Export Processing Zones: Free Market Islands or Bridges to Structural Transformation?

Do export processing zones draw local manufacturers into world markets – and thereby engender broader market reform – by way of a ‘demonstration effect’? The answer is likely (i) to be determined, not in the EPZ, but in the host country's national customs area, and (ii) to vary systematically with the size of the relevant market. While manufacturers from large economies are able to compete in world markets, and are therefore susceptible to the demonstration effect, their counterparts from small economies are unable to do so, and are therefore intractable. Thus, the nature of the EPZ life‐cycle, like the legacy of import‐substituting industrialisation, is in no small measure a function of market size.