Analysis of the Performance of Private Economic Zones in Philippines
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International Journal of Development and Sustainability ISSN: 2186-8662 – www.isdsnet.com/ijds Volume 7 Number 2 (2018): Pages 502-517 ISDS Article ID: IJDS17111502 Analysis of the performance of private economic zones in Philippines Arianne Dumayas * Faculty of Economics, Chuo University, Higashi-nakano 742-1, Hachioji-shi, Tokyo, Japan Abstract The establishment of special economic zones has been a popular development policy tool for many developing economies like the Philippines. Special economic zones in the Philippines started as solely government-led and managed zones but eventually, the participation of private sector was allowed in 1995. As of 2016, majority of 348 active special economic zones are developed and managed by the private sector. Given the two decades of private sector participation, it is apt to analyze the economic contribution of these private special economic zones, particularly in comparison with public economic zones. This paper evaluates the performance of private and public economic zones using indicators on investments, exports, and employment. The increasing number of private economic zones are instrumental in driving the growth in investments, exports, and employment from 1995-2015. The analysis at zone level shows that while private economic zones deliver significant outcomes, public economic zones continue to play a major role. However, these findings are based on descriptive analysis. Further study using more sophisticated estimation techniques is required to assess the effectiveness of economic zones. Keywords: Special Economic Zones; Investments; Exports; Employment Published by ISDS LLC, Japan | Copyright © 2018 by the Author(s) | This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Cite this article as: Dumayas, A. (2018), “Analysis of the performance of private economic zones in Philippines”, International Journal of Development and Sustainability, Vol. 7 No. 2, pp. 502-517. * Corresponding author. E-mail address: [email protected] International Journal of Development and Sustainability Vol. 7 No. 2 (2018): 502-517 1. Introduction Special economic zones (SEZs) are centerpiece of economic development policy around the world. The number of special economic zones worldwide is estimated to be around 4,300 zones in 2015(The Economist, 2015). The nomenclature of special economic zones varies among different countries and includes the common types such industrial parks, free trade zones, export processing zones, and business parks. Most of the countries have started implementing special economic zone strategy as an effort to liberalize the economy, capture foreign investments, and increase exports. As the economies continue forward into liberalization and deregulation, the underlying goals of these economic zones have consequently evolved from mainly export-oriented to high technology and innovation-oriented zones. Furthermore, the management of zones have changed from government-initiated or government-operated to public-private partnership or purely private. In the Philippines, economic zones were instituted in the late 1960s as part of the export-oriented- industrialization strategy. The first export processing zone, Bataan Export Processing Zone (BEPZ) was established in 1972 and four more economic zones were created in the succeeding years: Baguio City Export Processing Zone(BCEPZ) and Mactan Export Processing Zone(MEPZ) in Cebu in 1979, and Cavite Export Processing Zone(CEPZ) in 1986. From 1970s to early 1990s, economic zones were created and operated by the central government. In 1995, the development and management of economic zones were opened to the private sector through the enactment of Special Economic Zones of 1995. The same act also established the Philippines Economic Zone Authority (PEZA), the government agency that manages public economic zones and administers incentives to developers and locators within the special economic zones. As of 2016, the number of economic zones stood at 348 zones and majority of these zones are developed and managed by the private sector. The current Duterte administration aims to create additional special economic zones all over the country. PEZA is currently considering the plan to establish two new public economic zones per region (Mercurio, 2017). Considering two decades of private sector participation in the development and management of special economic zones, it is therefore necessary to examine the performance of private economic zones, particularly, in comparison to the government-managed economic zones. This paper analyzes the performance of private and public economic zones using data on investments, exports, and employment. This paper aims to answer the following research questions: How do private and public economic zones perform in terms of investment, exports, and employment from 1995-2015? Are there any variations in performance? Are private economic zones more effective than public economic zones? The findings of this exploratory study can potentially serve as a useful input in policy-making, specifically, considering the government plan to build more public economic zones. 2. Review of related literature Special Economic zones are commonly defined geographic area with differentiated rules and regulations from the national territory which are commonly instituted to attract investments, promote exports, and ISDS www.isdsnet.com 503 International Journal of Development and Sustainability Vol. 7 No. 2 (2018): 502-517 generate employment (Carter and Harding, 2011; Baissac, 2011). Special economic zones come in various forms which include export processing zones free zones, free ports, foreign trade zones, export processing zones, trade and cooperation zones, and economic technological development zones (Baissac, 2011). Over the past years, special economic zones have evolved, specifically, in terms of zone objective, incentives, structure, location, and ownership (Aggarwal, 2010). In terms of objective, establishment of SEZ have developed from facilitating trade and generating employment to fostering high-skilled and high- technological activities, stimulating economic activity, and diversifying export composition. The incentives within SEZs have also evolved from traditional tax-related incentives to various incentives such as infrastructure, services, industrial policies, labor policies, and corporate taxation. The structure of SEZs has also advanced from stand-alone industrial estates to integrated industrial townships. The economic activity within SEZ has also evolved from trade-oriented and labor-intensive to capital intensive to high-technology intensive SEZ. The location pattern of SEZs also changed from areas that are located near the port areas to various parts of the country with the aim of integration with host economies. The ownership and management of SEZ started as government-created and management but starting from 1980s, privately- developed and managed zones have emerged. The inclusion of private sector in the development of management of economic zones can be attributed to both push and pull factors (Farole, 2011). The push factors include difficulty for many countries to cover the associated costs of economic zones and need to revitalize failing economic zones programs. The pull factor involves the opportunity to profit for the private companies from real estate ventures and services to the firms. The first private economic zone is established in Dominican Republic in 1969 and this model was followed by other Latin American countries such as Costa Rica, El Salvador, Honduras, Nicaragua, Guatemala, and Colombia (Farole, 2011). Asian countries like Thailand, Philippines, and Vietnam have initiated private economic zones from 1990s. The number of private zones in developing and transitioning economies has increased from 25 % of zones in 1980s to 62 % in 2007 (FIAS, 2008). The comparison of efficacy of public economic zones over private economic zones or vice-versa is a highly debated topic, although anecdotal evidence shows that private SEZs are likely to be more effective (Baissac, 2011; FIAS, 2008). However, no comprehensive empirical analysis has been conducted to address this question. Private economic zones might have successful business operation but offer limited or negative economic contribution. On the other hand, public economic zones may fail to deliver profit but provide socio- economic impact. Assessing the performance of economic zones is often difficult and context-specific. To evaluate the success of economic zones, a framework based on the outcomes of the objectives can be outlined (Farole, 2011). The framework identifies two types of outcomes: static and dynamic. Static economic benefits are relatively short term and pertain to outcomes when economic zones are used as instruments of trade and investment policy. The static economic benefits are often measured through the following indicators: employment, foreign-direct investments, foreign exchange through exports, and value-added. Meanwhile, dynamic economic benefits include non-traditional economic activities, hard and soft technology transfer, the encouragement of domestic entrepreneurism, and the promotion of economic openness. 504 ISDS www.isdsnet.com International Journal of Development and Sustainability Vol. 7 No. 2 (2018): 502-517 3. Data and methodology This paper uses