(Hausmann, Pritchett, and Rodrik, 2005; Jones and Olken, 2005; Rodrik, 2006). Hence, development policies should strategically promote a structural transformation toward these “more sophisticated” economic activities, by providing production incentives to new exportables (Rodrik, 2006).

**A key starting point is improving the performance of the economic zones ...** In the Philippines, the track record of the economic zones is mixed (Box 1): while they attract FDI and generate the majority of exports of non-traditional manufacturing (semiconductors - Figure 23) and voice-based services (BPO or call centers - Figure 15), they have been far less successful than in other countries in finding their niche, attracting investment and fostering economic development.

# **Box 1. Getting the “ecozones” right**

**Economic zones: not always good news.** Over the last three decades, several developing countries – when a rapid nation-wide reform of their governance was neither possible nor credible - created “economic zones” to promote trade, spur exports and stimulate economic development. These industrial enclaves created new employment and increased export flows. Thirty years ago, 80 economic zones in 30 countries generated about 1 million direct jobs and US$6 billion in exports; today, 3,000 economic zones operate in 120 countries, employ 50 million people and account for more than US$ 600 billion in exports. However, in quite a few cases, these zones had adverse effects: higher-than-expected construction and maintenance costs, unstable employment (offered mainly to unskilled and low-wage female labor), weak links to local manufacturers, insufficient transfers of know-how (i.e., labor or managerial skills) and technology, and – thus - little domestic added value.

**In the Philippines, the ecozones need to improve their performance.** The Philippines was one of the first Asian countries in developing economic zones (“ecozones”). Today, the government-owned investment promotion agency (Philippine Economic Zone Authority – PEZA) supervises 41 private-owned and 4 government-owned ecozones. At first, these enclaves - conceived as a substitute for a good investment climate and designed to operate separately from the surrounding communities - offered “imported institutions” to new exporters (i.e., producers of non-traditional manufacturing, voice-based ICT services). However, their inadequate legal and regulatory framework resulted in a lack of fully competitive conditions, and large investors - not expecting sufficient returns to compensate their risks - have been reluctant to settle in. Additionally, the ecozones often offer distortionary incentives, which add to the government’s fiscal burden (i.e., a considerable amount of existing revenue is lost through tax avoidance).

**What makes an economic zone successful?** Only well-designed and effectively run economic zones can lead to additional infrastructure, FDI, employment, foreign exchange earnings, transfers of new technologies and skills, and - as a result - national revenues and economic growth. To be successful, a zone must lie in a geographically defined area, where domestic and foreign agents can find: (i) first-rate infrastructure and human capital; (ii) investment incentives and simplified procedures; (iii) domestic and international linkages; (iv)  enabling institutions, such as - for instance - an equal treatment of domestic and foreign firms, and transparent dispute reconciliation mechanisms; and (v) coordination with a comprehensive country-wide reform, in the context of an overall growth strategy. Examples are the Export Processing Zones in Singapore and Malaysia in the 1970s, and the Special Economic Zones in China, in the 1980s and 1990s.

_Source:_ Devereux and Chen, 1985; Rondinelli, 1987; Blomström and Kokko, 2003.

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