“Today & Tomorrow.Azerbaijan in Focus”.-2008.-¹ 3(10) March.-P.63-66

 

Organization of free economic zones in Azerbaijan: substantiation and specialization of territorial selection

 

Chingiz Ismaylov

Chairman of the Center for Regional Economic Development in Azerbaijan, Professor

 

At present more than 4 thousand free economic zones are operational in 120 countries of the world. More than 5 million people are involved in work and more than 500 billion dollars have been invested in these zones.

  Last years there is a striking interest to the creation of Free Economic Zones (FEZONES) in Azerbaijan. While the discussions concerning zones were limited to the narrow framework in the first part of the 1990s, in the next period the proposals on this theme found their reflection in the press.

The formation of market relations and the growth of possibilities of allocation of foreign investments naturally have raised importance of FEZONES creation. However, for a while there can’t be any talk about a considered and consistently implemented regional development policy concerning this problem in our republic. As an example, it is worth noting that only during the last two months the leadership of the Ministry of Economic Development made different contradictory statements on the problem related to FEZONES (Selection of different places for FEZONES, interruption of discussions of the problem in general). To our mind, one of the reasons of the current situation is that there are no considerations about the concept of FEZONES in the republic. First of all, the purpose of creating every FEZONE must be defined in the concept to be worked up.

As it is known, the main purpose in creation of FEZONES is attraction of investments, new jobs, development of the advantages giving by the geographic location and transportation potential, stimulating progress of far-located and backward regions. Every FEZONE, separately, has some unique, transport-geographic, economic potential and specialized human resources. The state, naturally, must set different purposes in their creation. It is clear that taking into account the international experience will make it possible to create a possibility for more successful achievements of the set goal.

 

 

Experience of foreign countries

 

The World Free Trade Economic Association created by the UNO in 1978, acquaints every year at its annual assembly interested parties with positive experience of FEZONES active in different countries. The different level of development, economic and financial conditions of countries demand different goals in creation of FEZONES. In most cases, the main goal in creation of FEZONES in the developed countries is to remove inequality in the regional development of the countries, while in the developing countries it is mainly the attraction of foreign investments in the country.

 In order to benefit from the foreign experience, the countries with social-economic situation and geographical position similar to our country must be taken as cases. Unfortunately, the experience of the United Arab Emirates, Dubai is considered as an example. For comparison: 126 mln. tons of oil and 46 bln. m3 of natural gas are produced annually in this country with the population of 3,4 million. GDP is 26 thousand USD per capita.

 

In our opinion, learning the unsuccessful experience of the proposal on the creation of FEZONES in the countries of Maghreb (covering the Mediterranean Sea) countries of the European Union would be more useful. In spite of the EU declaration on its readiness to allocate 10 bln dollars for this project, four out of 10 Maghreb countries have supported the treaty signed in 1995. The economic situation of one of these countries Algeria depends mainly on oil income, other fields developed weakly.

The experience of many countries (China, Poland, Philippines, Turkey, Iran, Russia, etc.) shows that in choosing the place the main priority is given to the ports having an outlet to the sea and border regions. Azerbaijan’s outlet to the closed Caspian Sea may be considered relatively advantageous. Georgia’s chances in the Black Sea are considered more advantageous in comparison with this and for this reason the “Dubai Port World” company is planning to allocate the investment worth of 700 million USD in the FEZONE to be created next to Poti (Georgia).

In the creation of FEZONES in borderline regions attention should be paid to the neighboring countries’ policy in this field. For instance, Iran has created FEZONES in the border regions – “Araz” in Julfa, in Astara and in Badar-Anzali. It is worth mentioning that the state and private sectors of Armenia are launching some activities in the “Araz” FEZONE.

The State Duma rejected the proposal made already in 1996 related to the establishment of FEZONE in Russia on the territory of Dagestan. Russia’s such position may be explained by threats of separatism. Nowadays only two FEZONES operate in Russia: the farthest western and eastern territories of Kaliningrad and Magadan.

 In Turkey FEZONES were arranged in the western part being the country’s coast. Such step while stimulating the development of these regions, from the point of view of the country’s social-economic development in whole has caused differences between western and eastern regions.

The FEZONES being created on the Caspian costal territories (Laqan port of Kalmykia in Russia, Aktau port - in Kazakhstan, Bandar-Anzali port – in Iran) have remained without results so far.

The world experience related to FEZONES show that implementation of the policy targeted at creation and gradual development of such zones will determine efficiency of their activities.  At the same time in case of the absence of the state support FEZONES cannot develop by themselves. Namely because the comprehensively considered policy pursued by countries in this sphere will enable the achievement of the set goals.

The creation and successful activities of FEZONES depend on the following factors:

          - Advantageous geographical location for the efficiency of foreign economic relations;

- Existence of a regional export potential;

- Natural resources potential;

- Development level of transportation net;

 -Working experience in accordance with the international level;

- Acceptable basis of human resources, especially availability of specialized professionals

- Suitable social, economic, and geo-political situation in the region.

 

 

The present situation related to the creation of FEZONES in Azerbaijan

        

          Depending on choosing of the place separated for FEZONES the continuous duration of the given tax privileges must be clarified. In most cases this duration hovered between 10-20 years.

The creation of FEZONES In Azerbaijan can basically become one of the means to remove misbalance in the social-economic development from the point of view of the country’s territory. In this connection, the most important problem is a reasonable choice of the territories. From the scientific view, a correct choice of the place creates the base of the future success. Otherwise, the idea on the creation of FEZONES can fail (as an example, we can show the Sumgait industrial zone and Yeni Yashma FEZONE, which are still in the status of discussed projects).

       It is necessary to take into consideration that the dependence on the central governmental structures, lessens from the management point and possibilities of economic independence in FEZONES. Consequently, on the territories with probability of creation of separatism the organization of such zones and to what dangers they might lead must be taken into consideration.

       In the Azerbaijani condition choice of the place that will be allotted for FEZONES must be analyzed on several levels.

      The first level – selection of the place must come forth from the country’s regional development strategy. Unfortunately, until now there can be no talk about a comprehensively considered regional development policy. The very superficially composed “State Program on Development of Regions” has not so far created a possibility in satisfactorily big volume of available human resources of the regions. For this reason, in the regions the social-economic development has not reached the desired level. If in the districts taken separately putting any enterprise to work and or the hand over of a social object create a seemingly revived picture, its important problems are still waiting for their solution.

        It is clear that the regional development policy of our country must be formed in accordance with the situation and change of our relations with the neighbor-countries. On account of this, must be analyzed on the basis of “self-gravitating” features of the border districts - on the second level. Azerbaijan has shore outlets directly to Iran, Russia, and Georgia, and from the territory of Nakhchivan to Turkey.  Our frontier districts in the state of war (there is a ceasefire regime in force) with Armenia and remain under occupation. Because of distinction of the geographical condition, natural resources and human potential of the border districts in the north, west, and south directions and difference in our relations with the neighboring states, priority for FEZONE territories must be determined. The creation of FEZONES in the border districts will cause the integration of the country’s economy in the world economy and strengthen its international economiic relations.

       The third level – advantageous possibilities for placing FEZONE of the region (natural-climatic conditions, the geographical position, resources potential, the developed transport infrastructure, human resources, the material-technical base, etc.). For example, choosing Sumgait city for a FEZONE due to the proposal made namely on the basis of such approach, was a contradictory step to the strategic regional development of the republic. After the creation of the FEZONE during the last 5-10 years the territorial and field distribution of the foreign investments put in the country must be analyzed. On this basis, from the point of allocation of investments of economy fields and districts it is possible to create an impression about attractive distinctions.

 Thus, two basic factors must be taken into consideration in advantageous choosing for FEZONE:

1) Conformity with the regional development strategy of the country

2) Probability of foreign investors’ interest to this territory

Taking into consideration the above said, technical-economic proof of the creation of the FEZONE must be carried out. The technical-economic substantiation that will be composed, must consist of the following divisions:

 - The basic purpose of the creation of the FEZONE;

 - Estimation of the basic factors for creation of the FEZONE;

          - Estimation of the chosen territory for establishment of the FEZONE (what is the reason for choosing namely this territory);

           - Development program of the FEZONE;

           - Financial infrastructure and technical possibilities;

           - Activities targeted at arrangement of management system on the territory;

           - Estimation and prospective development of the FEZONE activities.

 

In conformity with the world practice FEZONES are divided into different types. The more spread FEZONE types are the following:

         - Special economic zones;

         - Special trade zones;

         - Industrial zones;

         - Recreation-tourism zones;

         - Information technologies parks;

- Finance-banking zones.

          In other mentioned fields the selection of territories into specialized FEZONES is made in accordance with different requirements. Therefore the specialization of FRZONE that will be created in our republic must be determined from now. The importance of this problem for FRZONE comes forth from the Law.

The Law on FEZONE must clarify legal and economic bases of its creation and activities. At the same time it is worth getting acquainted with achievements made in this field by the neighbor countries in adopting the Law on FEZONES. For example, the Law on FEZONES was adopted in Turkey in 1985, in Iran and in Turkmenistan – in 1993, in Russia – in 2005. Such Law has not been yet adopted in the other neighboring countries. Thus, FEZONES can carry out activities on the basis of the President’s decree.

 

         Proposals on the creation of FEZONES

 

Consideration of probability of any risks in connection with the activities of FEZONES is demanded in the regional development strategy of the country. The feasible risks are as following:

        − Formal registration of monopolistic enterprises in FEZONE in order to escape taxes;

        − Decreasing budget incomes that will be gained as a result of economic-trade relations;

        − Deepening of inequality created in the development of regions (if FEZONE has been created in the east of the republic) ;

        − Growth of the territory’s possibilities in becoming economically independent decrease dependence from the center and can initiate rise of separatist moods;

        − Failure of the project as a result of incompetence of the local authorities.

With the purpose of lessening the probability of rising of these or other risks the state must work out a relevant regulating mechanism.

         Taking into consideration the above-mentioned, we think that the following territories can be considered priority as an initial variant in the problem of the creation of FEZONE on the republican territory:

        1) „A special trade zone“ in the border region known by the name „Gyrmyzy Korpu“ (Red Bridge);

         2) “A special trade zone“ in the border territory of Sadarak district;  

         3) “A special tourism zone“ on Narguin and Pirallahy islands.

         The consideration of establishment of FEZONES on these territories can be expedient. The chosen special economic zones must not be territorially compact and very large from the management point of view. Only in this case, on the indicated territories development will take place, the economic relations of the country will extend, and at the same time the significance of Azerbaijan in the region will further increase.