How to Improve Special Economic Zones
Published: June 21, 2012 (Issue # 1713)
Special economic zones, widely considered aáfast track toáeconomic development, will be one ofáthe most important topics ofádiscussion atáthe St. Petersburg International Economic Forum onáThursday andáFriday.
TheáShenzhen ináChina, maquiladoras ináMexico, Jebel Ali ináDubai andáthe Bataan ináthe Philippines are good examples ofáthe success stories ofáeconomic zones. With theápossible exception ofáDubai, theástandard ofáliving ináthose zones is three toáfive times higher than that ináother parts ofáthe country.
Theáformula forásuccess is basically theásame ináall special economic zones: theáabolition ofácustoms duties onáimported equipment, aáwell-established infrastructure, heightened government efforts toáminimize corruption ináthe zone, cheap labor andáinexpensive raw materials. It is therefore not surprising that more than 3,000 ofáthese zones have been created worldwide since 1980, andámore than 1,000 ofáthem are still functioning.
But as is often theácase with global trends, theásituation is different ináRussia. Foráexample, theáspecial economic zone that operated ináIngushetia fromá1994 toá1997 cost theáfederal budget $1 billion without bringing any benefit toáthe region. Ináaddition, billionaire Roman Abramovich oversaw aáspecial economic zone ináChukotka fromá2001 toá2005, but he did so foráthe wrong reason: Toáoptimize his own tax liabilities. Theáproject was a large windfall foráregional coffers but failed toáspur economic growth ináthe region.
Theámain problem with Russiaĺs special economic zones is that they offer few attractions foráinvestors. First, they are too small toáhost large-scale projects. Foráexample, theázones ináZelenograd andáDubna outside Moscow andáthe zones ináSt. Petersburg andáTomsk are confined toá129 toá207 hectares each.
Second, they offer scant advantages inácomparison toásimilar zones abroad. TheáLipetsk zone, foráexample, has cut theáprofit tax fromá20 percent toáonly 15.5 percent. Theásocial tax onáemployeesĺ salaries was cut fromá30 percent toáonly 14 percent effective fromá2012 toá2017, but after 2017 theárate will jump back up toá28 percent.
Third, they are all impractical fromáthe standpoint ofálogistics. Ináother countries, many zones are created near theácoastline toátake advantage ofámodern airports, sea ports andámajor highways leading toáthe city. But Russiaĺs poor transportation infrastructure makes setting up special economic zones inácoastline cities less attractive.
Fromáits beginning, theáspecial economic zone ináKaliningrad was created foráthe wrong reasons. Instead ofátrying toápromote competitive production foráexport, theáKaliningrad zone was established toápromote import substitution Ś foráexample, with meat products, televisions andácognac.
It would be helpful if participants atáthe St. Petersburg forum discussed why theáRussian government andáState Duma link theágradual closure ofáthe special economic zone ináKaliningrad with theácreation ofáthe Customs Union with Belarus. This thinking seems especially odd considering that Belarussian President Alexander Lukashenko signed aádecree onáJune 5 creating aná8,000-hectare Chinese-Belarussian industrial park ináthe Smolevichi district ofáthe Minsk region. Belarus will surely benefit fromáthis zone, while Russia will be left onáthe sidelines. Belarusĺ zone is theáfirst toáappear within theáterritory ofáthe Customs Union, andáit has all theácorrect elements: Theáland is sold atáa discount, no profit, property or land taxes will be levied forá10 toá20 years andáinsurance premiums are set atáonly 9 percent, compared toá30 percent ináRussia.
Special economic zones are aástandard mechanism toáincorporate aánewly industrialized country intoáthe global economy. But Russia does not need toáreinvent theáwheel. Foráexample, there is no need toácreate exemptions foráimporting duty-free goods toáthe domestic market because membership ináthe World Trade Organization will provide that.
But Russia should concentrate its efforts onácreating anáexport-oriented zone aimed atáEuropean investors andáthe European market. Kaliningrad would be aálogical place toástart. This could do more toáunify Russia andáthe European Union than aádozen gas pipelines. Technically, this would not be difficult toáestablish as long as there is political will ináthe Kremlin. Theáfact that theáregion is anáexclave makes it ideal foráthis type ofáexperimental project, one that would eliminate visas andácombine Russian tax laws with European anti-trust legislation. It could also include aáspecial gambling zone andáfocus onádeveloping tourism andáhotels andácreating aáregional center foráholding business conventions. Kaliningrad is theáideal place foráRussiaĺs ôwindow toáEurope,ö andáwith theácorrect strategy andáinvestment it could become Russiaĺs showcase economic center after Moscow.
Russia needs toálearn fromáother countriesĺ successful experiences with special economic zones. Letĺs hope theáforeign participants atáthe St. Petersburg forum will offer their insights andáadvice during theápanel discussions, lunch breaks andáreceptions andáthat Russiaĺs top economic advisers andáofficials take good notes.
Vladislav Inozemtsev is aáprofessor atáthe Higher School ofáEconomics andádirector ofáthe Moscow-based Center foráPost-Industrial Studies.