On potential of and outlooks for special economic zones in Ukraine


Elena CHMYR, the Ukrainian Scientific Research Institute of Economics

On potential of and outlooks for special economic zones in Ukraine

For the very first time Ukrainian regions became interested in setting up special/free economic zones (SEZ) in the late 80s – early 90s, when the economic liberalization ideas were only taking shape in the country, while the population and businesses were subject to sophisticated social and economic experiments.

Zakarpatye, Odessa, Chernovtsy, Kharkov, and Dnepropetrovsk regions, as well as the Autonomous Republic of Crimea, were the pioneers in this undertaking. Each of these regions had its own pros for establishment of SEZs. For instance, Zakarpatye region had the mighty Chop transportation facility, which used to handle more than a half of all the Soviet trade traffic with foreign countries. Back in the 19th century, Odessa used to be a free port and had powerful seaport facilities. Chernovtsy region looked forward to inflow of investment capital and to vivified foreign trade owing to its advantageous location at the western border of Ukraine, wide connections with the Ukrainian Diaspora abroad, fine entrepreneurial traditions and rich mineral inventories. Kharkov and Dnepropetrovsk, the two large industrial centers with well-developed infrastructure and nice intellectual potential, believed that establishment of industrial parks would further strengthen their standings and would hedge these regions from the economic turmoil. Finally, the Crimea, the most popular Soviet resort with one-of-a-kind nature and climate and with branched transportation thoroughfares, could truly make good use of SEZs.

Later on, the number of initiators of SEZs and other special establishments in Ukraine grew as the macroeconomic situation worsened, manufacturing moved into stagnation and unemployment rate boosted. In consequence, throughout 1989-1999 various Ukrainian regions worked out and submitted to the Cabinet of Ministers more than 30 projects of different special/free economic zones.

Here is an approximate list of these projects:

Chop-Interport free-trade zone, Zakarpatye and Europa-Tsentr (Europe-Center) special economic zone complexes, Zakarpatye region;

Bukovina complex trade, industrial, and specialized tourism-recreation zone, Chernovtsy region;

Odessa industrial zone, Antarctica, Yuzhnenskaya, Porto-franko (Free port), Yuzhnaya Palmira (the Southern Palmira) and Adzhalyk special/free economic zones, Odessa region;

Sevastopol, Manganary, Sivash, Kerch and, other special/free economic zones, the Autonomous Republic of Crimea;

Dzharylgach free-trade zone, Kherson region;

Dneproavia, Pridneprovye, and Krivbass, Dnepropetrovsk region;

South-Ukrainian zone of neighbor-state cooperation, Chernigov region;

Interport-Kovel, Volyn region;

Azovje, a technopark in Donetsk city, and a complex industrial special economic zone, Donetsk region;

Yavoriv and Kurortopolis Truskavets (Truskavets Resort City), Lvov region;

Stepnogorsk, Zaporozhye region;

Vorokhta and Yaremche, Ivano-Frankovsk region;

Lidia-Kharkov, Kharkov region;

Mogilev-Podolsky, Vinnitsa region;

Slavutich, Kiev region;

Kremenchug, Poltava region, etc.

Therefore, 15 out of the 25 large Ukrainian divisions put forth the projects for creation of special/free economic zones within their domains. As a rule, all the submitted proposals were based on detailed analysis of local peculiarities and on specific features of regions’ local economies. However, quite frequently such intensive efforts of initiators have turned out to be vain because a number of projects were not elaborated thoroughly, some of the projects required outrageous initial investments and did not mention any possible sources of this money, while some stipulated for long-term tax exemption of numerous taxpayers. Certain projects were deficient due to huge areas allotted for potential SEZs (the areas often embraced administrative districts, cities or even the whole regions) and excessive functions assigned. In selected cases, the initiators of these projects tried to take unjustified advantage of SEZs to settle local political, ethnical, and cultural problems. Back then all the prepared regional projects were nothing but a waste of time. The higher executive authorities made no decision on establishment of SEZs owing to lack of the appropriate laws, lack of more or less clearly defined state strategy of economic development, and hesitation of statesmen to give their approval to such important experiments.

At the same time, the very regions, which broached the topic of special/free economic zones, did not have sufficient information on activities of similar foreign undertakings, on foundation procedures, and on effectiveness of SEZs’ functioning. Local authorities were not sure how to regulate legal, economic, and organizational issues of SEZs’ activities and how to make operations of special/free economic zones comply with the Ukrainian economic laws.

Contrary to the usual practice, Ukraine refused to follow the Russian scenario back at the beginning of the 90s. In Russia the President signed decrees on foundation of a number of SEZs neglecting the fact that legal issues of SEZs’ activities had still been unresolved. In Ukraine the Verkhovna Rada (Supreme Council) responded to regional initiatives by passing the law "On general principles of establishment and functioning of special/free economic zones" in October 1992. In turn, the Cabinet set up the Interagency commission, a special body responsible for consideration and compilation of the necessary documents for establishment of SEZs. Later on, in 1994 the government approved "Main guidelines of state regional economic policy of Ukraine" and the Conception of establishment of special/free economic zones in the country (regulation No.167 of 1994). These acts created the legal grounds for business activities of SEZs.

Divisions that are selected as places for special/free economic zones should meet the following requirements:

have auspicious transportation infrastructure and geographic advantages;

be located nearby large transport junctions, international seaports, highways or railways, international airports, transport corridors or have a branched communication network;

be situated close to the Ukrainian frontier;

have sufficient resources such as natural and climatic resources, mineral inventories, available manpower, scientific and manufacturing potential, etc.;

have enough manufacturing companies and social institutions;

have no environmental impediments.

All these are the general requirements posed to a potential SEZ. Besides, when making a decision on creation of an individual special/free economic zone, the responsible officers also consider specific features of each type of SEZs, such as the objective and the functions, relations with the surrounding national economy, population density in selected areas, large industrial centers, and other objects.

The initial evaluation reveals that the following Ukrainian regions comply with the mentioned standards of special/free economic zones:

Zakarpatye, Volyn, Lvov, Odessa, Nikolaev, and Kherson regions, as well as the Autonomous Republic of Crimea, seem to be the suitable locations for free-trade zones;

almost all the industrial regions of Ukraine are suitable for placement of industrial zones;

the cities of Kiev, Kharkov, Odessa, and Lvov, as well as their suburbs, are the good places for scientific and technical zones;

the Autonomous Republic of Crimea, Zakarpatye, Lvov, Chernovtsy, and Ivano-Frankovsk regions are appropriate for establishment of tourism and recreation zones.

There have been defined standards and guidelines for selection of worthy SEZ projects. These guidelines comprise figures proving economic and social justification of SEZ, positive effect on the regional economy and assistance in resolution of the existing problems, acceptable rates of return, sufficient provision with the required financial and other resources, lowest requirements in direct or indirect financial backup from the state budget, etc.

It is worth recalling that a special/free economic zone is defined as a part of the Ukrainian land subject to special legal treatment of business activities. The appropriate Ukrainian laws permit establishment of free-trade zones and free ports, export and transit zones, bonded warehouses, technoparks, technopolises, complex industrial zones, tourism-recreation zones, insurance and banking zones, etc. All these diverse zones can be grouped into free-trade zones, trade-industrial, scientific-technical, tourism-recreation, and offshore zones.

The Ukrainian laws declare the following ultimate objectives of SEZs: acceleration of social and economic development of Ukrainian regions, promotion of foreign investments, creation of new jobs and employment of the Ukrainian workers, vivification of business initiative, encouragement of export-oriented (or import-substituting) businesses, attraction and introduction of advanced technologies, enhancement of efficient use of local resources. Proceeding from all this, foundation of special/free economic zones should be tightly related to nourishment of economic growth points, recovery of depressed regions, and stimulation of structural economic adjustments.

How can SEZs assist the current economic development of Ukraine and of separate Ukrainian regions? At this point of time, Ukraine has found itself in a complicated economic situation due to a number of various reasons including:

continuous recession in manufacturing output (by the way, experts mention that the Ukrainian government failed to make the year 1999 a turning point in breaking off the recession);

unexampled ageing of manufacturing facilities (the overall depreciation of tangible fixed assets comes to 45.9% in the whole national economy including 48.8% in industry, 39.3% in agriculture, and 50.8% in construction), drastic narrowing of reproduction activities, which have virtually turned from extended reproduction into a simple one;

dramatic drop in investments in the national economy (back in 1985 investments in industrial capital stock totaled UAH 17.2 million, while in 1998 this figure lowered to UAH 4.5 million comparable price value, i.e. investment activities plunged 3.8 times);

outflow of financial and other resources from the manufacturing sector and from the whole Ukrainian economy, along with insignificantly small direct foreign investments and vast external borrowing;

severe unemployment, that is dismissal of employees from manufacturing and service companies, appearance of underemployment, growth in unemployment rate, etc.

The Ukrainian authorities have so far failed to create the environment that would be attractive to foreign investors and would encourage local manufacturers. Ukraine has received some of the fewest direct foreign investments among the former socialistic countries. Partially foreign-owned companies barely yield some 0.1% of the Ukrainian GDP and national income.

It looks like pretty much everyone realizes now that in order to change the situation for the better the authorities should define clear, stable, and stimulating rules for entrepreneurship (tax law, budget law, customs regulations, etc.) and revive the investment activities using all the available resources in all the economic sectors. It is still quite an urgent task to attract foreign investments to give resources, technological and innovative backup to economic development in Ukraine. One can clearly see how SEZs can enliven foreign trade activities, recover capital transactions and manufacturing output, and assist the overall recovery of Ukrainian regions. Moreover, the extensive foreign experience proves that SEZs favorably influence on the economy of the place of their location. Quite a few countries have experienced the boom in business activities and the highest rates of economic growth exactly during establishment and development of SEZs. During these periods, foreign investments in special/free economic zones gain an average of 35-75% per year, average annual foreign investments per company registered in SEZ amount to USD 90-250 thousand, while manufacturing output increases at the average pace of 130-175% per year.

Subsequently, after the development stage when the SEZ finally locks on the specialization selected, the growth tempos of manufacturing output slow down to 110-130% per year. Additionally, SEZs have proven to be an efficient way of attraction of foreign investments in the country (10-80% of the overall foreign investments are made into SEZs). Moreover, industrial parks frequently solve the unemployment issues providing for up to 10% of new jobs in such S.E. Asian countries as Korea, Hong Kong, and the Philippines and up to 60% of new jobs in Singapore.

Considering the renowned effectiveness of SEZs, it seems advisable to make establishment of such undertakings one of the priorities of the Ukrainian economic policy.

The executive authorities have accomplished this task by including SEZ-related sections into the annual action guidelines for the government and into forecasts for social and economic development of Ukraine, as well as by singling out a special section devoted to SEZs in the Conception of state regional policy. For instance, in 1999 the government compiled the state program Ukraine-2010, which aims at "defining clear objectives, framework and priorities [of Ukraine] considering the available material, financial, intellectual, and other resources of the state, and selecting the best ways to meet these objectives". This program has a special clause 7.8 dedicated to activation of special neighbor-state cooperation zones and special/free economic zones. In particular, this clause mentions that "by focusing funds, material, labor, and innovative resources, special economic zones will serve as points of growth and development for the whole economy".

At the same time, it is worth pointing out that in early 2000 the President addressed the Verkhovna Rada with the "Strategy of economic and social policy for 2000-2004", which did not mention SEZs among the strategic priorities. Nevertheless, establishment of SEZs definitely complies with the President’s determination to "introduce mechanisms stimulating the domestic market, investment activities, and active regional policy". Moreover, in the coming 5 years the key priority of regional policy is to "foster social and economic development of the depressed areas".

Obviously, establishment of SEZs or other special undertakings cannot be viewed as the ultimate target of the Ukrainian economic strategy. These ventures are just one of the ways of coping with meso and macro social and economic difficulties. Though, this statement does not make establishment of SEZs any less urgent. This is further backed by the fact that in 1999 the Cabinet worked out and approved the State Program for development of special/free economic zones and priority development areas subject to special treatment of investment activities until 2010. This is the true "development program".

the Metal

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