CREATING FREE ECONOMIC ZONES IN AZERBAIJAN

Azerbaijani President Ilham Aliyev's decree "On the creation of special economic zones in the Azerbaijani Republic" shows that activity is continuing to attract both local and foreign investment to the national economy using an economic policy tool new to our country, free economic zones (FEZ).

History of FEZ in Azerbaijan

There have already been attempts to create free economic zones in the modern economic history of Azerbaijan. However, the issue of free economic zones has yet to be tackled properly in Azerbaijan: the necessary legal basis has been lacking, there has been no understanding of the worldwide process of globalization and our country's place in it, etc. 

In 1995 the representative of the UN Development Programme in Azerbaijan, Mr Paolo Lembo, actively promoted the idea of creating "a special economic zone" in Sumqayit. The project was not implemented, however. A campaign followed for the creation of FEZ in Lankaran and Naxcivan and a technology park in Xizi District.

In 2002 the Azerbaijani government reached agreement with the International Monetary Fund (IMF) and World Bank on creating free economic zones in Azerbaijan. The IMF and World Bank proposed creating them as free export zones. The IMF and World Bank experts espoused the view that creating free economic zones in the traditional sense would not serve the country's interests, as this could lead to a weakening of tax policy and create management problems. The experts suggested creating one or two free export zones, where imported goods would be processed for onward export (production zones). These goods could then be freed from import duty. The possible location of these zones is being studied at the moment: they are expected to be in the north of the country. Infrastructure - roads, power lines, a sea port and other conditions - are needed in the locations chosen if they are to function effectively. 

The Ministry for Economic Development is at present drawing up a draft law "On special economic zones".

Foreign countries' good and bad experience

Internationally speaking, negative experience sits alongside the positive experience of free economic zones. Our northern neighbour Russia seemed to have adopted the experience of other countries in establishing FEZ, but unfortunately, instead of being a tool to modernize the economy and attract foreign investment into the country, the benefits enjoyed by the zones became a means of hidden subsidy of lobby groups and a way to accumulate capital initially which then flowed abroad. It is extremely important to begin discussion in Azerbaijan of a range of issues, both legislative and scientific, concerning the establishment of FEZ in order to invigorate the diversification of our manufacturing and to prevent the emergence of the resource curse in the Azerbaijani economy.

A selective approach is needed to attract investment in FEZ: what kind of investments are they, what is their sector and technological structure, what will be produced in the enterprises that have received investment and will this production mean high quality standards. It is extremely important to use international experience in this instance. Experience shows that trans-national companies do not always bring in modern technology when they invest in a country, newly built enterprises do not always meet ecological standards and the production from these enterprises is not always of high quality. South Korea's experience shows that technology brought in from the USA, Western Europe and Japan differed in terms of its quality and its scientific and technical make-up. Japan did not want to have a neighbour as a competitor so did not export modern technology to South Korea. South Korea's National Scientific and Technological Institute calculated that only 30 per cent of the know-how, imported from the USA and Western Europe, concerned advanced technological processes while the remaining 70 per cent of technology, exported by Japan, was considered outdated and obsolete. There were instances when Japanese firms sold equipment at increased prices, although the output produced by that equipment did not meet accepted standards. The USA and Western Europe did not see South Korea as a potential competitor and, therefore, supplied the most modern technology to the country, while Japan was concerned at its neighbour's rapid growth rate and did not send the latest technology there. 

A Consultative Centre on Attracting Technology was set up in South Korea after analysis of what had been going on. With the help of foreign specialists the centre gave a preliminary assessment of the know-how earmarked for introduction in South Korea in order to tackle negative factors. The Korean authorities also made amendments to the regulations on attracting foreign technology. The new regulations banned the purchase of technology if:

The technology offered by the contract was outdated, incomplete or in some other way deviated from the norm

The contracts covered special technology which was deemed by the Ministry for Science and Technology "not to serve the interests of independent development"

The contract simply envisaged the use of trademarks

The contracts envisaged only the sale of raw materials or components, spare parts and assembly lines for the proposed production

The contract contained restrictions on the export of the intended production

The economic planning minister did not consider the contracts essential

We can see from these regulations that the authorities could turn down a contract if it just envisaged South Korean firms using foreign trademarks. Local consumer demand for goods with a foreign trademark, as the quality of goods produced for the local market left something to be desired, served as an incentive for Korean businessmen. Moreover, South Korean firms tried in this way to expand their internal markets, selling local output sporting the trademark of a well-known foreign brand. However, the Korean authorities did not like this lack of patriotism on the part of consumers or the not entirely honest behaviour of the producers.

The experience cited above shows how strictly the Korean government acted with the help of administrative methods in the conditions of a market economy.

The Azerbaijani economy will integrate further into the global economy with the creation of special economic zones in the country, so it is extremely useful to use this experience and to carry out expert assessment of technology when it is brought into the country. We think that responsibility for the ecological and scientific assessment of the technology and production brought into the country should be given to the Azerbaijani Fund for the Promotion of Exports and Investments (AZPROMO) while assessment of output should be entrusted to the Agency for Metrology, Standards and Patents. It would be especially desirable for output destined for export to have an expert assessment. Poor quality products stamped "Made in Azerbaijan" would harm the country's image abroad and close off foreign markets to our national output for a long time.

In conditions of globalization, high quality production and the introduction of modern technology allow competition with international producers. In this regard it is essential to draw up legislation to stimulate high quality manufacturing and production standards and speed up the establishment in the country of a single standardization system that meets international quality and safety standards.

International experience of setting up special economic zones allows us to draw the following conclusions:

International practice shows that creating FEZ is a highly effective way to develop the economy of particular areas and regions. The creation and operation of free economic zones are mainly aimed at specific economic priorities and at implementing strategic programmes and projects.

The more suitable areas for FEZ are as a rule on the border and have a developed transport, manufacturing and social infrastructure. In certain instances creation of FEZ is also effective in areas that have just opened up in terms of economic activity and do not have the aforementioned advantages, but do have a high concentration of valuable natural resources which allow for important, long-term state objectives to be achieved.

When using the free economic zone as a potential mechanism to attract new investment into the economy, it is thought to be important to create conditions to ensure that favourable FEZ regimes are used not for the sake of benefits for certain enterprises, sectors or areas, but with the aim of stimulating new forms of the economy and industrial production and of developing external economic links that will enable a technological breakthrough. Another strategically justified aim is to use the advantages of the country's transport and geographic location and the potential of its port areas. The creation of free economic zones in certain areas would speed up Azerbaijan's integration into international economic links and would also attract to Azerbaijan huge inflows of good and capital that have so far flowed into similar zones in foreign countries.