Summary
With approximately 5,000 zones set up in 130 countries, special economic zones (SEZ) - geographically-bounded areas in which customs, tax and investment regulations are more liberal than in the rest of the country - are one of the most important industrial policy instruments used by developing countries around the world. A frequent requirement imposed on firms that wish to enjoy the generous fiscal incentives offered in SEZ is that they have to export at least a certain stated share of their output. The utilization of export share requirements, therefore, makes the subsidies granted to firms in SEZ contingent upon export performance, a practice that is prohibited by the World Trade Organization's (WTO) Agreement on Subsidies and Countervailing Measures. SEZ are especially important for a small economy like the Dominican Republic’ where exports originating in the zones have accounted for 70% of total exports and 12% of GDP throughout the last decade.
In this Nottingham School of Economics working paper, Alejandro Riaño and coauthors exploits the staggered removal of export requirements across products and over time in the SEZ of the Dominican Republic to evaluate whether the importance of exports originating from the zones was affected by the elimination of export requirements. They find that the share of exporters based in SEZ increased following the policy change, while the share of SEZ exports did not experience a significant change. This result suggests that a substantial number of exporters did not find the export share constraint binding; but as the requirement was eliminated, new firms that focused on selling domestically found profitable to join the SEZ. All in all, the elimination of performance requirements made it more attractive for firms to be based in special economic zones. This paper is part of a larger project led by the World Bank's Trade and Competitiveness Global practice, entitled "Special Economic Zones, Global Value Chains and the Degree of Economic Linkages in the Dominican Republic."
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Authors
Fabrice Defever, José-Daniel Reyes, Alejandro Riaño and Miguel Eduardo Sánchez-Martín
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Posted on Wednesday 2nd November 2016