports, and increasing FDI and employment. Contrariwise, the second group of potential impacts of EPZs such as promoting technology, skills transfer and backward linkages with the host economy is difficult to quantify and thus, less studied. While it is difficult to quantify some indirect EPZ benefits, there is general consensus that on average EPZs have performed well in East Asia, moderately in Latin America, and poorly in Sub-Saharan Africa. With only a handful of EPZ case studies in the Sub-Saharan African region and the existing literature gap on Malawi’s EPZ programme, this study aims to add to the literature by qualitatively and quantitatively examining how much the EPZ programme has been contributing to Malawi’s industrialization goal. This is done by assessing the extent to which the expected EPZ impacts have been realized. Furthermore, the impact of the reviewed incentives regime on the performance of the EPFs has also been assessed. Serving as reference for the designing and implementation of future policy instruments, the study is relevant especially at a time when Malawi contemplates transitioning into the much broader concept of special economic zones in order to attain similar objectives. Figure 2: Conceptual Framework of the Effectiveness of an EPZ as an Industrialization Tool Foreign Exchang e Exports Earning Expansion s & Diversifica tion FDI Attracti on. Employm ent/Inco me Technology & Skills Transfers. Linkages with Domestic Industry. Figure 3: Conceptual Framework of the Impact of a Reviewed Incentives Regime on EPZ as an Export-led Industrialization Strategy THE CARROT. THE STICKS Export Expansion & Diversion Foreign Exchange Earnings Employment/Income Technology & Skills Transfer Linkages with Domestic Industry.

(28) 21. Host Government’s Intervention. Performance Requirements for the EPFs. 4. PROBLEM STATEMENT. 4.1. Research Question. Until 2007, the Government of Malawi was consistent in its provision of export processing incentives, which include financial incentives such as zero-percent corporate tax and duty-free exports and imports (including motor vehicle imports). But since the release of a report that suggested that the programme was not worth the sacrifice the government was making in terms of tax concessions (Nkhoma, 2007), the EPFs saw the birth of an unpredictable and less attractive incentive regime where, among other things, they started paying 30% corporate tax. Although the immediate consequences can be deduced from the number of EPFs that have so far left the EPZ programme, the exact impact of this change on EPFs’ performance is not yet known and hence creates an information gap that needs to be filled. Thus, this study seeks to fill the literature gap by exploring the impact of the changed incentives regime on the effectiveness of the EPZ programme as an export-oriented industrialization strategy. The research question to guide the study is then the following: . 4.2. How effective has Malawi’s EPZ programme, as an export-oriented industrialization strategy, been since the reviewed incentives regime from 2007?. Significance of the Study. As much as there is a sizable amount of literature on EPZ regimes across the developing countries, there is scarce coverage of Malawi. Commonly, the existing literature takes a broad view of EPZs in the Sub-Saharan African region or EPZs regimes in general (Virgill, 2009; Watson, 2001; World Bank, 2001 and 1998; Jauch, 1999; Kusago & Tzannatos, 1998; Madani, 1998; Devereux & Chien, 1995; Henrich & Amavilah, 1993; and Bermudez, 1990; etc.). Moreover, there is a lack not only of research on the performance of economic zone programmes in the African region, but also of.

(29) 22. systematic analysis of EPZs’ performance around the world (Farole, 2011). As a result, “policymakers are forced to rely on the same small handful of 10 to 20 year-old case studies” (ibid.: 2). For the case of Malawi, likewise, little research on the effectiveness of the EPZ programme has been done, making this area relatively virgin territory in the literature. It is imperative, therefore, to assess how the EPZ programme is faring against its stated objectives. This is especially relevant at a time when the country contemplates transitioning into the much broader concept of special economic zones in order to attain similar objectives (MoIT, 2015). The study therefore contributes to the existing literature not only with an update on the performance of the EPZ programme in Malawi, but also the impact the reviewed incentives regime has had on its performance. It thus serves as reference for the designing and implementation of future policy instruments.. 5. RESEARCH METHODOLOGY. 5.1. Research Design. With EPFs the subject, this study takes a case study approach whose purpose is both analytical and exploratory. In examining various performance parameters of an EPZ programme, the research makes use of both qualitative and quantitative (i) secondary sources of data, including web-based databases, from National Statistics Office (NSO), Ministry of Industry and Trade (MoIT, Statistics Unit), Malawi Investment and Trade Centre (MITC), and Reserve Bank of Malawi (RBM)17, and (ii) primary data from the scheduled interviews with management of the firms where a questionnaire was administered (see Appendix III).18 Out of the eight eligible EPFs, only one did not respond to the request to take part in the survey. As a result, seven EPFs from the northern and southern regions of Malawi were interviewed in December 2016 and January 2017 through both phone and face-to-face consultations. For confidentiality reasons, the EPFs cannot be named in this study, but Appendix II contains a detailed schedule of the interviews. For the same reason, more description of Data from NSO, RBM, and MITC was collected through MoIT. Sections A, B, and C, of the appended questionnaire aimed to capture export performance, employment, and the FDI catalysts and Spillover effects induced by the EPFs, respectively. On the other hand, Section D targets the possible consequences of the reviewed incentives regime which commenced in 2007. 17 18.

(30) 23. the EPFs regarding their respective sizes, production volumes, sectors, etc. is not provided in this study. Although quantitative data has been used in this study, this is mostly to substantiate and support its qualitative nature. The analysis involves the comparison of 2015 and 2006 cross-sectional data in order to assess the programme’s contribution to the general economy during the era of the reviewed incentives regime (2011-2015). The assessed parameters are (i) FDI attraction, (ii) the development of exports, (iii) the generation of foreign exchange earnings, (iv) employment creation, (v) technology and skills transfer, (vi) and linkages with domestic industry.. 5.2. Statement of Limitations. The EPFs that withdrew their EPZ certificates in reaction to the reviewed incentives regime were considered an invaluable asset to the research. However, they did not respond to the request to take part in the study. Such EPFs would have provided some first-hand information on how specifically the reviewed incentives regime affected their performance. Nevertheless, MoIT provided some of the needed information. Secondly, the majority of the participating EPFs were reluctant to divulge information on the quantitative performance indicators (the aforementioned parameters ii to iv, especially export values). For that reason, the export development parameter has been predominantly assessed by analysing the performance of EPZ-dominated industries in general. Thirdly, data on the targeted variables dating as early as before the EPZ programme was even established could have provided the background information to necessitate the illustration of the trends and evolution of Malawi’s exports, FDI, income, foreign exchange earnings, skills, and technology. This data is not available due to the abolishing of industrial licensing and registration in the early 1990s as part of that period’s regulatory liberalization. Furthermore, the Trade Map19, a. Another limitation related to Trade Map is that it does not explain whether the sources of export value growth is price or volume changes.. 19.

(31) 24. market analysis tool mostly used to assess the export performance and foreign exchange earnings parameters in this study, only captures data from 2001. Lastly, similar discrepancies are evident on the creation of employment parameter where quantitative data to show trends and the like is limited. So, in spite of the stated limits, the analysis of the research findings remains accurate and contributes significantly to the study of export-led industrialization in Malawi.. 6. RESULTS. This section reports the key findings on the EPZ programme’s contribution to the general economy during the era of the reviewed incentives regime. Of particular interest in this study is whether the reviewed incentives regime affects the effectiveness of the programme in steering the economy towards export-oriented industrialization. Specifically, I evaluate the impact that the programme has made in terms of FDI attraction, the development of exports, the generation of foreign exchange earnings, employment creation, technology and skills transfer, and linkages with domestic industry.. 6.1. FDI Attraction. Malawi collaborates with foreign investors to supplement the country’s insufficient export manufacturing in its efforts to promote export-led industrialization. To a larger extent, the successful FDI-attracting countries have employed various fiscal and non-fiscal incentives and preferential policies (see Table 6 below). In the case of Malawi, as already mentioned, the “unfenced-in” EPFs make use of the same infrastructure, utilities, employment and environment legislations, etc. that is available and applicable to the non-EPFs. Thus, the EPZ programme in Malawi attracts FDI mainly through the provision of fiscal incentives. According to MoIT (2015), Malawi’s EPZ programme is still struggling not only to attract FDI into the country, but also to retain it. The scheme has managed to attract only five companies over the.

(32) 25. 2006-2015 period.20 Within the same period of time, six EPFs left the programme and opted for a share in the domestic market.. “Table 6: Fiscal and Non-fiscal Incentives and Preferential Policies for FDI Attraction” FDI Promotion Tools Streamlined administrative process Sound infrastructure Inexpensive land and facility use Rapid customs clearance Ability to repatriate profits and capital investments Reduced/No duties on imports Corporate tax exemption Export tax exemption Flexibility in hiring and firing workers Depreciation allowances Limited license to sell into the domestic market”. EPZ Programme Provisions in Malawi Initial Provisions Current Provisions X X X √. X X X X ?21. √ √ √ X X X. ? X √ X X X. “Sources: Enright et al. (2005), Nkhoma (2007), and MoIT (2016)”. As illustrated by Figure 4 below, Malawi hosts relatively higher private foreign investment compared to the Sub-Saharan African region and other low-income countries, respectively (World Bank Enterprise Surveys, 2014). But the majority of such investments target the domestic market and not the export market. In that same vein, one interesting observation is that during the period 2010-2015, more than twenty foreign direct investors channelled their investments to Malawi (MoIT, 2015), but only three FDIs joined the EPZ programme. The rest opted for the tourism, agribusiness, and infrastructure development sectors, inter alia. As captured by Table 6 above, the scheme is found not to be attractive enough by most investors (Interviews, 2016-2017). The unattractiveness of the programme emanates from its regulations/administration and structure. For instance, the EPFs enjoy neither streamlined administrative processes nor the sound infrastructure that zoned EPFs in other countries have access to. As a result, EPFs in Malawi operate with the same business environment obstacles that non-EPFs encounter (Interviews, 2016Two more firms joined the programme in 2016. ? means the provision is still available but less attractive: e.g. repatriation of profits was initially not regulated and it is currently regulated. Similarly, some items which used to be imported duty-free have been scrapped from the duty-free imports schedule. 20 21.

(33) 26. 2017). These include problems pertaining to electricity supply; access to finance; corruption; tax rates; access to land; transportation; and licenses, permits and procedures such as slow customs clearance (World Bank Enterprise Surveys, 2014). Second, the 100% export clause, as stipulated by the EPZ Act of 1995, pushes the investors towards the domestic market where they are at liberty to choose their own export and local sales proportions. Figure 4 Malawi’s Private Foreign Investments in Comparison with the Sub-Saharan Africa (SSA) Region and other Low-income Countries in 2014. Source: World Bank Enterprise Surveys, “Malawi Country Profile,” 2014. Lastly, and of particular interest in this study, is the issue of corporate tax exemption, which was scrapped from the EPZ programme incentive tools list in 201122. Also, the list of goods not eligible for duty/tax exemption has expanded since then (see the original non-scheduled materials list in Appendix I). Meanwhile, during this reviewed tax regime (2011-2015), only two FDIs have joined the programme and three have left for the Industrial Rebate Scheme (MoIT, 2015). Thus, the reviewed tax incentives regime seems to have a negative impact on the ability of the EPZ programme to attract FDI. Subsequently, there can only be limited collaboration with foreign investors to supplement Malawi’s insufficient export manufacturing and promote export-led. 22. EPFs pay 30% corporate tax since 2011..

(34) 27. industrialization. And since the main arguments for EPZs as far as FDI inflows are concerned revolve around the role of the latter in the host country’s industrialization process, the researcher assumes that the limited collaboration with foreign investors does affect the short- and long-term benefits Malawi has derived from FDI in EPZs. These include export development, foreign exchange earnings, employment creation, technology and skills transfer, and linkages with the host economy. The assessment results of the performance of the EPZ programme in the aforementioned parameters is reported in the next subsections. But before that, a summary of EPZ programme’s investment levels is given in Table 7 below. Table 7. Sectoral Investment Levels in Malawi, 2015. Industry Agro-processing Textile and garments Wood and wood products Exotic leather. Number of EPFs 6 2 2 1 Total 11. Investment Level (US$ million) 63.5 22 17.5 2 105. Source: MoIT, 2015. On one hand, the agro-processing industry has generated about 60% of EPZ programme’s FDI. On the other hand, textile and garments, wood and wood products, and leather industrial sectors have accumulated 21%, 17%, and 2% of the total investment inflows, respectively. On average, the investment is distributed as follows: capital equipment (30%), infrastructure development (25%), raw materials (20%), expansion (15%), and training (10%) (MoIT, 2015). But the share of raw materials for the textile and garments EPFs is substantially higher than the average – unlike the other sectoral industries, the former imports almost everything for its production processes (Interviews, 2016-2017).. 6.2. Export Development. Agriculture, which employs about 80% of the Malawian workforce and contributes over 55% of foreign exchange earnings (Ministry of Agriculture, 2016), remains the most important sector of the economy. In fact, for over four decades, the manufacturing sector’s contribution to GDP has been.

(35) 28. hovering as low as 4% to 14% (Malawi Annual Economic Reports, 1982-2015). This is evident from Malawi’s narrow industrial base and export basket. Predictably, the agro-processing industry (macadamias23 since 1996; coffee since 2004; mango and banana puree since 2012; and dhal since 2016) dominates the EPZ programme. It is worthwhile, therefore, to assess the performance of the EPZ programme in terms of how much it has contributed to the development of exports from Malawi. According to the existing literature on the review of EPZs’ effectiveness for export-led industrialization, development of exports can be assessed not only through gross export growth (Madani, 1998) but also based on how much the exports have diversified24 during the reporting period. Overall, Malawi’s annual exports grew on average in value by 8% between 2006 and 2015 (see. Table 8 below). Specifically, while the gross exports expanded by 18% between 2006 and 2011, the periods between 2011 and 2015 and between 2014 and 2015 saw 5% and 24 % declines in the same, respectively. In terms of export performance of EPZ-dominated industries,25 the period between 2006 and 2015 registered an annual average growth of below 1%. Thus, on one hand, the exports in value increased by about 8% during the period 2006 to 2011. On the other hand, they decreased by 8% during the period 2011 to 2015. And, for the last year of reporting (2014-2015), the fall in exported value almost doubled to 16%. Table 8 EXPORTED VALUE IN US$'000 EPZ Dominated Industries Traditional Industries Total Exports Proportion of EPZ Exports (%). Malawi’s Gross Exports (2006-2015) in Thousand US Dollars 2006 31,359. 2007 32,168. 2008. 2009. 33,903. 39,043. 2010. 2011. 2012. 2013. 2014. 41,816. 44,869. 39,388. 42,985. 36,912. 30,875 1,049,226. 634,858. 836,391. 845,096. 1,148,874. 1,024,388. 1,383,395. 1,178,645. 1,151,463. 1,384,685. 666,217. 868,559. 878,999. 1,187,917. 1,066,204. 1,428,264. 1,218,033. 1,194,448. 1,421,597. 3.9%. 3.1%. 4.7%. 3.7%. 3.9%. 3.3%. 3.2%. 3.6%. 2.6%. Source: ITC calculations based on: (i) UN COMTRADE statistics until Jan 2011, (ii) NSO of Malawi statistics since Jan 2011.. As of December 2016, about 39% of the EPFs were processing macadamias for exports under the EPZ programme. UNIDO’s Enhancing the Quality of Industrial Policies (EQuIP) Toolbox. 25 Edible nuts, exotic leather, textile and garments, rubber, wood and wood products (essential oils), and fruit purees. 23 24. 2015. 1,080,101 2.9%.

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