Effectiveness and Economic Impact of Tax Incentives in the SADC ...

3-4 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
financial service centers. The government also provided financial grants tailored to each project.
Still, manufactured exports did not take off until the 1980s, after the government adopted major reforms
due to “sheer necessity for economic survival” (Emmons, et al., 1999, 9). The reforms included tight monetary
and fiscal policy to achieve macroeconomic stability, a social compact with business and labor, and low
overall tax rates. The World Investment Report 1998 (105) states that investment “has been visibly influenced
by this policy,” attracting thousands of flourishing new enterprises and creating “new comparative
advantage” in sectors such as chemicals, office machinery, electrical engineering and computer software.
Since 1987, Ireland has been the fastest growing economy in Europe. By the late 1990s, foreign-owned
manufacturing firms accounted for nearly 60 percent of gross output and 45 percent of manufacturing
employment, up from a zero base in the late 1950s.
COSTA RICA
Thirty years ago the economy in Costa Rica was dominated by coffee and banana exports. Today the country
is a dynamic export manufacturer boasting a showcase Intel semiconductor factory. In the 1970s, the
government introduced EPZs and investment tax incentives, after previous efforts to stimulate development
by protecting infant industries failed to deliver material benefits. Initially, the export promotion effort failed,
too, because the export zones were poorly located and overly bureaucratic, and the economy was afflicted by
debt crisis and macroeconomic instability. The export boom only gained traction in the mid-1980s after the
government stabilized the economy, devalued the currency to improve competitiveness, and liberalized the
EPZ laws. By 2000, export earnings reached US$7.5 billion, a six-fold increase (in constant dollars) compared
to 1970. Key factors in the transformation included solid democratic institutions, a highly educated and
healthy workforce, stable macroeconomic policies, a supportive investment environment, and expanded
transportation links to the North American market.
To woo the Intel factory, Costa Rica had to compete with Mexico, Brazil, Chile, Indonesia, and
Thailand. Intel looked first at factors such as economic and politically stability, human resources, openness
to trade, a pro-business environment, cost conditions, the logistics of manufacturing (including air transport
links), and a fast track permit process. Taxes entered the picture as an element of the cost evaluation. Though
the government did not offer Intel special tax breaks or grants, the standard EPZ package was attractive
enough. It included a 12-year tax holiday followed by a 50 percent exemption for 6 more years, a “job bonus”
ranging from 7 percent to 15 percent of the payroll for 5 years, and a subsidized on-site training program
covering every new direct worker for 3 months. Spar (1998) contends that even with these advantages, Costa
Rica made the short-list only because the investment agency had been “assiduously courting” the electronics
industry since 1993.
MAURITIUS
Mauritius, too, has undergone an economic transformation over the last 30 years, from a low-income mono-
crop (sugar) economy to an outward-oriented middle-income country with strength in manufacturing,
tourism, and financial services, and an emerging ICT sector (in addition to sugar). EPZs were introduced in
the early 1970s. Thereafter, through 1999, economic growth averaged 5.9 percent per annum, accompanied
by large improvements in health and education and an extraordinary reduction in income inequality and
poverty. Important ingredients in the Mauritius success story include a commitment to economic and
political stability, a well educated labor force, reasonably efficient infrastructure, effective rule of law and