Special economic zones in the world economy

1.3 Reasons for zone development and major trends

 

The rationale for the development of special economic zones differs between developing and developed countries. For developing countries, these zones have traditionally had both a policy and an infrastructure rationale. The typical special economic zone policy package includes import and export duty exemptions, streamlined customs and administrative controls and procedures, liberal foreign exchange policies, and income tax incentives—all meant to boost an investment’s competitiveness and reduce business entry and operating costs. Export- oriented zones are intended to convey “free trade status” to export manufacturers, enabling them to compete in global markets and counterbalance the anti-export bias of trade policies.

Madani (1999) and Cling and Letilly (2001) outline four broad policy reasons for the development of zones, especially EPZs, in developing countries:

• In support of a wider economic reform strategy. In this view, EPZs are a simple tool permitting a country to develop and diversify exports. Zones are a way of reducing anti-export bias while keeping protective barriers intact. The EPZs of Taiwan (China) and the Republic of Korea follow this pattern.
• To serve as “pressure valves” to alleviate growing unemployment. The EPZ programs of Tunisia and the Dominican Republic are frequently cited as examples of robust, job-creating programs that have remained enclaves with few linkages to their host economies.
• As experimental laboratories for the application of new policies and approaches. China’s freeports are classic examples of this category. Financial, legal, labor, and even pricing policies were introduced and tested first within the freeports before being extended to the rest of the economy.
• To attract foreign direct investment. Most new SEZ programs, particularly in the Middle East, are designed to attract foreign investment.

The rationale for free zone development in industrialized countries is more varied. The new Free Economic Zone program in the Republic of Korea, which is a broader concept than a regular export processing zone, and the 22 foreign access zones in Japan, for example, are explicitly intended to promote foreign investment. The main rationale for the Shannon Free Zone in Ireland, in contrast, was to establish a “growth pole”  in the economically distressed southern part of the country. Revitalization of economically distressed urban and rural areas is the motivation behind the many enterprise zone-style programs in the United Kingdom, France, and the United States. But overall, enhancing trade efficiency and manufacturing competitiveness remains the principal rationale behind special economic zone programs in most industrialized countries. Many companies choose a zone location based on the advantages of operating in a flexible, duty-free environment.

The U.S. Foreign Trade Zone program is a typical example. It should be noted that in addition, the United States has 173 Federal Empowerment Zones, which do not provide zone-like benefits that are comparable to other zones, and are therefore not included in the table. Operating costs are lower in a zone as a result of reduced insurance, security, and overhead costs. Cash flow is enhanced by the ability to postpone duty payments until and only upon entry into the domestic customs territory. Foreign trade zones have been critical in enabling manufacturers to operate “just-in-time” systems. The efficiency advantages provided by these zones are arguably more important for industrialized countries even with the advent of modern production concepts and approaches, and the reduction of tariff and non-tariff barriers (NTBs). The fact that zones are expanding in OECD countries suggests that they may be much more than tools for developing countries with bad policy environments—they may be critical to firm-level competitiveness in a globalized economic environment. (See also Table 3, which lists types of zones in selected industrialized countries.)

Major Trends in Zone Development

There have been profound changes in the free zone concept and development approach since the first modern zone was established in Ireland in 1959. Even more fundamental changes are foreseen over the next decade, as the WTO agreement is implemented in full.

Free zones were traditionally developed as isolated enclaves, both in terms of the underlying policy framework and geographic location. Access to a generous set of incentives and privileges was tightly controlled. Qualifying firms typically had to be 80–100 percent export-oriented (for EPZs), engaged in recognized manufacturing activities, and at times only foreign-owned. Zone location was restricted to relatively remote areas or near transport hubs, and zones were viewed primarily as growth poles for regional development. Zones were exclusively developed and operated by government bodies.

This rigid concept has changed quite fundamentally over the past two decades. One of the major changes in thinking has been to permit zone development countrywide, rather than to restrict zones to remote areas. This change was in response to the failure of many government-run zones and the growing interest of private property groups in zone development. Applications for new zone development projects are increasingly treated like any large scale property developments; they are subject to all applicable land use planning, zoning, building, and environmental clearance processes. Governments have had to develop zone designation criteria and transparent processes to govern the designation of new zones promoted by private groups. Another major development has been the re-thinking of the role of zones in economic development. EPZs were intended to promote exports, create jobs, and transfer technology through backward linkages. The rapid pace of globalization and trade liberalization is stimulating a much broader view of zones, their development objectives and performance expectations. Increasingly, zones are viewed as a key mechanism to promote two-way trade and facilitate liberalization and modernization of the host economy.

Traditional EPZs are increasingly being augmented and sometimes supplanted by new, more flexible arrangements. Hybrid EPZs are the preferred model in most Central and Eastern European countries and many Latin American countries. Commercial free zones have been the traditional development norm among most Middle Eastern and North African countries, but are a relatively recent innovation in Asia, where zone development has emphasized export manufacturing.

2. Special economic zones in foreign countries

2.1. SEZ in the United States

 

It is known that the United States actively support the philosophy of global free trade, so it is hard to imagine that their economy is in need of special zones of free trade. Nevertheless, in 1934 the program on free trade areas started to operate in the country. This program was designed for better integrating the country into the global trade by stimulating economic activity in areas (mainly due to the customs benefits), as well as to reduce the unemployment rate in the country, which was extremely high during the Great depression. The operation of foreign trade zones is monitored by the Customs Service and the U.S. Committee on Foreign trade zones (NAFTZ).

Under existing U.S. law, foreign trade zones operating in the country are divided into two types: zones of general purpose and specialized sub-zones.

The first general-purpose trade zones were created in the U.S. in the middle of 1930s of the last century and were located in the major ports - New York, New Orleans, San Francisco, Los Angeles and Seattle. In 1950s these zones were created in the Toledo (Ohio), Bay County (Michigan), Mayaguez (Puerto Rico) and Honolulu (Hawaii).

Specialized areas (sub-zones) are organized in the interests of the individual, usually large, companies whose activities are beyond the scope of general-purpose zones. They are created for the development of export potential and to establish import-substituting industries. Specialized areas are technically part of general-purpose zones, but geographically located outside, and sometimes even at a great distance from them. The first specialized zones were established in 1952.

Nowadays foreign-trade zones cover the whole country: in each state there is at least one foreign trade zone and it’s possible to distinguish the general pattern of allocation of such zones: most of them are concentrated on the coastal area of the United States, which justifies that the main purpose of such zones is the increase of competitiveness of US companies on the international level, as well as  facilitation of foreign trade and development of the areas (this provides employment for the regions and income for people). However, deepening in details, it is possible to notice that out of more than 200 FTZs several dozens of them stand idle (that is they have legal status for operations, but probably there is no demand for their services.): in many of them there is 1 operating company or no residents of FTZ at all. But still, the extensive network of FTAs is a convincing demonstration that the federal government plays an active role in the provision of national business opportunities offered by areas throughout the country.

Another widely spread type of special economic zones in USA is enterprise zone. This group of special economic zones is not directly associated with servicing of foreign trade. The original concept of the SEZ is being eroded, as customs benefits are secondary or non-existent, and various tax, financial and administrative incentives play the key role.

Enterprise zones originated in the United States as a result of the neo-conservative variant of regional policy aimed at revitalizing small and medium-sized businesses in economically depressed areas, mainly urban, by providing greater freedom of activity and significant financial benefits.

According to the legal status enterprise zones in the United States are divided into three types - federal, state and local, each of which is created by a decision of governmental agencies at the federal, state, and local levels. First enterprise zone under the jurisdiction of the state was organized in Florida in 1980.

To obtain the status of enterprise zone, the area allocated for this purpose must meet a number of requirements, the most important of which are:

• More than 70% of the residents of an area should have a personal or family income below 80% of median income of residents of the city or the country
• Unemployment in the area should greatly exceed its average level over the city or the country.

In all, there are about 1500 enterprise zones of all levels operating in 700 cities, suburban and rural areas of the United States. Their rapid spread may be explained by already mentioned economic and other benefits granted to American companies operating on their territory. Since the production development and the reduction of unemployment are the two main objectives of the government programs on enterprise zones of all levels, the federal, state, and local authorities provide all kinds of assistance in achieving the set objectives.

Finally, discussing special economic zones of the United States its vital to mention the type of SEZ the US are famous for: this is industrial park. Industrial parks (techno-innovation zones or technoparks) have declared themselves as a new and effective form of integration of science and industry, as a place for innovative activity and the creation of venture companies involved in the development of new technologies. Usually they are a geographically grouped set of research laboratories and production facilities provided on preferential terms and leased to venture firms engaged in the commercial development of promising scientific and technological innovations and ideas.

There are two types of industrial parks in the U.S.: those that arose spontaneously on the initiatives of certain individuals or private organizations, and those that were created at the direction of the governments of individual states. The examples of the first type are Silicon Valley in Santa Clara (California), Technopark "128 Boston Road," as well as Triangle Park in North Carolina, established in the heart of the district where there are three universities: Duke, North Carolina and University of state North Carolina.

Today in the U.S. there are about 150 industrial parks (more than 30% of the world number). The universities, local municipalities, corporations and associations usually own these parks on the share holding. Some of them are for profit, others are non-profit organizations.

Industrial parks share two typical characteristics:

• the provision of concessional assistance to venture companies, individual inventors and scientists developing new products and technologies.
• collaboration with industrial companies The main advantage of this for industrial companies is access to university resources, the ability to involve teachers, the most talented undergraduates and post-graduates, to use the library and etc..

In recent years, the creation of technology parks in the U.S. has slowed. It is marked not so much the formation of new parks but the revitalization of existing ones.

The role they play in the U.S. economy is evidenced by the fact that the "Silicon Valley" which is the center of high-tech industry provides one-fifth of world production of computers and computer technology. Technology parks actively contribute to the knowledge-intensity of U.S. goods, thereby increasing the competitiveness of U.S. products on the world market.

2.2. SEZ in China

 

Since the declared Chinese policy of “open doors” aimed at economic integration and liberalization, the special economic zones have played an instrumental role in the integration of China to the global economy and in its economic development.

China was not one of the first among developing countries to establish special economic zone programs:  by that time many Asian countries such as Hong Kong. India, Singapore, Thailand, Malaysia, Philippines, Rep. of Korea had already established their zone programs before and in 1970s.

In china, the first four SEZs were established in 1980 in proximity to Hong Kong (Shenzhen), Macau (Zhuhai) and Taiwan (Shantou and Xiamen). Their location was aimed at attracting "overseas" Chinese capital and also as a showcase for the potential impacts of such a reform. By 1984, the SEZ model was judged to be successful and could be expanded. The initial setting of the four SEZs was solely concerning southern China, so 14 coastal port cities, from the Dalian to Beihai, were selected to become SEZs. This triggered the development of modern port infrastructures, particularly container ports, which were essential to support an export-oriented strategy. The importance of specific economic clusters was acknowledged in 1985 when the status of SEZ was expanded to the Yangtze River Delta, the Pearl River Delta, and the Xiamen-Zhangzhou-Quanzhou Triangle (Min River delta). This also provided additional space for the setting of industrial districts. In 1988, the status of SEZ was expanded to Hainan Province which mostly developed the touristic and agribusiness sectors.

Since their inception, SEZs and their positive economic impacts were solely a coastal endeavor with interior provinces lagging behind. By the late 1980s, a substantial migration of labor from interior to coastal provinces was beginning to be observed. In an attempt to counterbalance this trend, six Yangtze River ports and 11 border cities were granted the SEZ status, in addition to all the capital cities of interior provinces and autonomous regions. Yet, accessibility to port infrastructures and foreign markets remained the dominant factor in the dynamism of SEZs and comparatively, limited development took place in interior provinces until the 2000s.

The main objectives of establishing SEZ in China were:

• Attraction of foreign capital, advanced equipment and technology, gain experience in management, national personnel training
• Increase in export revenue
• Encourage reform and showcase of its activities
• Efficient use of natural resources
• Stimulation of economic development, advanced foreign technology and experience transfer
• Mobilization of financial opportunities of Chinese emigration
• Guarantee accelerated development of the regions, in which special zones are located

Special economic zones in China are different from other free economic zones in Asian countries by wider diversification of activities and coverage a much wider area. SEZs have a favorable location - in the coastal zones that have historical experience of foreign trade, near Hong Kong, Macao and Taiwan.

A good example of peculiarities of SEZ development in china can be Shenzhen zone. The opening of the free economic zone on the territory of Shenzhen has become an important strategic decision, because Shenzhen is located in close proximity to Hong Kong. China used the experience of this special administrative region to stimulate economic growth and the result was extremely positive. From the beginning, the combination of a favorable environment for business and well-chosen vectors of activities resulted in an unprecedented growth of the economy. The growth rates of the economy of Shenzhen were very high: from 1980 to 1984, Shenzhen's GDP grew by 6 times (58% of GDP growth per year), while China's economy grew "only" 1.5 times. In other SEZ growth lagged behind Shenzhen, but also was high: 32% in Zhuhai, Shantou 9%, 13% Ksiamene. From 2000 to 2010, Shenzhen's economy grew by 4.4 times and from 1979 to 2010 - 4852-fold (in current prices). Shenzhen's GDP in 2010 amounted to 146 billion dollars. In July 2012 Shenzhen was named one of the 13 largest cities in China, with a population of about 14 million people.

Nowadays in China there are 6 special economic zones (4 of them are located on the south-east coast), 14 open coastal cities, 14 free trade zones, 13 border cities, 53 zones of high and innovative technologies, more than 70 science and technology zones, 38 export –processing zones. As we see, Chinese government actively supports the free zone programs and provides resources and incentives for zones establishment. Comparing China with other countries, it is one of the leaders in the number of special economic zones (see table 4). Such zones provide Chinese people incomparable employment opportunities. As it is shown on the table 4 China is the leader in number of zones, as well as in employment and exports arisen from such zones, if we compare it with countries of Asia and the Pacific, Latin America, Central and Eastern Europe and Central Asia, Middle East and North Africa.

Moreover, the following distinguishing feature characterizes the Chinese SEZs: the zones of high and new technology, or simply the analogues of American industrial parks, which account for 4% of the national GDP and 10% of the total value of exports and imports. Such zones are of strategic importance to the current economic economy. The evidence of their transformation into a major driving force of development of high and new technology against the background of optimization of the economic structure of China is the fact that, since 1991, their main economic indicators at an average increase annually by more 40%. As a result, in 2003 they continued rapid development of the country and for the first time brought income in excess of 2 trillion Yuan. This is 32% more than in the previous year, with revenues from sales of high-tech companies located in the Beijing area of scientific and technological development "Zhongguancun" and the Shanghai area of new and high technologies development, exceeded 150 billion Yuan.

Using the information above about the historical development of special economic zones in China and applying the image 2 (shows the main SEZs of China) it is possible to conclude that China's geography of production is strongly coordinated by its proximity to coastal areas and their capabilities to access global markets through port and airport terminals.

To conclude, China as other countries supported the policy towards establishment of special economic zones. It coincided with general policy of the country towards liberalization and openness, thus promoting even higher growth. Moreover, China's geography of production is strongly coordinated by its proximity to coastal areas and their capabilities to access global markets through port and airport terminals. The Chinese model of territorial and economic openness through the creation of various types of SEZ is very realistic and allows relatively painless transition to a market economy and the gradual incorporation into the international division of labor and international foreign economic relations of countries and regions.

3. Special economic zones in Russia

3.1 Characteristics of special economic zones in Russia

The SEZs are no novelty in Russia. The first steps in developing special zones were already taken in Soviet Russia at the end of the 1980's. In the 1990’s, some 10-20 SEZs operated in Russia. These SEZs received a lot of criticism, since they were accused of having become legalized places for illegal business. As some Russian firms used the SEZs for tax evasion and bribed the SEZ administration to maintain their privileges, the federal authorities decided to terminate the SEZs. United Russia policy has further emphasized that the Russian market should operate under the same legislation, and thus, the privileges granted earlier to some regions of Russia have been taken away.

The “new era”  of special economic zones in Russia began since coming into force of the «Federal law NO. 116-FZ OF JULY 22, 2005 on special economic zones in the Russian Federation».

According to the Russian law, special economic zone is a section of the territory of the Russian Federation determined by the Government of the Russian Federation where a special procedure for exercising business activities is applied. The aim of establishing such zones is developing the processing branches of economy and high technology branches, for making new types of products and developing transport infrastructure.

The managing body of special economic zones is defined as an Open Joint Stock Company created for implementation of agreements on  the establishment of special economic zones and 100% of which is owned by the Russian Federation. Such managing body is JSC “Special economic zones” whose functions embrace: