Where the EPZ Are Called "Utopia" for Business...

The glossy color brochures put out by the Taiwan government describe the nation's Export Processing Zones (EPZs) as "Utopia for Industrial Entrepreneurs." There are three EPZs on Taiwan-one at Kaohsiung Harbor, one nearby at Nantze, and one near Taichung.

The brochures, published by the Export Processing Zone Administration of the Ministry of Economic Affairs, characterize EPZs as a "combination of a free trade zone and an industrial park, designed to promote export-oriented industries." The Kaohsiung Export Processing Zone (KEPZ) was the nation's-and the world'sfirst, and it was inaugurated in December 1966; eight years after a U.S. consultant on ports proposed the idea.

Free trade zones had existed before in many commercial centers, but EPZs were something new-a symptom of the program of export-oriented growth based on imported raw materials which had emerged in Taiwan (and a number of other countries) by the early 1960s.

In Taiwan, the idea caught on fast. By 1969, as applications to set up the KEPZ far exceeded the space available (68 hectares), the government decided to go ahead with plans to open two more zones: one large zone (90 hectares) in Nantze, just outside of Kaohsiung; and one smaller zone near Taichung (23 hectares).

Other countries sharing Taiwan's export-oriented development strategy also found the EPZ idea attractive. Today more than 25 other countries have established similar industrial zones.

From the beginning, Taiwan sought to lure foreign investment into the zones in order to promote industrial expansion, increase production for export and reduce unemployment (which officially stood at around 6 percent of the labor force from 1958 to 1964). The advantages of locating in the EPZs were widely advertised by the government:

• cheap, abundant labor;
• no duties on imported raw materials or exported finished products;
• no sales tax or commodity tax levied on companies within the zones;
• a five-year corporate tax holiday (or an accelerated depreciation rate on fixed assets) offered to enterprises in the zones which conformed to the criteria of the "Statute for Encouragement of Investment";
• greatly reduced red tape;
• standard factory buildings available for purchase (with generous government financing) or rent;
• good transportation to and from major harbors and airports.

The Taiwan government did impose some restrictions on enterprises operating in the zones: they should have no adverse affects on existing industries outside the zone; they should cause no environmental problems; they should export all of their products; they should invest a minimum of $U.S. 150,000; and they should produce a value added of at least 25 percent of the FOB (freight on board-i.e., excluding transport costs) price of exported commodities.

Despite these restrictions, which have not all been strictly followed, Taiwan's EPZs still proved quite attractive to foreign and overseas Chinese investors when they first opened. Gustav Ranis, a Yale economist who has written extensively on Taiwan's development experience, explains: "These zones substantially facilitated (and thus lowered the cost of) obtaining all the locational and fiscal benefits required to promote the re-export of intermediate goods after the addition of value in the form of (mainly) unskilled labor."

The zones' attractiveness to business has been enhanced by the fact that many developed countries, like the United States, waive tariffs upon reentry of processed intermediate goods on all but the value-added portion of the product.

Despite their considerable publicity, Taiwan's EPZs have generated only a small percentage of the nation's total export-oriented production in the 1960s and 70s. And EPZs seem destined to play an even more restricted role in the 1980s. Wang Li-wen, head of the Investment Services Department of the EPZ Administration, says the EPZs' contribution to growth is on the decline: in the 1960s exports from the three zones constituted 10 percent of the country's exports; now this figure is less than 6 percent and still falling. "This is normal," Wang insists. "This is healthy; this demonstrates that our economy is progressing."

Wang strongly opposes plans to establish additional EPZs in Hualian or Taichung, partly because there is still considerable unused capacity in both the Nantze and Taichung zones. In 1972, 164 companies had $U.S. 50.7 million invested in Taiwan's EPZs; now there are 129 companies with an investment of $121.3 million which, discounted for inflation, amounts to an annual growth rate of barely 1 percent.

The zones are no longer as attractive to investors as they were in the 1960s because conditions have changed. Many of the original attractions of the zones are now available everywhere in Taiwan-investors can now choose among hundreds of sites with excellent access to modern transport facilities, whereas when EPZs opened they offered the best infrastructure available. Reduced import/export paperwork and simplified tax procedures also used to be an important consideration for many investors locating in the zones; but now simplified trade and tax regulations exist throughout the island.

Even the tax benefits of locating in the zones are now insignificant for most businesses: export tax credits are available to any enterprise importing raw materials which are then re-exported as finished products; business taxes are waived on all "export enterprises," inside or outside of the zones; and the corporate tax ceiling of 25 percent on the net profit of all profit-seeking enterprises is levied impartially throughout Taiwan.

Ironically, investors feel the EPZs may have become even less attractive than the rest of Taiwan. EPZs have a major handicap competing with the rest of the country for investment: all products manufactured in the zones must be exported (unless special permission is granted, for example, for components that will be sold in Taiwan but later exported).

From conversations with businesspeople and government officials at the EPZs one thing stands out: rapidly rising wages pose a serious threat to the future viability of Taiwan's EPZs.

Taiwan's rising wages reflect broad changes in the country's economy-the growth of a skilled workforce; the exhaustion of low-wage, unskilled labor; the transition from labor-intensive to capital- and technologyintensive industries. Since EPZs were originally intended to reduce unemployment and exploit large reserves of unskilled labor, they appear to have outlived their usefulness in Taiwan.

How high are Taiwan's rapidly rising wages? Within the EPZs, the average monthly salary is $NT120, or $U.S. 170 (one U.S. dollar is equivalent to 36 New Taiwan dollars). This translates into slightly over one U.S. dollar an hour, for a 48-hour week.

Average wages in Taiwan outside the zones are a bit higher: $N.T.7,817 ($U.S.217) per month. But this figure hides the fact that men in Taiwan earn an average of $N.T.8,937 a month, while women earn only $N.T.5,729.

According to the "Monthly Bulletin of Labour Statistics, Republic of China," wages in Taiwan range from a low of $N.T.2,000 per month to a high of more than $N.T.20,000 per month; within the zones, in contrast, the vast majority of workers (about 75 percent) earn between $N.T.5,400 and $N.T.7,000 ($ U. S.150-194).

Labor shortages and rising wages in the EPZs have reached the point where many businesspeople have begun to consider either moving to a country where wages are lower (e.g., Thailand or Malaysia), or moving towards more automation. "Increased automation is the only solution for us," the overseas Chinese manager of a Nantze EPZ textile factory told me. "We can't just pack up and leave a million dollars of capital behind. Besides, let's say we did move to Thailand: we'd just be facing the same problems there five or 10 years down the road."

But for all their dissatisfactions, EPZ entrepreneurs have no complaints about militant unionism. There are labor unions in Taiwan, but their influence is minimal. Nearly ever large enterprise in the EPZs have a union which workers are required to join and 90 percent of the labor force in the EPZs, as a result, is "unionized." But industrial unions are not allowed to cross company lines. Consequently, there are 161 separate unions within the three zones, and none of Taiwan's unions has a say in setting wage rates. The Taiwanese constitution states that unions should maintain a "cooperative" relationship with employers. More significantly, Taiwan's unions, in the EPZs and elsewhere, lack the fundamental right to strike. Strikes are illegal in Taiwan because the island is technically still a "restricted area," under martial law since Taiwan's government is still at war with the Chinese government in Peking.

On entering a typical EPZ factory, the noise and activity of incessant production assaults the senses, though most EPZ factories appear well-ordered and clean. In conversations with workers at the EPZs, one impression stands out: the factories are oppressively regimented. "Every minute counts," complained one woman electronics worker at the Kaohsiung EPZ. "You're paid for eight hours a day and that's what you work, not a minute less." Bells, buzzers, punch-cards, supervisors and strict monetary penalties keep workers at this woman's workplace punctual: they begin work at 8:15, rest for five minutes at 10:30, break for lunch from 12:30 to 1:00, rest again for ten minutes at 3:30, and finish work at 5:00 sharp.

"Workers in the United States don't tolerate as much discipline," explained the American manager of an EPZ electrolytic capacitor factory, in discussing the reasons why his company left the U.S. to relocate in Asia. In electronics, he noted, where products are either perfect or useless, factories have to demand a high degree of regimentation. "The girls here are great," he elaborated, "because even under the gun they hardly ever complain." His factory only hires women for production jobs, as do most EPZ factories. In 1981, according to government figures, of 66,523 "workers" in all EPZs, 55,783-84 percent--were women.

Part of the reason the women in these factories tolerate such highly regimented, tedious jobs is that they consider their employment in the zones as temporary. Turnover of production jobs at most EPZ factories is high. Many people take jobs there while they look for other, more permanent work; some of the women work over summer vacation from schools. Most women on the job full time only work for a few years while they are young. Seventy percent of the female labor force in the EPZs is under 24 years of age.

One young woman I talked with grew up in Kaohsiung, and during the summer months, for two consecutive years, worked in the KEPZ, first in an electronics factory assembling printed circuits and later sewing in a glove factory. "The routine nearly bored me to death," she recalled, "but jobs in the EPZ are easy to find, and, for a few months, you can put up with anything."[1]

Economic Effects of EPZs

As their names suggest, the Export Processing Zones primarily import raw materials and components in order to re-export processed goods. This type of industrial activity-often described as international subcontracting-has many shortcomings.

In the first place, international subcontracting, which the EPZs encourage, generally results in only limited purchases from the domestic market. In 1980, for example, after paying an import bill of $U.S.1 billion, the zones earned receipts for $U.S.1.42 billion worth of exports. The net foreign exchange earned was thus only about U.S.$400 million-far less, critics claim, than if this amount of business had been conducted outside the zones.

A large amount of the profit created by the zones is routinely remitted abroad. Companies operating in the EPZs are allowed to remit up to 100 percent of their profits and up to 15 percent (each year) of their capital investment. Most companies do not take full advantage of these limits, according to the Investment Section of the EPZ Administration. But in 1976 (the most recent year for which precise figures are available), net profit in the zones totalled $U.S.89 million and remittances totalled $U.S.31 million-that is 38 percent of profits. (This figure, l was told, has not varied significantly in recent years.) But it is an embarrassment to many Taiwanese officials who feel that more should be done to "encourage" local reinvestment for modernizing and automating existing factories.

A third shortcoming of EPZ-based production in Taiwan is that it inhibits the transfer of production technologies. Many firms in the zones have closer ties to foreign suppliers (often part of the same company) than to local ones, because the location and organization of the EPZs often makes local sourcing less convenient.

In 1980, anew special economic zone was opened in Taiwan (the Hsinchu Science and Technology Industrial Park) to encourage the growth of high-technology industries. This new park is an expression of a fundamental shift of Taiwan's economy: from labor-intensive production to technology-intensive, high value-added production. If Taiwan's three EPZs find no better fate, they may be adapted into high-technology industrial parks like Hsinchu. As the low-wage, low-tech industries are moved by their multinational entrepreneurs to such countries as Malaysia, Indonesia, and the Philippines, Taiwan could launch a new type of export platform: high-tech, but an export platform nevertheless.