Tax-free industrial parks or national industry

Processo, 813, 1 July 1998

Since the decade of the 1970's, the creation of tax-free industrial parks have been a priority policy of the government in encouraging industrial activity in El Salvador. First, with the creation of the tax-free industrial park in San Bartolo and then with the development of some twenty more--the majority of them during the decade of the 1990's--the effort has been directed towards stimulating foreign investment in businesses dedicated to the assemblage of goods destined almost exclusively for exportation. These businesses are totally exempt from the payment of taxes and, at the end of the decade of the 1990's, they are dedicated almost exclusively to assembling items of clothing for the U.S. market.

This activity--known as the "maquilas", or, so-called runaway shops--has displaced traditional industrial sectors and agricultural exports as the principal sources of production and export goods. Between 1992 and 1996, the value of the production of the maquila industry tripled, while for 1997 maquila production accounted for 44% of all total exports.

It is probably as it contemplates this bonanza that the government has proposed to reform the law for tax free industrial parks in order to create conditions even more favorable for international investment in the this kind of activity. One of the aspects which most draws attention on the question of the proposed law is that it aims to increase the percentage of production of the maquila shops that can be commercialized within the country. Additionally, what is being proposed is to abrogate the tax exemption of the businesses installed in the tax-free zones. As a result of the foregoing, it is interesting to review the participation of the maquila shops in the context of the national economy with an eye to what could be the implications of the reform of the law for tax-free industrial parks over national industrial businesses, especially in textiles.

The economic importance of the maquila shops could be evaluated examining its participation in variables such as production, employment, exportation and importation. Owing to the growing economic importance of this type of activity, for five years the Central Reserve Bank (BCR) has offered disparate figures for this particular sector. According to these figures, maquila shops, in 1997, became the most important sector in the manufacturing industry as it came to represent 9.3% of production for the sector which are lightly greater than the products of mills and bakeries which represented 9.2%. That data is relevant, above all, when it is taken into considered that, for 1993, bakery and mill products represented 9.4% of industrial production while maquila production represented only 4.6%. Likewise, the growth indicators of production have been very much above the growth rate for the GNP, and this includes the most dynamic national sectors. In recent years, production by the maquila sector has grown to

On the other hand, employment generated by the maquila grew to represent 35,370 jobs, according to Commercial and Industrial Vice-Minister Roland Alvarenga. So, in relation to the total number of jobs in industry, this figure represents approximately 3.2% of total jobs and 12.6% of all jobs in industry. It is important to point out here that one of the most characteristic factors--and, at the same time, the most questionable--of maquila-style production is that salary payments to the majority of minimum-salary laborers, which, although it is legal, are below the level defined as extreme poverty. This, in addition to amounts representing value added in this industry is far superior to intermediate consumption and to the fact that it is an activity exempt from the payment of taxes, implies the existence of higher percentages of profits for investors.

Other effects to be considered with respect to the maquila activities are their effects on the external sector because its activity has implications as much on exportations as upon importations. In fact, for 1997, maquila activities generated exports in the amount of 9,274 million colones, but at the same time brought about imports for a total of 6,699.875 million colones. As a result, the yield from maquila activities as it affected foreign trade was positive in that it was represent by a figure of 2,547.125 million colones; this figure eliminated the possibility that the deficit in the balance of trade could have been 22% greater than it was.

This scenario gives significance to the new bill to reform the law governing tax-free industrial parks presented by the government. This law would permit maquila businesses to sell 100% of their production in El Salvador and broaden their activities to include factors such as market forestalling and warehousing, packing, re-packing, distribution and redistribution of products. With this, according to declarations by the ViceMinister of Commerce and Industry, the number of jobs in the maquila sector could grow from 35,370 to 129,2217, in intermediate range projections. According to the ViceMinister, in Honduras, the approval of sales at a national level and other incentives have permitted the creation of 120,000 jobs.

Faced with this possibility, the Executive Director of the Salvadoran Association for Industry (ASI), Mr. Jorge Arriaza, expressed that the sale on a national level of the goods produced in the maquilas is an "anti-national industrial [measure] because it would compete in a way which is unequal [unfair]". According to Mr. Arriaza, the bill should be revised because it is necessary to introduce gradual measures in order to void the disappearance of national businesses which produce on the basis of higher costs than do the maquila businesses.

This polemic becomes pertinent in that it takes into account an aspect of the economic liberalization processes which threaten to turn against those who encourage it--that is to say--against members of private enterprise. National industry's lack of capacity has not been proved with regard to the implications for opening up markets. In this country the industrial sector functions under obsolete operative norms which considerably elevate their costs together with the almost complete lack of capacity to compete successfully in the context of opening markets.

As Mr. Michael Porter, an expert in competition, has mentioned, in El Salvador the empresarial sector has become accustomed to take over closed markets and complains constantly every time the government opts to create regulatory laws or take regulatory measures. Word for word, Mr. Porter has indicated that ""everyone complains and competes to see who can best insult the government".

It should be pointed out, however that, although the offering of the maquila to the national economy is considerable, this does not justify the government's adopting measures which seek to stimulate that activity at the cost of national businesses, as inefficient as these may be. Given this, it is preferable to invest more time and resources in seeking out strategies which can effectively be translated into improving the competitiveness of the national industry. As a result of the foregoing, it is important that the government assume a more decisive role in encouraging competition because, if it does not, and if it continues its tendency toward liberalization of the economy, it will not only be the textile industry which is threatened but also all other branches of production.