- Free productive activity exempt from bureaucracy and government intervention. ("Approved enterprise status" is granted automa- tically by virtue of admission into the zone, as all production is for export.)
- High-quality, skilled labor combined with Israel's comparative advantages in technological innovation.
- An efficient industrial park equipped with appropriate services designed to improve Israel's competing edge in foreign markets.
9. "Divisibility," Export Orientation and DFI Attraction
Circumstances in Israel differ from those of Taiwan, Korea, Mexico and countries that have successfully used FEPZs, but if economic growth is the target, a strategy of massive export- oriented industrialization financed by direct foreign investment must be introduced. Only massive growth of exports can resolve problems of unemployment and regional development.
FEPZs are an appropriate first step in switching to an export-oriented policy of growth. In the short run, FEPZs do not undermine existing policies, socio-economic structures or special interests in the host country. Yet the Zones create employment, generate foreign exchange earnings and attract foreign investment. These results gradually percolate into the general economy, either contributing to existing liberalization policies or creating a movement towards such policies.
Israel, with its welfare-state orientation, strong trade union, monopolistic structure, national planning policies, unstable economic regulations and tax rates and security and population dispersion problems, can only attract direct foreign investment by creating a state of "divisibility" in the economy. This means establishing, through appropriate legislation, FEPZs free of bureaucratic intervention, where unrestricted economic activity can be practiced independently from the rest of the country. It would be impossible to implement the FEPZ concept on a nation-wide basis in one full swoop, because of political opposition and the high cost of rapid economic reorganization. The idea is to introduce free economic activity in a limited area, along with practices and infrastructure that will serve the export industry efficiently, thereby achieving economies-of-scale through concentrating activities in one place.
The essential feature of the FEPZ is the creation of "islands" or enclaves within the country in which ordinary domestic policies, such as bureaucratic procedures, taxation, licensing, regulation, and other barriers to free trade do not apply. FEPZs are industrial parks outside the customs jurisdiction and foreign exchange control of the country. They can be located in the Negev, Jerusalem region and the Galilee.
In the FEPZ, optimal conditions would be legislated (a "controlled investors' paradise") to attract investment and entrepreneurs into the zones for the development of competitive industrial activity, including:
The FEPZ would also expand business for outside enterprises and services in the rest of the country; "backward and forward linkages" would be created by suppliers and purchasers of raw material and services to and from the FEPZ. The economic, financial and legislative relations between the FEPZ and the rest of the country would be subject to customs regulations as in ordinary international trade.
10. Profitability for All Parties: The Investor, the Economy and the Region
Introduction of the FEPZ is worthwhile for all involved, namely: the investor, the economy and the region.
The investor will be able to make use of the comparative advantages of the economy, stable laws and regulations, technological and science infrastructure, trade agreements with the U.S. and the E.C.M., benefits and incentives and the advantages of the FEPZ itself as an efficient industrial park.
The balance of payments in the economy will improve as a result of the increased trade and export earnings. Growth will be stimulated by the increase in value added (wages and taxes) and the backward and forward linkages with domestic industry, commerce, services and the attraction of new technologies and international markets. This can be a prelude to introducing liberalization throughout the whole economy.
The establishment of the FEPZ is a pinpoint solution for an entire region. A demand for variegated jobs will be created which will encourage technological education and promote increased economic activity for the existing population in areas that are currently in deep stagnation, such as the Negev, Jerusalem and the Galilee, attracting new residents.
11. The Free Export Processing Zones Bill
On January 2, 1989, MK Amir Peretz (former Chairman of the Sderot Municipality) submitted proposed Bill No. 129, "Free Export Processing Zones Law 5749-1989," to the Knesset.
The preliminary reading of the bill was held on March 21, 1990 and was transferred to the Knesset Economic Committee for preparation for first reading. The Committee held deliberations on the bill in May 1990 and February 1991.
In his explanatory notes to the Bill, MK Peretz explained that:
As previously mentioned, the Peretz Bill opened the dialogue on an alternative approach to state direction of the economy. But Peretz did not go far enough in achieving his own objectives. A final bill must include provisions to protect investors from the restrictive labor legislation and practices that preclude the efficient and profitable use of labor throughout the country and which also prevents ministers from delaying or blocking legitimate investors.
Within the next few months, the Institute for Advanced Strategic and Political Studies will publish a prototype "Investors Guide." This prototype guide will spell out in full detail, including cost projections, the anticipated workings of the Israeli FEPZ. It will also clarify the features of the Peretz bill that need modification and suggest appropriate language.
Meir Eldar is a Policy Analyst at the Institute for Advanced Strategic and Political Studies and a Development Economist (M.A.) expert in Far East export-oriented economies. He initiated the "Free Export Processing Zones Law 5749-1989" in the Knesset. Preliminary sections of this manuscript were published in Globes in April 1990 [Hebrew], The Journal of the Flagstaff Institute in July 1990, The Industrialist in September 1990 [Hebrew] and The Economic Quarterly in September 1991 [Hebrew].
The goal of the proposed Law is to create conditions to attract investments to the development regions in the Negev, Jerusalem and Galilee for the establishment of export industries by means of Free Export Processing Zones - FEPZ. Experience gathered over a number of years indicates that foreign investors are discouraged by limitations on economic activities and the bureaucratic systems they encounter. 57
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