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Rise of Export Processing Zones

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Submitted By mikeyzee
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The post-WWII era was a period that brought about significant global social and economic change. With the conversion from domestic to export production due to increasing domestic production costs, First World nations sought after Third World labour as a way to reduce production costs. The rise of Third World industrialization, or newly industrialized countries (NICs), in the 1970s and growing throughout the rest of the century allowed the First World to keep up with rising consumption rates while keeping labour costs low. To represent the shift to export production, and to serve firms seeking lower wages and Third World governments seeking capital investment, export processing zones (EPZs) were created. Most EPZs are located in developing countries, and these zones attract employers as a solution to domestic production while also taking advantage of reduced trade barriers set up by the host nation in an attempt to reduce poverty, unemployment, and stimulate their domestic economy. The creation of these EPZs supported the rise of neoliberal globalization and the free market system throughout the latter half of the 20th century, which stated that the private sector would determine state priorities. This paper will examine the rise of EPZs and their connection to neoliberal globalization, as well as their relationship to the debt crisis of the 1980s and the growth of structural adjustment programs.
With the Cold War immediately following WWII, countries were divided into a class First, Second, and Third World countries, according to their status in the war. The Third World, also known as the Global South, represented all nations that were not aligned with either the core advanced capitalist countries (First World) or the countries in the Soviet-led bloc (Second World) (Smardon, 2011). These Third World countries were largely economically underdeveloped, and were located primarily in South Asia, Latin America, Africa, and the Middle East. Meanwhile, the First World countries were in the midst of an economic boom, and a rise in consumer consumption meant that, according to neoliberalism, corporations needed to increase supply to meet the demands of consumers. However, due to high labour costs caused by unions, many corporations were not able to financially increase their levels of supply. Instead, they looked to Third World countries that were willing to offer labour at lower wages, and as an incentive, would remove trade barriers. Exporting industrialization began in the 1930s in Latin America, but would become more popular throughout the 1960s and 1970s. Transnational corporations (TNCs) recognized the opportunity to shift production to Third World countries, and these states welcomed the investment with a ready supply of cheap, disorganized labour (McMichael, 2008). With the increasing demand for cheap labour, EPZs were founded. EPZs are usually separate from the rest of the country, and are built for the sole purpose of receiving raw materials and converting them into a final product as fast as possible. When the first EPZs were founded, they were used primarily for textiles and clothing. Presently, as countries are becoming more sophisticated, they are able to specialize in more skilled labour jobs, such as electronics. The employees in these zones are subject to low wages, and human rights are often ignored. Despite being highly unethical, by ignoring civil rights and lessening working conditions, TNCs are able to increase profit margins greatly.
A major theme of the McMichael text is globalization in the neoliberal context. As labour costs peaked during the 1970s, TNCs looked to the Third World to help restore profitability. The integration of these national economies into the international economy via trade, investment, ideas, and technology would form the concept of globalization. In terms of investment, First World countries required cheaper labour to restore growth and profitability, as well as to meet consumer demand. Third World nations welcomed this foreign investment from TNCs as those funds would help to jumpstart their economy and boost employment. It is important to note that although it seems First World nations are benefitting in the trade-off by paying employees less, both sides are winning, because this is a simple but must-have for Third World countries. By investing into foreign economies, nations are extending their borders and means of production on a global level, thus supporting neoliberal globalization.
The use of technology also played a major role in the rise of neoliberal globalization in the latter half of the 20th century. Known as the “Information Age”, the world economy was stimulated through the development of semiconductors and computer chips. What used to take days to send, now took a matter of minutes as TNCs were able to send blueprints of new designs to offshore plants to be produced, assembled, and then shipped back to them. From this, comes the concept of the global commodity chain, where a good is a transformed from raw material to an end product over several countries. Through these commodity chains, corporations are able to become as big as countries. Some of these corporations, such as Wal-Mart or Nike, provide the basis for global production and they increasingly organize work forces according to nonunionized international sourcing of products (Smardon, 2011). The evolution of information technology rapidly globalized the production of goods and services in the world, and as a result, EPZs became increasingly popular for TNCs like Nike. The use of semiconductors and technology in EPZs allowed TNCs to further decrease lead time in the production of goods, as well as allowing them to manage operations without the need to travel to the outsourced location. Through embracing technology, EPZs were able to function far more efficiently, and because they heavily supported business and not the state, were consistent with the logic of neoliberal globalization.
Another key component that enabled the proliferation of EPZs involves government action. One form of government intervention that promoted EPZs and other related development programs is through tax laws. There have been many instances dating back centuries of tax reform in First World countries such as the United States, but in accordance with neoliberalism policies, these reforms were widely used throughout the “globalization project”. By broadening the tax base and altering the tax rates, the government is encouraging efficiency in the work place, and TNCs take advantage of this through the use of EPZs. This means that TNCs are able to mass-produce goods, without an increase in taxation per product. Along with tax breaks, governments also set up minimal customs controls, which allows for even lesser costs associated with production for TNCs.
The debt crisis of the 1980s was fueled by a number of factors. One of the main contributors associated with the crisis was over-lending in the First World, notably in the United States. With banks loaning an excessive amount of funds to individuals, the dollar was losing value. To counteract this, the interest rate levels were raised, to make it more expensive to borrow. However, as this happened, lending and investing into the Third World states decreased as First World businesses could not afford foreign investment. As well, with the forced recession in the US caused by raising interest rates, there was a decrease in demand for Third World products. This would prove to cripple the Third World even further financially and economically. The other main contributor to the debt crisis was a spike in oil prices beginning in 1973, also known as the “first oil shock”. This led to the offshore capital market growing from $315 billion to over $2 trillion in under a decade. With trade in foreign exchange being more than 11 times the value of world commodity trade, TNCs were forced to diversify their global portfolio to reduce their risk of bankruptcy (McMichael, 2008). With the First World running into a recession caused by the spike in oil prices, global banks looked to Third World economies, who were becoming a major contributor in the growth of the world economy, to take part in massive borrowing. These lenders provided a great opportunity for Third World nations to build up their infrastructure and economy. However, when these unregulated global banks lent the money to these Third World countries for economic expansion, they assumed that the countries would never go bankrupt and would not default on the loan. This would only fuel the fire, as Third World states would use borrowing to counterweight corporate foreign investment. Becoming increasingly uncontrolled throughout the 1970s, debt financing inflated the foundations of the development state even further (McMichael, 2008). This debt would continue to build up throughout the 1970s until some Third World countries, many in Latin America, defaulted on their loans.
These events would lead to many nations abandoning their import substitution industrialization models of economy in favour of the neoliberal export-oriented industrialization strategy (EOI), which was promoted by the International Monetary Fund. EOI became widely used following the Keynesian Welfare State era, and neoliberalism took place. The goal of EOI is to expedite the industrialization process through exporting goods and services in which that nation has a comparative advantage. That is, in this case, a Third World may not be more efficient in the production of a good, but has different relative costs and efficiencies for producing those goods (Economist, 2007). In the case of Third World countries, reducing wages of domestic employees attracts foreign investors and reducing export prices (McMichael, 2008). Export-oriented industrialization is achieved through opening domestic markets to foreign competition in exchange for access to foreign markets (Sarkar, 1986). EOI is very relatable to practices of EPZs. Third World countries will often reduce trade barriers to encourage First World nations to invest. As well, governments can intervene in the process through financial support for the export market, as well as employing a floating exchange rate to devalue the currency. A floating exchange rate allows for a currency’s value to fluctuate according to the foreign exchange market. As these exchange rates adjust automatically, they enable a country to reduce the impact of recessions, as well as reducing the risk of a currency crisis, also known as a balance of payments crisis, where the value of a currency changes rapidly, decreasing its value for withholders. Many Third World countries now employ this type of exchange rate system, including Brazil, Chile, Mexico, the Philippines, and several sub-Saharan African states. These types of national structural adjustment programs slowly allowed indebted nations to work back towards economic stability.
Along with the growth of structural adjustment programs, many Third World states saw a rise in the number of export processing zones (McMichael, 2008). These EPZs were established in response to the debt crisis, and the ensuing changing economies, from import to export-oriented industrialization, of their nation states. As well, the Third World states that were in debt to the global banks required as much funding as possible. By starting up EPZs in their country, firms are seeking direct foreign investment in exchange for a cheap and ready supply of labour. These funds can then be used to start up government programs which will help to stimulate the struggling economy. As well, EPZs create local employment. Wages provided to the employees, no matter what amount, can then be spent back into the economy. This process is known as the multiplier effect. Despite the efforts by Third World governments, many nations still owe millions of dollars in debt. Despite limited borrowing for some of these countries, they remain in debt due to interest on the loan. For example, with a high interest rate on a loan, countries pay more annually on loan interest, rather than the principal. By promoting export development, these Third World nations support McMichael’s “globalization project” and as their debt is slowly reducing, their actions are taking effect on their economies.
As discussed, the growth of McMichael’s “globalization project” is largely correlated to the rise of EPZs in Third World countries. As Keynesian economics was increasingly challenged in the 1950s and 60s, the new economic policies of neoliberalism came to power, especially being supported by the International Monetary Fund. These policies encouraged the efficiency of private enterprise, free trade, and open markets. The new set of economic policies in First World countries extended to the Third World, and provided the basis for the proliferation of EPZs and other similar programs. Despite ethical issues associated with the EPZs, they provided First World TNCs with the cheap labour that they required to keep up with the demand for products. These EPZs, as well as new neoliberal globalization policies introduced to the Third World countries, such as trade liberalization, tax reforms, floating exchange rate systems, and reduced customs, allowed them to slowly break free from their economic troubles, while allowing First World TNCs to regain growth and profitability. However, growth would be foiled by oil shocks and over-lending in the First World, and when global banks decided to loan funds to Third World nations, they did not realize there was a risk of defaulting. The debt crisis of the 1980s altered the style of economy for many Third World states to assist in lessening the burden of debt, and as a result, more EPZs were founded in an attempt to boost employment and restore economic growth. Despite efforts, many Third World nations still owe mass amounts of debt and will continue to see economic challenges in the future.

REFERENCE LIST
McMichael, P. Development and Social Change. USA: Pine Forge Press, 2008.
Sarkar, P (1986). The Singer-Prebisch Hypothesis. Oxford University Press.
Smardon, B. Class Lecture. Introduction to Business, Government, and Society. York University, Toronto, ON. 2011.
The Economist. 15 Oct 2007. http://www.economist.com/blogs/freeexchange/2007/10/this_week_in_comparative_advan

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