Many countries have designed incentive policies to attract foreign direct investment and promote exports based on special exportation areas or free-trade zones. A new publication by the Economic Commission for Latin America and the Caribbean analyzes these tools and offers proposals to replace them, taking into consideration that several of the current incentives should be dismantled by the end of 2015 because they violate World Trade Organization rules.
The study “New-Generation Public Incentives for Attracting Foreign Direct Investment in Central America,” prepared by Jorge Mario Martínez, chief of the commission’s International trade and industry unit in México, identifies good practices globally with emphasis on support mechanisms for services and incentives for research and development and those related to the environment.
Upon analyzing the cases of Costa Rica, Panamá, New Zealand, the Republic of Korea, Singapore, China and countries in the Middle East and North Africa, the report seeks alternatives in light of World Trade Organization regulations that prohibit some of the existing incentives, such as tax exemptions that depend on export performance or on the use of national products by companies located inside free-trade zones, since they have a direct impact on the terms of trade and are considered subsidies, the international trade organization.
As small economies and developing countries, Central American nations obtained a transition period to adapt their incentives to comply with the international rules. However, this period ends Dec. 31.
So there is a need to assess the different economic policy options available to replace these prohibited subsidies in such a way that they do not affect direct investment or exports, but instead foster a greater link between companies in free-trade zones and the national development agenda, the study says.
According to World Trade Organization figures, tax exemptions and fiscal stimuli represented as much as 5.6 percent of Mexico’s gross domestic product and 1 percent of Costa Rica’s in 2005. The publication proposes new-generation incentives that balance the need to attract foreign investment with adherence to the global organization’s regulations.
These include special incentives such as subsidies to services, the sector that has grown the most in recent years — even more than trade in goods.