Special economic zones in the world economy

 

 

 

Introduction 3

1. Special economic zones in the world economy 5

1.1. The essence of special economic zones and their role in the world economy 5

1.2 Types of special economic zones 8

1.3 Reasons for zone development and major trends 14

2. Special economic zones in foreign countries 17

2.1. SEZ in the United States 17

2.2. SEZ in China 21

3. Special economic zones in Russia 24

3.1 Characteristics of special economic zones in Russia 24

3.2 Characteristics of special economic zone in Kaliningrad region 30

Conclusion 33

Bibliography 37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction

 

Urgency of the problem. The urgency of the chosen topic of research is predetermined by the process of development of special economic zones at present time.

Nowadays the concept of special economic zones is actively used by many countries and since the creation of the concept, it has evolved over time and hasn’t finished yet.

Special economic zones play an important role in the world economy. Starting from the second half of the XX century, they rapidly gained popularity among most of countries on all the continents. Nowadays by different sources of information there are about 2000 – 3000 special economic zones operating in the world.

According to the documents of international Kyoto convention of the World Customs Organization, the special economic zone is defined as a part of the territory of a country where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory (the “customs” exteriority principle).  In other words, special economic zone is a part of the territory of a country with special regime. The legislation that expresses this regime, regulates the activities of economic entities and covers the following issues: customs regulation, taxation, licensing, visa issue, banking activity, mortgage and property relations, concessions and the management of special economic zone.

As the first special economic zones were introduced, a half of a century has almost gone. Over this time many economic zones were established with different purposes, thus giving a birth to new types of SEZ and different objectives, policies and varying incentives for investors. As the world practice shows, the special economic zones have proven their effectiveness in the development of the region, provision of employment, enhancement of technological development, improvement of competitiveness of domestic and exporting firms and acceleration of overall growth of the economies.

Moreover, the special economic zones allow governments to combine their yet some protectionist measures like tariff and non-tariff measures with development of regions by attracting and stimulating foreign investment and private financing in the defined regions. Thus, special economic zones act as points or areas, which are open to the world and have opportunities of rapid development.

The development of market relations in the Russia laid down the necessity of development of such tools of economic activity as special economic zones. Even before the dissolution of the Soviet Union, the government already had ideas and tried to establish in some way special economic zones. But still it was not successful until the “new era” of Russian special economic zones that starts from the establishment of Federal law on special economic zones of the Russian Federation.

The objective of the current work is analysis of special economic zones in the world and Russian practice of using such zones.

In order to achieve the set objective the following tasks should be resolved:

to define the characteristics and systemize the types of special economic zones

to identify the conditions of establishment and the peculiarities of special economic zones in the following countries: The United States, China.

to examine the peculiarities of special economic zones of the Russian Federation as a reflection of the actions of the Russian government to improve investment inflows into Russian economy.

The structure of the work is based on the set objective and consists of introduction, three chapters, conclusion and bibliography.

The theoretical base for the work are scientific reports, educational literature and internet portals. 

1. Special economic zones in the world economy

1.1. The essence of special economic zones and their role in the world economy

 

Free zones have existed for centuries. They were originally established to encourage entrepot trade and mostly took the form of citywide zones located on international trade routes. Examples include Gibraltar (1704), Singapore (1819), Hong Kong (China; 1848), Hamburg (1888), and Copenhagen (1891). But it is only relatively recently, particularly since the 1990s, that their popularity as a policy instrument has taken off.

The number of zones—especially EPZs—has grown dramatically, particularly over the last decade. Before the 1970s, most zones were clustered in industrialized countries, primarily in Western Europe. Inspired by the performance of the first modern industrial free zone in Shannon, Ireland in 1959, a number of developing countries, mainly in East Asia and Latin America, initiated EPZ programs. In the 1980s, the pace of zone development increased and expanded to new regions, including South Asia (Bangladesh, Pakistan), South America, and sub-Saharan Africa (Mauritius). The first privately developed and operated zones came on line in the Caribbean and Central America in the 1980s. Since then, zone development has exploded with the emergence of new programs in the countries of Eastern and Central Europe, the Commonwealth of Independent States, and Middle East and North Africa.

Today, according to this assessment, there are currently 2,301 zones in 119 developing and transition countries, clustered mainly in Asia and the Pacific and the Americas (Table 13). China alone accounts for about 19 percent of these zones. Just over half of them are privately owned and operated. Altogether, these zones account for approximately $200 billion in gross exports per annum and directly employ some 40 million workers, and perhaps some 60 million indirectly. In 1975, in contrast, there were only 79 zones in 25 countries around the world, employing about 800,000 people (ILO, 2003). All were government-owned and -operated.

Special economic zones became widely used since 1973 with the adoption of Kyoto convention of the World Customs Organization (WCO), later Revised Kyoto convention was adopted (2006), that contains the core definition of a free zone, as well as proposed guidelines and standards for them. According to convention, free zones are defined as a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory. In other words, special economic zone is a part of the territory of a country with special regime. Such regime is regulated by specific legislation, which covers the following issues: customs regulation, taxation, licensing, visa processing, banking activity, mortgage and property relations (including those relating to the rights of land ownership), granting of concessions, and management of a free zone. Acts of labor and social legislations may have a certain specificity as well.

The experience of creating SEZ in industrialized and developing countries is fundamentally different. In developing countries, the main functions to be implemented by SEZ are to achieve a higher level of industrialization, the inclusion or increase of the country's role in international trade. The main or even the only source of capital employed in this case are the foreign investments. In developed countries, the establishment of SEZ is primarily used as a tool of regional policy, in other words, EPZs are established in those areas where the need for improved economic and social development exists. At the same time, when choosing the territory for creation of SEZ the criteria such as unemployment level and household incomes are used. The number of regions that are granted special economic conditions of development is always limited. Due to the fact that a characteristic feature of the SEZ in the industrialized countries is an attempt to give an impetus to the economic development of certain territories, their main driving force is not the foreign investment, but national private capital, government grants and loans.

The principles incorporated in the basic concept of a special economic zone include:

• Geographically delimited area, usually physically secured (fenced-in)
• Single management/administration
• Eligibility for benefits based upon physical location within the zone
• Separate customs area (duty-free benefits) and streamlined procedures.

Numerous studies have pointed to certain key characteristics of zones in developing and transition countries:

Concentration in a few countries. A relatively small number of countries account for the majority of worldwide zone activity. Zones are concentrated in Asia and the Pacific (mainly China), Latin America, and Central and Eastern Europe and Central Asia. In general, less than a dozen countries account for most jobs created within zones and exports generated. China hosts a greater number of zones, zone workers, and exports than any other emerging market.

Concentration in a few product areas. The majority of zone enterprises worldwide are engaged in labor-intensive, assembly-oriented activities such as apparel, textiles, and electrical and electronic goods. In 1999, it was estimated that these activities accounted for more than 80 percent of zone output worldwide (Madani, 1999). This is less the case today, given the recent increase in zones with a diversified output, especially in the CIS. The degree of product specialization tends to be linked to the level of industrial development of the host country. Apparel assembly operations, for example, dominate activity in low-wage countries like Bangladesh, Sri Lanka, Madagascar, and the Dominican Republic. Electronics, electrical and automotive components predominate in middle- income countries like Mexico, Malaysia, and Thailand.

Reliance on a female workforce. Female workers account for 60–70 percent of the zone workforce worldwide, a number that has remained consistent since the inception of EPZs. As economic activity diversifies away from simple assembly operations, the percentage of women in the workforce decreases. In the Malaysian EPZs, for example, 40 percent of the workers are female, down from 60 percent two decades ago.

1.2 Types of special economic zones

 

The organizational and functional structure of SEZ is quite diverse. Sometimes it is quite difficult to determine the peculiarities of a certain SEZ, as each of them has the features of many areas. In the theoretical literature 30 different types of free economic zones are distinguished, but they can be reduced to several major types.

While organizing special economic zones two different conceptual approaches are used: territorial and functional. In the first case zone is considered as a separate area of land, where all resident enterprises enjoy preferential regime of economic activity. According to the second approach zone is preferred treatment applicable to certain type of entrepreneurial activity, regardless of firm’s location in the country. The examples of implementation of the first approach is the Chinese SEZ, area "Manaus" (Brazil), numerous export processing zones in developing countries. The results of the second approach are point zones, represented by individual companies (offshore companies, "Duty Free" shops).

1. Free trade zone (commercial free zone).

Free trade zones (FTZ), also known as commercial free zones and free commercial zones, are considered to be one of the simplest forms of special economic zones. These zones are related to the zones of 1^st generation. They exist since XVII-XVIII centuries. Such zones are small, fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations, located in most ports of entry around the world. Usually non-resident for such zones company-importers open their branches there. FTZs are free from customs duties on import and export of goods.

Free trade zones are widespread in the world. Initially they were exclusively related to trade, but nowadays in many of them production activity is executed – mainly processing of imported goods with the aim of reexportation.

Special shops “Duty Free” in international airports can be considered to be among the simplest free trade zones. From the point of view of regime/regulation, they are regarded as outside the country’s boarders.  

2. Export processing zones

Industrial estates offering special incentives and facilities for manufacturing and related activities aimed mostly at export markets, typically take two forms. In the

traditional EPZ model, the entire area within the zone is exclusively for export-oriented enterprises licensed under an EPZ regime. Hybrid EPZs, in contrast, are typically sub-divided into a general zone open to all industries regardless of export

orientation and a separate EPZ area reserved for export-oriented, EPZ-registered enterprises.

Export processing zones are related to the zones of second generation. They arose as a result of evolution of trade zones, when started to import not only goods but also capital and to perform not only trade but also production activity.

Such zones are created on a territory with special customs regime, where export and import-substituting products are produced. They have significant tax remissions and financial benefits. Export processing zones gained most prevalence in the developing countries. The greatest effect of such zones was achieved in the newly industrialized countries (mainly Asian).

The logic of formation of EPZ was predetermined by the economic strategy of developing countries, when the middle of the 1960s there was a need of promoting industrial exports and employment due to the inflow of foreign capital.

Export processing zones are administratively unique areas with developed infrastructure and favorable investment, production and trade conditions. Their appearance is concerned with the establishment of export-oriented industries

(as a strategy of economic development of a given country or territory) and with foreign direct investment (as a strategy of investing in this country.) It is assumed that the functions of such zones should be to attract foreign investment and the development of the manufacturing capacity of the national industry.

 

3. Freeports

Freeports are generally a much broader concept and typically encompass much larger areas. They accommodate all types of activities, including tourism and retail sales, permit people to reside on site, and provide a much broader set of incentives and benefits. The large-scale freeports in China are a traditional example.

They are fundamentally different from traditional free zones. Instead of export drivers and investment magnets, they are designed as liberalized platforms for diversified economic growth that not only could but should spill over into the national economy. The Freeport concept represents a major expansion over traditional approaches, both physically and functionally:

• Larger size. Freeports tend to cover larger areas, therefore offering firms greater flexibility in terms of plant location and scope for inter-firm linkages. 
• Broader range of permissible activities. Firms can undertake any legal activity including manufacturing, tourism, duty-free shopping, informatics, warehousing, transshipment, and re-packaging activities, among others. Individuals can reside within the zones, permanently or temporarily.
• Duty-free privileges. All types of merchandise can be introduced duty- and tax-free by registered enterprises or individual residents. Enterprises can freely import any merchandise in any quantity, and are not restricted to direct inputs for manufacturing (as is the case with EPZs). Duty- and tax-free merchandise can be sold at the retail or wholesale level and some-times consumed within the zone area. This is in contrast to EPZs or even commercial free zones that do not permit retail sales or on-site consumption of duty- and tax-free products.
• Full access to the domestic market on a duty paid basis. Unlike EPZ enterprises that are usually required to export at least 80 percent of their production, most freeports allow unrestricted sale to the local market or to consumers as long as all applicable import duties, taxes, and other charges are fully paid.

 

4. Techno-innovation zones.

Techno-innovation zones are referred to the zones of the third generation (1970-80s). They are formed spontaneously (U.S.) or are designed specifically with public support around the major research centers (Japan, China). In such zones national and international research, design, research-and-production firms are concentrated, that benefit from a uniform system of tax and financial incentives.

The greatest number of techno-innovation zones is operating in the United States, Japan and China. In the United States they are called industrial parks, in Japan - Technopolis, in China – zones of new and high technology development.

The most famous in the world and the largest industrial park in the United States 'Silicon Valley' provides 20% of the world production of computer equipment and computers. It employs about 20 thousand employees. In the USA more than 80 such zones exist. In Japan, within the framework of special government programs two dozens of technopolises were created on the basis of leading research organizations. In China, these areas are also created usually during the implementation of national plans for the development of science and technology. By the middle of 1990s in China there were more than 50 zones of new and high technology development. It is typical that in the Asian newly industrialized countries techno-innovation zones are formed as innovation centers for already established export-oriented zones that are already sufficiently developed as export processing zones and require re-orientation towards production of high-tech products.

5. Service zones

Service zones are territories with preferred treatment for companies and organizations that provide a variety of economic, financial, insurance and other services.

Some of the service zones are offshore zones and tax havens. Offshore zones and tax havens attract entrepreneurs by favorable monetary and financial, fiscal regimes, a high level of banking and commercial secrecy, loyalty of the government regulation.

The main requirement from the company registered in offshore zone and claiming for tax and other benefits - not to be a resident of the country where the offshore center is situated, and not to produce profits on its territory. Tax havens are different from offshores because in the former all firms (both domestic and foreign) get tax benefits on all or some of the activities. Currently there are more than 300 offshore centers. Among them, there are about 70 tax havens.

6. Enterprise zones

Enterprise zones are intended to revitalize distressed urban or rural areas through the provision of tax incentives and financial grants. Most zones are in developed countries, for example the United States, France, and the United Kingdom, although South Africa is developing a similar mechanism.

7. Single factory EPZ

Single factory EPZ schemes provide incentives to individual enterprises regardless of location; factories do not have to locate within a designated zone to receive incentives and privileges. Leading examples of countries relying exclusively on a single factory scheme include Mauritius, Madagascar, Mexico and Fiji; other countries such as Costa Rica, the United States, and Sri Lanka allow both industrial estate-style zones and single factory designations.

It is frequently pointed out that special economic zones have also evolved into highly specialized facilities, configured to the needs of specific industries and activities.

Examples shown in Table 2 include special zones to promote high technology or science- based industries; petrochemical and heavy industry zones relying on cheap energy sources and specialized facilities; financial services zones to promote offshore financial and non-financial activities; software and information communications technology (ICT) zones accommodating software coding and other offshore ICT services operations; airport-based zones, specifically support aviation and air-based activities; tourism zones to facilitate integrated resort and leisure community development; logistics parks and cargo villages/cities, providing specialized facilities and support services to facilitate trade, supply chain management, and logistics; and others.

 Do these types of projects qualify as special economic zones? The answer is not always clear-cut, and is the reason why so many studies have dramatically varying estimates of the number and types of zones worldwide. The key criteria for identifying eligible projects is whether they offer a special regulatory framework and incentive regime that is available only to enterprises locating within the zone. In many cases, this is not the case—enterprises receive general investment incentives available to firms elsewhere. Applying this approach would omit single factory programs and general industrial parks/estates/zones (which accommodate enterprises operating under a diversity of incentives), as well as other developments that do not provide a specific incentive regime.