FREE ECONOMIC ZONES IN WORLD PRACTICE

There are new tendencies in the development of the modern society and economic relations nowadays: not a single country of the world can live and successfully develop outside the world community - first of all, the economic one. Globalization is now characterized by the systemic integration of the world market, regional economies and all spheres of human activity, as a result of which there is high economic growth and rapid introduction of modern technologies and methods of management.

Globalization has made the domestic (national) economy not only closely related to, but also dependent on the foreign economy. According to E. Luttwak (American expert), "turbocapitalism" has made a structural change in the economic system, with regard to which politics are helpless to some extent, since such an economic system is defined by the market and is not controlled by politics. Economic space and the market no longer coincide with the theory of some state: there has been a transition from the "market-state" system to the "many states - one market" system. Capital can no longer obey national conditions and is exempt from state ties.

It defies taxation by the state, and chooses itself where to pay taxes. Business is transferred to places where expenses are low, while the quality of services, the infrastructure and work force is higher. The modern economic system has multiple centres of decision-making. It is subjected to the influence of transnational forces that do not obey anyone's will and state control. However, states can prompt them to take action that is favourable for their purposes, following their logic and providing for relevant incentives, for example, in the sphere of taxation, services, the infrastructure, work force and so on.

Nevertheless, globalization also generates new challenges and threats to the steady and secure development of the economy of various countries, especially small ones with a "narrow" domestic market. It makes the national economy vulnerable to various negative processes that happen on the world commodity and financial market. Another threat of globalization is that it undermines national state sovereignty under pressure from foreign capital and the activities of transnational organizations. However, globalization poses the main threat to the national economy through growing international economic competition which has become an integral part of the world economy. Competition has long gone beyond the framework of individual companies and firms, and has become international.

Due to various economic, historic, social and political reasons, most of the post-Soviet economies formed from the very beginning as individual cells of the global economy. By supporting the free convertibility of national currencies and liberalization of the current account of the balance of payments in combination with the liberalization of prices and the high openness of the foreign trade sector, national economies and national manufacturers have been put in a situation of global competition based on expenses in the real time regime. The real context of development is in essence not the national, but the global economy, where competition is won by the manufacturers and firms that are in a position to ensure their global competitiveness based on production expenses.

Azerbaijan is quite consistent in re-organizing its economy and aspires to adapt it to the requirements of the process of globalization. Our country is actively participating in global energy and communications projects: the so-called "Contract of the Century" signed between Azerbaijan and leading oil companies of the world on the exploitation of the hydrocarbon reserves of the Caspian is being successfully implemented, the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines have been put into operation, the Silk Road is being restored and it is planned to build a Baku-Tbilisi-Kars railroad.

Over the last two years, the Azerbaijani economy has been growing at a high pace. Thus, the growth in GDP in 2005 accounted for 26.4 per cent and in 2006 - 34.5 per cent. Investments in the national economy last year totaled 6.7bn dollars. However, with the successful accomplishment of oil and gas and communications projects, the amount of investments in this sector of the country's economy will naturally fall beginning from the next year. In these conditions, it is quite important to find new approaches to speeding up investment processes by using new instruments of economic development that have proved effective in the world. Among them, in our view, it is necessary to highlight such a mechanism of attracting investments as the creation of free economic zones (FEZ).

In this connection, the decree issued by President Ilham Aliyev on 6 March 2007 "On the creation of special economic zones in the Azerbaijan Republic" is quite timely as it gives a new impetus to the country's development.

Let's address foreign experience and practice

According to various figures, there are from 400 to 2,000 free economic zones operating in the world at the moment. The FEZ can ben divided into the following main types depending on their purposes and tasks:

-Complex production zones;

-Foreign trade (free customs zones, including export production and transit zones);

-Functional or special zones (technological parks, techno-cities, tourism and so on).

The choice of the type of zones for specific purposes is influenced by certain factors. For example, for transport and export-import zones, it is necessary to have a major transport hub. As a rule, they are situated in coastal cities that have maritime ports, rail services and an airport. In order to create zones likes technoparks and techno-cities, it is necessary to have a developed scientific-production base and qualified work force. The creation of tourist zones requires cultural and historical centres, balneological resorts, landscapes that can attract tourists and a developed infrastructure.

Free economic zones in the USA and other capitalist countries

Free economic zones were first established in the USA on the basis of the 1934 act in the form of foreign trade zones. Their aim was to speed up foreign trade by using effective mechanisms of reducing customs expenses. It was mainly planned to reduce import tariffs for spare parts and components for producing vehicles. Warehouses, dockyards and airports were declared foreign trade zones. Enterprises operating in these zones exempted from customs control in the USA if the goods imported into the zone were sent to a third country. Customs expenses were also reduced when products of US companies were delivered to the zone for further export. If goods from the zone were sent to the USA, they went through all the customs procedures stipulated by the law.

A successful type of a free economic zone was the establisment in 1957 of a prefential zone in Ireland with a centre at Shannon airport. The territory of the zone was 15 ha. The purpose was quite modest: to create 300 new jobs. However, this was one of the cases when the result considerably surpassed the expectations.

A different type of free economic zone was set up in Brazil in 1967 - "the indusrial district of the Manaus Free Trade Zone" (Amazon Region). The purpose was to stimulate the development of industrial production, and the main way of achieving this goal was tax privileges. This zone developed very rapidly, which had a considerable influence on the improvement of the entire Brazilian economy. The backbone of the FEZ was formed by about 30 raw material and fuel-energy spheres whose products were consumed in Brazil itself. Export from the zone accounted only for 3-5 per cent of production.

In South Korea, Malaysia, Singapore and Hong Kong there are export-oriented "pinpoint" zones. 

Scientific-technical zones are also rapidly developing. There were 84 of them in the USA in 1973 with 142,000 workers and 45,000 scientists working there. The largest scientific-technical zone in the USA is the Silicon Valley. It produces 20 per cent of computer technology and computers in the world. In the near future, it is planned to establish up to 1,000 free economic zones in the USA. The volume of investments should total more than 3bn dollars with 100,000 new jobs.

In Holland and Germany, there were 45 and 50 technoparks respectively in 1985, and it was planned to set up another 100 in each country. Eighteen techno-cities are being set up in 14 prefectures of Japan on the basis of leading scientific units. The largest techno-city Tsikuba provides 145,000 people with jobs. In Britain there are more than 25 zones and technoparks which employ a total of 18,400 people.

Free economic zones in post-socialist countries

Post-socialist countries, for example, Russia, also have experience in setting foreign trade zones. The foreign trade zones are Sherrizone (near Sheremetyevo airpor), the free customs zones Moscow franko-port (near Vnukovo airport) and Frank-port terminal (on the territory of Moscow's Western river port).

In 1978, free economic zones were set up in 14 coastal cities of China. The purpose was to develop foreign trade. The main instruments are tax and customs privileges. About 15-17m dollars were invested in each hectare of the zone when it was established. The number of free economic zones in the country is increasing year by year. In 2006, 80 per cent of China's GDP was produced in free economic zones.

Offshore zones as a variety of free economic zones

Offshore zones are a type of "tax oases" that cater for international financial operations. Examples of offshore zones are mainly islands - Antilles Isles, Bahaman Isles, Bermuda Isles, Virginia Isles, Cayman Isles, Barbados, Cyprus, Malta, Ireland, Liberia, Lebanon and a number of others.

The offshore zones give the following advantages to the economic agents that use them: tax privileges, absence of currency control, an opportunity to carry out operations with residents in any foreign currency, to write off expenses on the spot, anonymity, confidentiality of financial operations (the main requirement is to inform the authorities about suspicious operations related to drug trafficking).

The domestic market of subsidized capital is isolated from residents' accounts. The thing is that a classical type of offshore zone allows only non-residents to engage in economic and financial activities in the offshore zone.

In turn, there can be various types of tax privileges. There are no taxes in the offshore zones of Ireland and Liberia. In Switzerland, taxes are very low. In the offshore zones of Lichtenstein, Antilles Isles and Panama, a single fee (lump-sum tax) is paid in the process of registering a company. Such zones usually also take annual registration fees from companies, duties for banking and insurance licences and licences for trust activities. We can also add that if in Ireland and Switzerland offshore companies are required to carry out minimum accounting procedures, in the Antilles Isles, Liberia, Panama and Lichtenstein there is no such requirement. In West Samoa, the form and procedure of accounting are not regulated and are chosen by the owner of the company. Hungarian experience is also interesting: a classical offshore regime has been set up in this country. Offshore companies get tax discounts totaling 85 per cent, which makes it possible to reduce the real tax rate to 5.4 per cent. An offshore company is granted the right to carry out operations in foreign currency, to get foreign loans and credits without special permission from the authorities that regulate foreign currency operations, to have accounts in foreign banks on condition that a certain part of the accounts are kept in Hungarian banks.

According to specialists, many free economic zones have gone their "way", turning out of depot and transit zones first into export-production and then complex zones. The world's experience shows that if there are no export zones, the export of goods and services from the country increases by 7 per cent per year on average and if they are available - by 20 per cent.

As we can see, free economic zones in world experience are set up with some purpose - to increase welfare both in the zones themselves and on the territory of the country as a whole. As a rule, this purpose is to speed up foreign trade activities, to increase the volume of exports, to create additional jobs, to stimulate industrial production, to attract foreign investments to the country, to develop backward territories and to level interregional differences.

The methods of achieving these purposes are usually equal - these are tax and customs privileges and various preferences.

There is no doubt that in the near future, free economic zones can be seen as an effective instrument of Azerbaijan's economy policy.

P.S. You can read about the issue of setting up free economic zones in Azerbaijan and the necessary measures to ensure their effective operations in the next edition of our magazine.