Free Trade Zones: Economic Hypocrisy

If free zones -with their tax breaks and other privileges- are good for the economy, why isn't the entire country made into a free zone?

Wednesday, June 10, 2015


Why not provide companies founded with Central America capital the same benefits and privileges enjoyed by foreign firms operating under free zone regimes? The job creation and contribution to the economy that can be made by companies in free zones because they enjoy these privileges should be able to come from business founded with Central American capital as well, which in contrast to foreign firms, have to deal with excessive regulations and bureaucracy in the States of Central America.

As Juan Carlos Hidalgo points out well in his opinion piece in, "... while firms located in Free zones are offered all kinds of facilities and exemptions, the local business community has to support relentless taxes and regulatory ordeals. According to the World Bank's doing business index, the average Costa Rican entrepreneur pays total tax on profits of 58%, higher than the average in developed countries and higher even than in Latin America. "

Hidalgo adds that "... In this regard, a study by economists at the Paris-Dauphine University found that free zones sometimes give an excuse for countries to maintain protectionist barriers around the rest of the economy. The reason? These schemes allows them to appear to be open without backing a genuine liberalization of the whole country. "

As an article in The Economist points out, "...History can give anxious trade ministers pause. Free zones -enclaves where exporters and other investors are exempted from taxes, tariffs and regulations- create distortions in the economy. Other costs include investment in infrastructure and foregone tax revenue. The hope is that these will be outweighed by the increase in jobs and trade. In reality, many free zones fail. Performance data is difficult to find because the effects of the zones are difficult to separate from other economic forces. "

Is not this what happens in all Central American countries?

See "Free zones" and "Political priority, economic gamble".

More on this topic

Regulations for Collection in Development Areas

July 2019

In Guatemala, the regulations governing the tariffs to be applied to users, administrators and economic zones have come into force as part of the new legislation on Special Public Economic Development Zones.

The tariffs that will be applied according to the categories established in the regulation, published in the Diario de Centroamérica on June 28th, were effective.

Special Economic Zone for El Salvador

July 2018

A proposal has been made to create a special economic zone in 26 municipalities in the southeast of the country, which would provide tax incentives for activities related to clean energy and the prospecting of natural gas and oil.

The Executive presented to the Legislative Assembly a preliminary draft of the Law on the Special Economic Zone of the Southeast Region of El Salvador, which has the objective of developing 26 municipalities of Usulután, San Miguel and La Unión.

Panama Continues to Attract Foreign Investment

December 2014

The special tax regime for multinationals which have an established site in Panama remains the main factor, while the low supply of trained personnel has been identified as a serious problem.

In addition to tax incentives offered to companies that set up offices, there are also special areas such as Panama Pacific and the Colon Free Zone, whose special schemes offer other incentives for companies to set up there.

Colon Free Zone Calls for Same Exemptions As Multinationals

December 2013

Companies in the Free Zone are demanding the same tax treatment as that enjoyed by multinational companies who set up in the country.

In light of a lack of an agreement for the the Colon Free Zone to recoup the payments owed to it by Venezuela and lift the taxes imposed by Colombia on textiles and footwear coming from this area, users have proposed a series of measures.

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