Export Processing Zones and The Economies of Emerging Nations

Abstract

Several attempts have been made across the world to develop the economies of various countries over the years. In this regard, many policies and programmes have been implemented to help nations in their development effort. Export processing zones (EPZs) are one such policy tool that has become popular and is widely embraced particularly in the developing world. It is a trade policy tool premised on the idea of providing varied incentives to manufacture goods for export. The question however is whether the faith in the policy is a justified one since not very many robust econometric/quantitative studies have been conducted to ascertain EPZs‘ impact on the broader economy. This study thus investigates the direct impact of export processing zones on various macroeconomic variables (exchange rate, economic growth and inflation) in Ghana and Bangladesh. Exchange rate and inflation in particular have no prior studies that have considered how they are impacted by EPZs. To achieve the study‘s aims, we applied both the symmetric autoregressive distributed lag (ARDL) and the nonlinear autoregressive distributed lag (NARDL) estimation techniques. Quarterly data for the study were sourced from the Ghana Free Zones Authority (1998Q1 2022Q4) and the Bangladesh Export Processing Zones Authority (1984Q1-2022Q4), augmented with national-level data from various world bodies. Results for our first objective show the presence of cointegration for both Ghana and Bangladesh. Also, while EPZ investment affects exchange rate positively in the contemporaneous short-term for both countries, with Ghana also experiencing long-term positive effects of the investment variable, export from the zones has no impact on the rate of exchange for the two countries in both the long and short-runs. This means especially in the short-run, free zones investment helps to strengthen the local currency. Vector error correction analysis also shows that all the independent variables overall jointly Granger-cause exchange rate in the long run for both countries. Relative to objective two, the results indicate the presence of cointegration as well as long-run asymmetry between EPZ investment and economic growth for Ghana while relative to Bangladesh, the asymmetric effect was observed in the short-term. Empirically, positive and negative shocks in EPZ investment have insignificant long-term effects on economic growth for both countries while in the short-run, positive shocks impact growth positively for Ghana and negatively for Bangladesh but the negative shocks restrict growth in both countries. With objective three, we observed cointegration among the chosen variables as well as long-run asymmetry and short-run asymmetry in EPZ export for Bangladesh and Ghana respectively. The results also indicate that negative shocks in EPZ investment and export in the long-term lead to inflation in Ghana and Bangladesh respectively. From the results, the overall impact of EPZs on the broader economy in Ghana and Bangladesh especially in the long-term is very much limited. Therefore implementing nations should diversify zone operations into higher grade manufactures to rake in more foreign exchange to shore up the local currency. More domestic investors should also be attracted into the zones to enhance revenue retention in the local economy. Policymakers should as well take into consideration the asymmetric effects of the zones on the various macroeconomic variables instead of the regular linear assessments of the zones while encouraging the full integration of the zones into the domestic economy. Future researchers should also look at more benefits of the zones in more countries data permitting while considering the various exchange rate regimes and other monetary policies existing in the EPZ implementing countries.