Final Complete
Final Complete
A Dissertation Submited to the HSC in Conformity with the Requirement for the
Degree of Doctor in Finance
Committee Members
2018/2019
Table of Contents
Table of Contents I
Abbreviations IV
List of Figures V
Declaration VIII
Acknowledgements IX
Dedication X
Introduction 1
Chapter I
Free Trade Zones – Definition, Characteristics and Pre-Requisites
1.1 Introduction 6
1.2 Free Trade Zones – Definitions & Terminologies Surrounding the Concept 6
1.3 Explaining Terminologies Surrounding the Concept 7
1.4 Historical Evolution of Free Trade Zones Concept 9
1.5 Free Trade Zones – Conceptual Underpinnings 11
1.6 Policy Reasons for Development of FTZs 12
1.7 Major Trends in Zone Development 12
1.8 Pre-requisites / Salient Features for an Efficient FTZ Model 13
1.9 Best-Practice Policy Framework for a Successful FTZ Program 15
1.10 Common Obstacles to Zone development 17
1.11 Impacts, Significance and Benefits of FTZs 18
1.12 Regulatory / Legislative Aspects Pertaining to FTZs 20
1.13 Conclusion 21
Chapter II
Jabel Ali Free Zone – Dubai
2.1 Introduction 25
2.2 Jebel Ali FTZ Management System 26
2.3 Jafza Contribution to the National Economy 27
2.4 Salient Features of Jebel Ali Port 28
I
2.5 Types of Companies inside Jafza 32
2.6 Types of Free Zone Licenses in Jafza 33
2.7 Jafza One 34
2.8 Causes of Success of Jebel Ali Free Zone 34
Chapter III
Free Zones Experience of Kazakhstan
3.1 Introduction 40
3.2 Free Zones in Kazakhstan – from Failure to Success:
A Historical Background 40
3.3 Institutional Mechanism of SEZs in Kazakhstan 41
3.4 SEZs in Kazakhstan – Current Status / General Overview 42
3.5 SEZs in Kazakhstan – A Summary 54
3.6 Performance / Contribution of Kazakhstan‘s SEZs towards National Economy 56
3.7 Why SEZ Experience in Kazakhstan has been Successful? 65
3.8 Conclusion 72
Chapter IV
Shangai Pilot Free Trade Zone (Shpftz) China
4.1 Introduction 76
4.2 Salient Features of SHFTZ 79
4.3 Priority Focus Sectors 86
4.4 Reasons for the Success of SHPFTZ 86
4.5 Contribution of SHFTZ to the Chinese Economy 92
4.6 Conclusion 98
Chapter V
Relevance of FTZ Model for Algeria- in Light of International Experience / Case
Studies
Conclusions 157
II
Abbreviations
III
SEZ: Special Economic zones
IV
List of Tables
Table 1.2 Terminologies Used for Free Zones and their Users 11
V
Table 5.3 Corruption perceptions index 2017 138
List of Figures
Figure 3.9 Share of Exports, Production, Investment, FDI, and Tax Deduction
of SEZs of Kazakhstan – 2016 62
Figure 3.10 Annual Growth Rates in SEZ Production and Employment, 2002-16 63
VI
Figure 3.13 Significant Legal Provisions for SEZs 66
VII
Figure 5.13 Port of Djendjen Algeria: The Custom Free Port 126
Figure 5.14 Points Marked on Each Pillar with Comparison to Rest of Middle East 131
Figure 5.17 Graphical Representations of the Most Problematic Factors in Algeria 142
VIII
Declaration
The contents of this thesis are the work of the sole author alone, and have not
Previously been submitted at this or any other university
IX
Acknowledgements
“My Lord, enable me to be grateful to your favour which you have bestowed upon me and
upon my parents and to do righteousness of which you approve. And admit me by your mercy
into [the ranks of] your righteous servants “27:19 Quran
X
Dedication
To my brother’s Soul
XI
Introduction
Problem Presentation
A nation‘s prosperity depends, to a great extent, on the role that foreign trade plays when it
comes to that country‘s economy, mainly because of its significant impact on the value of the
national income. Therefore, most countries work hard to improve their chances of global
trading by increasing export.
Free trade zones FTZ are being developed across the world to enhance the economic activity
in the hosting country by offering various incentives to local as well as foreign entities
operating in that zone.
Success or efficacy of the concept of FTZ is evident from the fact that the number of
countries that are adopting and introducing these zones are increasing with each passing day.
A sense of competition amongst the contemporary zones has led to the introduction of
innovative incentive packages linked with state-of-the-art facilities which are offered to
investors. The concept, therefore, is a successful one. However, the degree of success and
quantum of investment / economic activities is linked to other factors such as the zone‘s
geographical location, rules, regulations and fiscal policies as well as the overall economic
environment of the particular country.
Like many countries around the world, Algeria is trying to diversify its economy and
encourage local and foreign investors LFI to increase Foreign Direct Investment FDI, and
reduce its reliance on hydrocarbons. In order to find out how Algeria could have benefited
from FTZs, I have chosen three case studies from the most successful FTZs in the world: the
Jebel Ali Free Trade Zone (JAFZA) in the United Arab Emirates, the Special Economic
Zones (SEZ) in Kazakhstan and the Shanghai Free Trade Zone (SPFTZ) in China. The
selection of these three countries is not random, but was mainly because of some social and
economic resemblance between the UAE, Kazakhstan, China and Algeria. In addition to the
success of JAFZA, SEZ and SPFTZ which made them leading examples of FTZs in the
world, both UAE and Kazakhstan, rely heavily on fuel and gas to finance their economies
like Algeria, Kazakhstan was following planned economy like Algeria, and China is also one
of the main trading partners of Algeria. Nonetheless, and regardless of the great success of
some FTZs around the world and their positive contributions to their hosting countries‘
economies, the Algerian FTZ never saw the light and as a matter of fact the order No. 03 - 02
of July 19, 2003 which set out the guidelines of free zones in Algeria and which was
published in the Official Gazette of the Republic of Algeria No. 43 of July 20,2003, was
cancelled by Act No. 06 - 10 of 24 June 2006 which was published in the official Gazette
number 42 for 25 June 2006, meaning that it never started. This dissertation is therefore
focussed on how Algeria can benefit from the free trade zone model based on three
successful experiences in some developing countries?
1
Despite the fact that Algerian FTZs have been frequently mentioned in popular media and
among Algerian policy makers in the last two decades, research on the likelihood of their
success in Algeria is virtually non-existent .Therefore, there is a strong need for exploratory
research in this untouched area and this speaks volumes on the benefits and insights derived
from this study.
Competitive Advantages
of Algeria economy as
FTZ
(Data Analysis)
What are FTZs, and what are their key success factors?
Why FTZs succeeded in the UAE, Kazakhstan, and China and what are the benefits to
the hosting countries economy?
2
What were the obstacles of FTZs in Algeria, and what Algeria could have gained if it
did not abandon FTZs?
Both, the analytical approach as well as the comparative approach have been utilised in this
study.
The analytical approach analyses various literature dealing with the relevant free trade zones
and their impact on the hosting countries.
The comparative approach is used to show the elements affecting the success of these FTZs
and to compare them to the Algerian FTZ and economy.
This study also seeks to review the description and analysis of data obtained from published
statistics and reports obtained from some international organisations; embassies as well as
government agencies, which have been evaluated in both Arabic and English with regards to
the theories of the place of FTZs in the economic development of a hosting country.
This study concerned itself mainly with the description and analysis of data obtained
from an up-to-date survey carried out by the author in 2018, and from published
statistics and writing. This was placed in the context of an evaluation of the relevant
written material in Arabic and English which deals with the theories of the place of the
Free Zone in economic development.
Data collection was based on written materials, such as books and articles, plus some
official reports from the authorities of the three chosen zones and from other
international organisation
To achieve the main aims of the research, the author conducted some Skype interviews
and conferences calls with several selected officials dealing with the admin side of the
FTZ. The researcher also travelled to three countries, Egypt, Kazakhstan and Ireland to
conduct interviews and to get some data and reports related to the research task.
The researcher has concluded a series of proposals to attract more national, Arab and foreign
investments to any future FTZ in Algeria.
Previous Studies
» Yasser Ali Alkadi, The economic feasibility of free zones, comparative study of Egypt and
South Korea, PHD thesis, Almanoufiya University, Egypt, 1992
This was a comparative study between the Korean experience of FTZ and the Egyptian one ,
the researcher was over-generous when speaking about the theory of FTZ, and tried looked
at each zone like an economic unit and whether it had some kind of economic and financial
efficiency or not.
The researcher could have used some leading experience from the Arab world as case study
or at least a shining example from any developing country.
3
» Tahanni Ahmed Shamloula, The role of industrial export zones in industrial
Development, PHD thesis, Alexandria university, Egypt, 1993
The study concentrated on the role of the exporting free trade zone as a mean of economic
diversifications, and analysed the contribution made by the following zones on FDI,
Employment and exportation (South Korea, Taiwan, Srilanka, Philippines, and Mexico). The
researcher tried to analyse some historical data for quite long period due to the unavailability
inability of recent stats. The study neglected other socio economic benefits of FTZ
» Ali Bouchemal, Analytical study of free trade zone and perspectives in Algeria, Higher
School of Commerce, Algeria 1996
The study focused on the South Korean experience and tried to forecast it future in Algeria,
like previous studies, the theory aspect took most parts of the thesis and the chosen case was
not a leading figure in the world of FTZs
» M‟nouar Ousrir, Free areas under global economic changes with a study of some
developing countries ‗experiences (analytical theory), PHD thesis , Youcef Benkhada
university, Algeria, 2005
Even though it shed some light on the proposed FTZ in Algeria but it never highlighted what
would make Algeria a good place for successful free trade zones ,Like previous thesis thus
study never mentioned to the way they managed the chosen free trade zones beside the
chosen case studies are no were near the top FTZ in the word
» Nadia Hassan , Reasons for the failure of order number 02 - 03 on free zones as a
mechanism to implement the Algerian strategy of investment, legal proximity to the light of
legislation, PHD Thesis, Faculty of Law Studies , Algiers University, 2007
This was a well presented juridical study and due its nature there was less focus on the
economic benefits and salient features needed for any successful FTZ The researchers also
made mention to some TV interviews and non-academic newspaper in her references which
is always hard to cross check
» Imen Ahmed Marae, The management of free zone – comparative study - applied on the
free public zone of the city of Nasser in the Arab republic of Egypt, PHD Thesis, Cairo
university, Egypt, 2009
The study focused on the challenges facing the administration of public free trade zones in
Egypt, and even though it shed some light on how Egypt can benefit from other successful
trade zones in the world but it didn‘t analyse what made the chosen zones successful and
didn‘t provide tangible suggestion on how to turn things around in the Egyptian FTZs
4
Research Hypotheses
My main hypothesis is that the free trade zone system has many positive impacts which will
speed up the development process of a hosting country‘s economy.
- There are a range of planning and administrative factors that affect the realisation
of the economic goals of free trade zones which relate to the capability of FTZ
administration to control and challenge investors on their rate of progress.
- No matter how generous the incentives and exemptions granted by a hosting
country are, such incentives will not attract long term investment, unless the
country puts in place all the basic requirements for a successful FTZ.
- The effect of FTZ is almost identical on the Economy of UAE, Kazakhstan and
China, and if they did not provide all elements of success, they wouldn‘t have
achieved such great results.
- Despite the great success of some FTZs around the world and their positive
contributions to the many hosting countries, the system will not be successful in
Algeria, unless the nation‘s fiscal, legal and banking systems are reviewed and
unless Algeria set up the right environment in which the FTZs can flourish.
- Algeria missed a great opportunity of economic diversification by abandoning the
FTZs, but there is always room for recovery.
The limits of this study are that it does not include examples from other failed FTZs.
In addition, the data adopted in the study was not for a uniform time period but was taken
from different time periods. Moreover, most of companies working on the chosen FTZs never
replied to the questionnaire and the researcher had to reply on published reports
Research Objectives
A practical contribution of this paper is that its attempt to provide insightful information
to assist local and foreign investors and the Algerian government in making informed
decisions when designing FTZs or when planning to invest in these zones.
5
This study contributes to the contemporary management literature reviewing and analysing
the strategic development process that determines the Algerian FTZ‘s trajectory in today‘s
global economy. It presents the emerging international business research stream with a new
direction for the on-going discourse of importance of FTZs. It also contributes to the
development of grounded-theory application in studying investment behaviour in country-
specific settings.
Furthermore, the theory developed from this study distinguishes itself from other
Internationalisation process theories in that it acknowledges the concurrent influence of
FTZs‘ geographic locations, managing authorities, socio-economic infrastructure and the
interrelationship of these factors. Unlike the existing theories developed by the ecological
school, which only account for the potential influence of external factors, this theory
incorporates both internal and external factors into its explanation.
This study will examine the investment climate in Algeria and major barriers for the FTZs in
this country and will define the benefits of the FTZs by analysing data from the three chosen
countries.
Structure
After the Introductory Chapter which covers the theory and types of FTZs and their basic
requirement, Chapter Two describes Jebel Ali Free Trade Zone in the UAE, one of the top
FTZs in the Golf region. Chapter Three discusses the Special Economic Zone in Kazakhstan
and how Kazakhstan managed to turn the SEZ around from a total failure to one of the most
successful FTZs in the world. The objective is to learn from that experience when
implementing such a special customs‘ system in Algeria. Chapter Four discusses the SFTZ,
which is the first Chinese FTZ.
The last and Fifth Chapter sheds light on the Algerian economy and intends to estimate
opportunities lost because of the abandonment of FTZs in Algeria.
The study concludes with results and recommendations with regards to what Algeria must
consider if it decides to adopt the FTZ in the future.
6
Chapter I
1-1 Introduction
Free Trade Zones (FTZs), often referred as Foreign Trade Zone, Special Economic Zone and
Free Port etc, is a geographical zone where goods and materials can be manufactured, traded
and exported while enjoying various liberties in the form of taxation, duties, special tariffs
and other facilities offered to attract / facilitate business. These zones are developed in the
areas which offer glaring geographical incentives for doing business, like airports, seaports
and other areas of interest (Encyclopedia Britannica).
FTZ also denotes a geographical zone, which has more liberal economic laws as compared to
the ones being in vogue in the other parts of the country. The key rationale of FTZ is to
remove all the obstructions pertaining to tariffs, customs and duties from seaports, airports, or
borders. The dividends accrued from this initiative include rapid turnaround of cargo ships /
planes as consequence of reduced formalities pertaining to production and distribution
(F.I.A.S Report, 2008).
1-2 Free Trade Zones – Definitions & Terminologies Surrounding the Concept
The universal concept of FTZs is uniform in nature. However, its definitions differ for
different countries mainly due to varied desired objectives set by the governments for every
FTZ. Free Trade Zones have been defined by different organizations, experts and countries in
different yet mutually analogous terms. Some of the examples of the definitions used in in
different parts of the world are discussed in the succeeding paragraphs: -
According to the perspective of the Philippines government, they consider FTZs as the
specified areas which already have or are likely to be converted into agro-industrial,
commercial, recreational, investment, banking, and financial centres‖ (Special Economic Zone
Act of Philippines, 1995).
Aqaba SEZ in Jordan has been established with the stated aim to augment economic capacity
in the country by attracting diverse economic activities and investments (Article 3 of the
Aqaba Special Economic Zone Law no. 32 for the Year 2000).
Some experts claim that a FTZ is a part of explicitly ascertained and isolated area of land
with an exclusive tax, customs and imports regulations which differ from the ones being
implemented in the mainland of that country. FTZs usually enjoy a status of extra-
territoriality. The main purpose behind establishing FTZs, is to act as principal business hub
for companies desirous of carrying out business activities with the outside world, not
precisely to the country that the FTZ belongs (Farole, 2011).
Kozakiewicz, 2015 asserts that FTZs are aimed at uplifting exports, facilitate manufacture
and trade to attract investment (FDI), in the country. They also trigger and enhance economic
7
as well as technological growth in that country, by generating commercial activities whereby,
goods are landed, imported, exported, handled, processed, assembled and manufactured with
companies accruing various financial benefits.
FTZ is a designated area that abolishes traditional trade barriers, such as tariffs, and reduces
bureaucratic procedures. These zones are targeted to augment International market presence
of that county by attracting new business and investments by international players. However,
according to few experts FTZs are intended to boost exports, stimulate production and
competition amongst the companies, to attract FDI, minimizing regional disparities, and to
inspire technological advancement and economic growth (Farole, 2011).
FTZs are generally established around key zones, where economic activity can flourish with
ease and with minimal teething issues. Areas like seaports, airports and locations
geographically suited to facilitate trade and related functions are best for establishing the
FTZs. These zones, owing to inherent advantages in terms of relaxed regulations, taxes,
duties, are gradually seeking a pivotal importance in propelling global trade, (Zeng, 2010).
According to Bost, 2010, the Atlas of the Free Zones in the World has accumulated 45
diverse terms used in relation to the concept of FTZs. These names are often used
interchangeably, and the nomenclatures have more to do with marketing than the conceptual
parameters of FTZs. Similarly, World Bank has also followed the same approach of using
different terminologies like ―Special Economic Zone‖ while discussing about ―Free Zones‖
(Farole, 2011). Few of such varied terminologies used to refer to concept of Free Zones are
mentioned in the figure below and explained in succeeding paragraphs: -
8
Figure1. 1 Terminologies Used for Free Zones
Free Zones
Free Ports
- Export Processing Zones (EPZ): EPZs are the geographical zones that offer
advantages for manufacturing related activities. EPZs are intended to have a peculiar
focus on exports, however, a considerable no of such zones also permit non-exporting
activities (F.I.A.S report, 2008).
- Free Ports: According to Rodrigue and Notteboom, 2009, Free ports are considered
as a wider scope of the concept of Free Zone owing to their expanded outlook
covering far larger areas to incorporate a large variety of activities to fuel economic
growth in the country.
- Special Economic Zones (SEZ): According to Wang, 2013, Special Economic Zones
are the practical manifestation of the concept of Free Ports, mainly inspired by
Chinese experience to be used as an instrument for promoting Foreign Direct
Investment (FDI) in specified areas.
- Enterprise Zones: These zones are exclusively designed to revitalize economically
troubled areas (both urban as well as rural) by extending incentives relaxations in
terms of taxes, duties and financial assistance. Most of these zones are situated in
industrialized countries like United States of America (USA), France and United
Kingdom (F.I.A.S report, 2008).
- Single Factory EPZ: Incentives and schemes offered in this type of zones are mainly
aimed at benefitting individual enterprises and are not restricted to a specified area or
location. These factories can opt for receiving incentives without physically locating
to certain specified zone. Countries adopting single factory EPZs include, include
USA, Mauritius, Sri Lanka, Madagascar, Mexico and Costa Rica (Woolfrey, 2013).
9
While considering single factory zone scheme as an exemption due to difference in its
approach and applicability, most of the concepts and paradigms discussed above point at the
fundamental characteristics / principles of FTZ concept, that includes following (F.I.A.S
report, 2008):
Free Port Integrated Size > 100Km “ Multi use Domestic, Aqaba SEZ,
Development international Jordan
and export
market
FTZ as a concept is not a modern one. Its conception dates back to the evolution of Western
Civilizations. Historical evidence suggests existence of such models in 300 BC timeframe
located in Greek islands of Delos. Introduction of these zones enabled these islands to
become richest in the world in that century. Similarly, the Romans had provisions of free
cities which enjoyed following privileges (Haywood, 2000)
In 12th century, the Hanseatic League established trading colonies throughout European areas
like Hamburg, and Steelyard in London.
10
Prior to 1920‘s the free zone concept was mainly being pectized by the developed countries.
With the passage of time the concept gradually expanded in the rest of the world. In 20th
century, the concept of free port also experienced both functional as well as geographical
diffusion. The concept has gradually expanded from typical seaports operations to encompass
River Free Ports with examples of Brazil, Lake Ports with examples as Chicago, Airports
with examples as Shannon, Ireland and inland ports with examples as Zona Franca Florida
Sur, Uruguay. According to Barbier and Véron, 1991, Shannon‘s free zone was the first
modern trade zone created in 1958. This airport was initially used as a logistical base for
American aircrafts. it gradually expanded to offer a host of logistical services including
packaging, customization and manufacturing.
Emergence of European Union witnessed reduction in the benefits of FTZs, which meant that
development of economic and regulatory milieu is deeply connected with significance of Free
Port in its regional context. The success of FTZs was also badly affected by the protected
status of American industries. However, a far greater access to American market was
afforded by trade liberalization inspired by General Agreement on Tariffs and Trade (GATT).
This led to rapid establishment of FTZs across sea, air and land entries.
According to Bolle and Williams, 2012, Number of Free Trade Zones in 1970s was
approximately 50, which expanded to about 100 in 1984, more than 200 in 1993. The figure
has swallowed to about 3,500 FTZs situated in 135 countries across the globe. These zones
are accommodating work force to the tunes of approximately 66 million individuals, across
the world. Majority of these FTZs are situated in developing countries, with the largest once
11
located in China, Singapore and the United Arab Emirates (UAE). For instance, Shanghai
FTZ located in China has covered area of 11 km2 and has accommodated 4,600 companies
(including 280 foreign enterprises).
3500
3000
2500
2000
1500
1000
500
0
1950 1960 1970 1980 1990 2000 2010
Rationale behind Establishment of FTZs: According to F.I.A.S report 2008, the rationale
i.e. the purpose as well as desired end results behind established of free zones is different for
developing and developed countries. The causes behind this difference are discussed below: -
All these measures are designed to enhance an investment‘s competitiveness and minimize
costs of doing business. Zones aimed at boosting exports are designed in a manner to
facilitate the exporters to compete in international market by facilitating the manufacturers of
exports goods.
According to Madani (1999), Cling and Letilly (2001), there are 4 fundamental policy
reasons behind establishment of FTZs for all countries in general while for developing
countries, in particular: -
Since the development of inaugural FTZ in Ireland, the conceptual parameters pertaining to
zone development have undergone tremendous variations. Some significant developments are
discussed below (Sinclair, 2001):
14
Off- Shore destination, to attract maximum companies for doing business in these
FTZs (Granados, 2003).
Export Oriented: Ideally, FTZs should be aimed to enhance production of goods
aimed at being exported to foreign countries. Efforts must be made to facilitate
companies specifically dealing with export related business activities (Granados,
2003).
Incentives: Incentives are the best possible measure to attract companies in
establishing their business in a particular FTZ. Detailed incentives being offered or
can be offered by FTZs are discussed in final segment of this chapter (Granados,
2003).
A Comprehensive Legal Framework: FTZ should entail a comprehensive legal
framework, to safeguard interests of both Public and private enterprises without
undermining the privileges / authority of the government. This, once enforced in true
letter and spirit, contributes a great deal in enhancing confidence by the investors,
both domestic as well as foreign (Granados, 2003).
Partnership between Public and Private Sectors for Development of FTZs:
FTZframework entailing enhancement of public-private partnership for the overall
economic improvement portrays a scenario of Win-Win for all the parties involved in
the process (Granados, 2003).
Public
Legal
Private
Framework
Partnership
Advanced
Incentives
Infrastructure
Flexible Export
regulations oriented
Beneficial
Location
15
1-9 Best-Practice Policy Framework for a Successful FTZ Program
Primary ingredients of an ideal best-practice policy framework for FTZs entails following
elements (F.I.A.S report, 2008):
16
Facilitate Delivery of Secondary Licenses and Permissions: Once companies are in
the process of establishing / expanding their businesses inside a FTZ, they may
require additional infrastructural or other allied facilities. A centralized system aimed
at facilitating these outfits will help them in flourishing their businesses.
Table1.3 Basic Policy Framework for FTZs
Basic Policy Framework for SEZs
Parameter International Standards
Concept of Outside domestic customer territory.
Extraterritoriality Eligible for national certificates of origin.
Eligible to participate national trade agreements and
arrangements.
Eligibility for Benefits No minimum export requirement.
Manufacturers and services.
Foreign and local firms.
Expansion of existing enterprises.
Private developers of zones.
Foreign and Local No limitations; Equal treatment.
Ownership
Private Zone Clearly define in legislation.
Development Specific zone designation criteria.
Eligible for full benefits.
Competition with Government zones on a level
playing field.
Sales to the Domestic Liberalized.
Market Provided on a blanket basis rather than case to case
basis.
Treated as import into domestic market.
Subject to payment of import duties and taxes.
Purchase from Treated as exports from domestic market.
Domestic market Enterprises eligible for indirect export benefits.
Labour policies Full consistency with ILO standards.
Specified dispute settlement mechanisms
17
1-10 Common Obstacles to Zone development
18
Setting Up Business in a FTZ. Each type of a free Zone has specific laws associated
with it. Depicted below provides the 3 categories based on business activities.
Branch of a
company
Free Zone
Establishment
(FZE)
FTZs entail a whole spectrum of impacts on various dimensions of the host country, in
addition to the economy. Few of the significant ones are discussed below (Aggarwal, 2007):
Economic Benefits
Economic benefits that can be accrued from FTZs are appended below:
19
Growth in the Foreign Direct Investment (FDI): According to the experts and
empirical evidence available, FTZs can enhance FDI of their respective countries by
offering congenial business environment, with state-of-the-art facilities and a
comprehensive incentive / legal framework (Aggarwal, 2007).
Increase in Foreign Exchange Earnings: A gradual rise in the Foreign exchange
earnings is another outcome of an efficient FTZ. The overall economic influence of
zones is enhanced as local value addition is elevated. Zones in some of the East Asian
Countries have played significant role in enhancing local purchases of zone-based
goods and services. Moreover, owing to increased export earnings, resulting into
decline in the overall cost of imports for local buyers is also likely to be have positive
impact on the exchange rate (Aggarwal, 2007).
Technological Advancement and Industrial Upgradation: Apart from other
economic benefits zones have played a pivotal role in the technological advancement
and in turn upgradation of industrial output of the host countries. Overall process
entailing diversification of export bases also lead to upgrading the skill element of
their output. These zones also help in generating
transfers of technology and knowledge spill-over which results in production of non-
traditional goods by local companies (Tiefenbrun, 2012)
Budgetary Impacts: Budget related impact of the FTZs mainly hinge upon tax
policies and fiscal incentives being on offer to the qualifying outfits. Most of the
FTZs typically offer a set of fiscal incentives to the operating outfits, these incentives
include Tax holidays or reduced tax rates, exemption on import duties, indirect tax
abatements, and so on, (Lafargue, 2008).
Social Impacts
Labour Standards, Wages, and Working Circumstances: Ever since the evolution
of the concept of Free Trade Zones, concerns regarding Labour rights and incentives,
especially in the developing countries, have been on the rise. Main areas of concern
include effects of FTZs on labour, especially in gender‘s context, pay, packages and
incentives and benefits, worker rights and working conditions. International Labour
Organization (ILO), has played a very proactive role towards managing / ensuring the
labour rights under the umbrella of FTZs. This has led to an overall betterment of
labour policies and practices within zones (Haeun, 2005).
Human Resource Development: Owing to their peculiar nature in terms of
technological advancement, FTZs play a significant role in up gradation, and skill
development of the workforce by formal training as well as ―hands on, on job
training‖. Experts appreciate the knowledge spill over effects of various zones,
particularly the ones related to higher value-added or knowledge intensive industries
(Madani, 1999).
20
Environmental Impacts
Development of huge infrastructure along with various industrial outfits in FTZs can have a
considerably damaging impact on the Environment, if not regulated and monitored
appropriately. Non-availability of requisite waste treatment infrastructure and facilities can result
into serious health hazards especially for nearby population (Williams, 1995). However, modern
day FTZs entail purpose-built facilities to deal with the environmental impacts of these zones.
Similarly, more proactive zone-specific environmental regulations also play a significant role
in managing the negative impacts of these zones on the environment.
Benefits rendered by FTZs for companies working inside the zones are reflected in the
figure below:
Excellent Support
Minimal Taxes Liberal labor laws
services.
The Kyoto Convention also known as the International Convention on the Simplification and
Harmonization of Customs Procedures defines FTZs as a particular class of ―Special
Economic Zones‖ and ―a part of the territory of a World Customs Organization (WCO)
21
Contracting Party, where any materials produced are subject to a different (generally lenient)
set of custom duties than being levied on the other parts of the host country (F.I.A.S report,
2008).
The Kyoto Convention also entails that a country‘s lawmaking should specify the pre-
requisites pertaining to the formation of FTZs. It should also stipulate the type of items
allowed to be manufactured / permissible to these FTZs. Nature of the operations / processes
allowed to be executed during the operation cycle of good manufacturing and supply may
also be identified. Similarly, customs regulations may be tailored in a manner to allow
relevant authorities to have comprehensive checks on the process of goods manufacturing and
distribution.
Monitoring and control of trade in these zones has been exercised inconsistently, which has
led to spread of a common misperception that FTZs are ‗extraterritorial‘ and thus not liable to
the national customs or other trade regulatory authorities / laws. This discrepancy and
misperception may lead to a scenario that facilitates illegal activities in some of these zones.
The World Customs Organization has endeavoured to tackle this issue by rendering
guidelines in the Revised Kyoto Convention, in the following domains (Polner, 2011):
However, a few countries have implemented the Revised Kyoto Convention, so far.
1-13 Conclusion
Free Trade Zones are being developed across the world to enhance the economic activity in
the host country by offering various incentives to the local as well as foreign entities
operating in that zone.
Concepts of free zones have evolved over past decades with its conceptual parameters,
dimensions and linked terminologies also varying over the period of past few years.
Success or efficacy of the concept is evident from the fact that number of countries adopting
and introducing these zones are increasing with each passing day. Senses of competition
amongst the contemporary zones have led to introduction of innovative incentive packages
linked with state-of-the-art facilities to be offered for the investors. The concept, therefore, is
a successful one. However, the degree of success and quantum of investment / economic
activities is linked with the factors like geographical location, rules regulations and fiscal
policies and overall economic environment of the peculiar country.
From here on, our discussion will focus on specific case studies from the developing world.
FTZ models of countries like United Arab Emirates, Kazakhstan and China will be discussed
in detail to draw relevant conclusions for their subsequent application to the other aspirant
countries. First in the Line would be Jebel Ali Free Zone also known as Jafza. Various
22
features of the Jazfa including the policies, regulatory mechanism, contribution of the zone
towards national economy and the overall measures leading to the success of this zone will be
covered in detail in the Chapter 2.
23
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April, F.I.A.S., 2008. Special Economic Zones: Performance, Lessons Learned, and
Implications for Zone Development. FIAS, Washington, DC.
Bolle, M.J. and Williams, B.R., 2012, August. US foreign-trade zones: Background
and issues for congress. Congressional Research Service, Library of Congress.
Bolle, M.J. and Williams, B.R., 2012, August. US foreign-trade zones: Background
and issues for congress. Congressional Research Service, Library of Congress.
Bost, F., 2010. Atlas mondial des zones franches. La Documentation française.
Cling, J.P. and Letilly, G., 2001. Export Processing Zones: A threatened instrument
for global economy insertion. DIAL, documento de trabajo, DT/2001/17.
De Almeida, M.C.C.M., 2016. Export Processing Zones and the Law of the World
Trade Organization. University of Brasília Law Journal (Direito. UnB), 1(2), p.684.
Farole, T., 2011. Special economic zones in Africa: comparing performance and
learning from global experiences. The World Bank.
Granados, J., 2003. Export processing zones and other special regimes in the context
of multilateral and regional trade negotiations. BID-INTAL.
Haeun Sanŏp Yŏn'guwŏn (Korea), 2005. Free Trade Zone and Port Hinterland
Development. United Nations Publications.
Haywood, R., 2000, October. Free zones in the modern world. In Presentation of the
World Economic Processing Zones Association, CFATF Meeting, Aruba.
Kusago, T. and Tzannatos, Z., 1998. Export processing zones: A review in need of
update. Social Protection Group, Human Development Network, The F.I.A.S.
Lafargue, Y., 2008. Les zones franches industrielles et logistiques dans la Supply
Chain mondiale. 18th journée CPIM de France Paris Google Scholar.
Lavissière, A. and Rodrigue, J.P., 2017. Free ports: towards a network of trade
gateways. Journal of Shipping and Trade, 2(1), p.7.
Madani, D., 1999. A review of the role and impact of export processing zones. The
World Bank.
24
Polner, M., 2011. Coordinated border management: from theory to practice. World
Customs Journal, 5(2), pp.49-64.
Rodrigue, J.P. and Notteboom, T., 2009. The terminalization of supply chains:
reassessing the role of terminals in port/hinterland logistical relationships. Maritime Policy &
Management, 36(2), pp.165-183.
Spence, N.K., 2017. A critical evaluation of how free trade zones and maritime
activities impact on port development: a case study of the port of Kingston.
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Edward Elgar Publishing.
Wang, J., 2013. The economic impact of special economic zones: Evidence from
Chinese municipalities. Journal of development economics, 101, pp.133-147.
Williams, E.J., 1995. The maquiladora industry and environmental degradation in the
United States-Mexico borderlands. Mary's LJ, 27, p.765.
Wong, K.Y. and Chu, D.K., 1984. Export processing zones and special economic
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Zeng, D.Z., 2011. How do special economic zones and industrial clusters drive
China's rapid development? The World Bank.
25
Chapter II
2-1 Introduction
Jebel Ali Free Economic Zone (Also known as Jafza) was established by Emirates of Dubai
at the Western fringes of the state in 1985 (Jafza, 2019). Jafza initiated its operations by
providing office spaces and ware housing facilities to a rather modest number of companies
i.e. 19. Since its inception, Jafza has been gradually expanding the ranges and variety of
services / facilities being provided to its clients to become one of the largest free zones in the
world. (The Economist, 2015)
Owing to multifarious advantages / incentive being on offer (details in the succeeding parts of
this chapter); Jazfa has been turned into one of the most valued business destinations in the
world (Shayah & Qifeng, 2015). From the modest figure of 19 companies, today Jafza houses
an astounding number of companies (more than 7000) operating within its localities, and the
figure is ever expanding. Similarly, number of customers of Jafza has also increased manifold
from the initial number existent in first decade i.e. 500. This number is also on the path of a
rapid growth. As of now, Jafza acts as a hub of numerous business owned and operated by
citizens more than 100 countries. With a fabulous value for trade amounting to 87.6 billion
dollars, its accounts for over 32% of FDI and 50% of total exports of Dubai (Jafza, 2019).
Jafza holds businesses from world‘s most distinguished business outfits; presence of
approximately 150 companies belonging to Fortune 500 is testimony to the fact. Region wise
distribution of these companies is as under:
26
Figure 2. 1 Region Wise Representation of Companies in Jafza
25%
20%
15%
10%
5%
0%
Middle South
Europe Americas Far East Africas Others
East Asia
Percentage 42% 23% 15% 7% 6% 5% 2%
Jafza holds the unique distinction of being the first free zone qualifying for ISO certification
in 1996. It implemented online communication in 1998, whereas Jafza introduced the largest
Customer Relationship Management (CRM) system in the region in 2007. Owing to its
productivity, Jafza has been earning acclaim at various international platforms. (Jafza, 2019)
Jafza spans over an area 140 km2 and offers purpose-built office spaces, warehouses and
dedicated areas for other commercial activities. Being situated in Dubai, which holds a huge
customer base being global hub for trade and business, state of the art logistics infrastructure
is considered as Jafza‘s main source of attraction. Besides, Jafza has the unique distinction of
being located between two largest international logistic enablers i.e. World‘s 8th largest port
and biggest Cargo airfield. Connected by a six-lane highway, Jafza enables transportation of
custom bound goods from one place to another within one hour. Cutting edge facilities like
custom built office spaces, warehouses, office spaces and land for large-scale manufacturing /
extensive warehousing, distinguish it from other zones in the region. (FIDFINVEST, 2018)
In order to streamline the management of Free Trade Zone and allied ports in a specialized
manner, Government of Dubai decided to establish Dubai Port Authority, in 1991. The
authority was responsible to handle the functions of assets like Rashid port, Jebel Ali port and
Jebel Ali free trade area, in a unified manner. Hierarchy of the port included 2 x directors and
3 x deputy directors for effectively managing the affairs of the ports and free zone. Functions
of banking, customs, transportation and public security were also unified under this authority,
to ensure minimal red tapes for the investors / businesses (Jing & Yong, 2014).
27
Figure 2. 2 Dubai FTZ Management Organization Structure
However, according to Jing and Yong (2014), Jebel Ali FTZ enjoys relative independence in
different facets of its functioning and has following rights:
Land procurement.
Decisions pertaining to nature, type and quantum of industries which would be
established inside the zone.
Decisions, plans related to functioning of the factories, warehouses and other
infrastructure.
To determine / implement costs of various services being offered by the FTZ for
clients.
Decisions pertaining to usage of facilities / services inside the FTZ.
According to the official prospectus of Jafza Sukuk (2019), owing to its inherent advantages
like location, state of the art customized facilities suiting various businesses both at global as
well as regional level, provision of value driven solutions suiting the customer requirements,
Jafza has paid a pivotal role towards the economic growth of Dubai. Consistent investment
friendly policies of the government have made it one of the most preferred investment
destinations, across the globe. Salient features are discussed below:
Non-oil exports from JAFZA alone, amount to more than 50% of the total Non-Oil
exports of Dubai.
Similarly, Imports from JAFZA amount to more than 31% of total Non-Oil imports
of Dubai.
28
Business activities by JAFZA companies have contributed towards employment
creation for more than 0.16 million individuals, which is a considerable figure.
Jafza has also been instrumental in the immense growth of cargo / commercial
activities at also immensely participated to the unbelievable overall development of
Dubai‘s ports.
Apart from the direct contribution, Jafza companies have made meaningful
contributions in the indirect sectors like transportation, hospitality and tourism.
Another major contribution of Jafza is in relation with enhancement and
augmentation of human capital of the local citizens. Working with the best business
outfits, managers and mentors within the country and abroad, broaden the overall
horizon and performance landscape of the local workers. Whole range of varied
experiences and expertise brought about by the foreign businessmen plays a
significant role towards performance enhancement of youth, thus making immense
contribution towards Dubai‘s economy on long term basis official prospectus of
Jafza Sukuk (2019).
According to the official brochure of the Dubai Port (DP) World, Jebel Ali Port is the most
important infrastructural feature of Jafza. It has played a significant role in bringing Jafza to
its current stature. Possessing state of the art cargo and other related facilities, Jebel Ali port
29
is one of the most sophisticated and most productive ports in the world, which has been
accepted by the Journal of Commerce (JOC) due to its quality management, safety and
security features. Salient characteristics of the port have been discussed in this part of the
chapter to enable us to understand the causes behind success of Jafza.
Logistic services
Port
Smart Port Unified Customs
30
The below tables show the Salient Features of Jebel Ali Port
Container Terminal
Capacity - 19.5 million TEU Details - 28 berths ; 94 quay cranes
General Cargo
Capacity - Over 1.4 million sqm Details - 27 berths
CFS/Warehousing
Details - Open & Covered storage
Capacity - Over 200,000 sqm
facilities
Temperature
Controlled Storage
Capacity - Approx 10,000 sqm Details - -29°C to +20°C
Tank Terminal
Capacity - Over 2.0 million sqm Details - 11 berths
31
Table 2.2 Salient Features Jebel Ali Port
Container Facilities
32
Capacity 3,261 pallets
Chambers 3
Temperature +10°C to +20°C
Cold Store
Floor area 5,765 square meters
Capacity 9,991 pallets
Chambers 9
Temperature -29°C to +13°C
Commercial Trucking
Proven capability for door-to-door pick- Terminal Tractors 53
ups and deliveries Equipment (In Trailors 92
Numbers):
Cost Effects of Various Facilities
Amenity Area / Size Expenses in UAE Local
Currency (Dirham)
Land Minimum of 5,000 30 to 80 per square meters
square meters
Already made factories, Office spaces, 313 to 1110 square 188,000 to 666,000 per
show rooms and warehouses meters square meters
showrooms with office
Office Spaces 27 to 100 square 2,000 to 2,500 per square
meters meters
Registration Fee for Free Zone Enterprise - 10,000 (One Time fee)
Registration Fee for Free Zone Company - 15,000 (One Time fee)
Registration Fee for Branch of a Comapny - 5,000 (One Time fee)
Source: DP World Official Brochure
According to Shayah and Qifeng (2015), Like every free zone Jafza also holds certain special
type of companies. Main types of these companies are discussed below:
Limited Liability Company (LLC). This type of company is more suitable for
outfits desirous of undertaking retail business. This allows flexibility of performing
trade both locally as well as globally.
Free Zone Company (FZCO). This type of company mainly deals with international
trade while local trading has to be processed through a local representative. It can be
formed by 2 to 5 stake holders.
Offshore Company. This type of company is established exclusively for business /
trading outside UAE.
33
Free Zone Establishment (FZE). Free Zone Establishment is a distinct legal entity
which can be established by a single shareholder.
Following types of licenses are applicable for the companies intending to do business in Jafza
(PKF, 2018):
Industrial License. Industrial license permits the owner the import of raw materials;
allow manufacturing of specialized products while exporting these completed
products to any global destinations.
Trading License. This permits owner to carry out import, export, distribution and
storage of items specifically mentioned on the license.
General Trading License. This permits owner to carry out import, export,
distribution and storage of items strictly in accordance with the Jafza rules.
Service License. This license deals with permission to companies for provision of
multiple types of services as per the provisions of the relevant authorities.
National Industrial License. Industrial license is issued to the companies involved in
industrial production and manufacturing. It permits the companies an ownership or
shareholding with the local citizens.
34
2-7 Jafza One
Jafza One is a state of the art, modern commercial hub, situated in the heart of Jazfa. Owing
to its location and allied facilities it plays a significant role towards value addition and
investment attraction towards Jafza. One of the main reasons of business success is an
inspiring work environment (PKF, 2018).
Being a purpose-built commercial centre, Jafza One acts as Flagship business venture for
Jafza. It comprehensively caters for a wide array of corporate requirement under a centralized
system to facilitate the businessmen investing in Jafza. Being ideally located, Jafza One
contains purpose-built spaces for corporate offices, business headquarters, residential
complexes and executive suites, while duly taking full advantage of scenic views across
Jafza, Jebel Ali Palm, Jebel Ali Port and Sheikh Zayed Road (PKF, 2018).
Jafza One encompasses and area of more than 100,000 square meters dedicated for offices,
including multi story office towers. Office sizes vary to suit different users ranging from
small to large outfits. It has state of the art exhibition canters, convention halls, theatres and
conference rooms (PKF, 2018).
Success of Jebel Ali Free zone has primarily been materialized by a comprehensive set of
advantages / incentives offered by the state i.e. Dubai for doing business in Jebel Ali Free
Zone. Few of these incentives are discussed below:
According to Jing and Yong (2014), Dubai has historically remained a busy commercial
arena. Its appreciation as a great business hub in the 13th century is found in the literature of
Marco Polo. The state has not only maintained its stature as a regional business hub, rather it
has been gradually broadening its sphere of business influence. It is currently one of the
busiest business centres across the globe. Considering the abundant prospects for business
and investment, Dubai is rightfully ascribed as the corporate capital of Middle East region.
Apart from its own incentives / facilities, few significant characteristics of Dubai which
contribute towards success of Jafza are discussed below (Jafza Official Website):
• Dubai is an open economy which is completely integrated with the world economy
and connected with major economic activity centres across the globe like Middle
East, Europe and Africa. This pivotal location is the main ingredient of Jafza‘s
success.
• Dubai is one of the safest cities in the world with a fair judicial system and a very low
rate of crime.
• The businesses inside Dubai are serviced by international and local financing and
banking institutions in a befitting manner.
35
• Modern educational system catering for requirements of various cultures and
languages is an important hall mark of the city.
• State of the art healthcare system meeting the requisite global standards is another
important attraction of Dubai.
• Cultural diversity in the form of more than 200 nationalities and cultures alludes
towards the globalization trends in Dubai.
One of the major reasons behind such great success of Jafza lies in its policies, rules and
regulations aimed at facilitating and incentivizing the companies doing business in it. Jafza
acts as a customized platform for global connectivity providing connections with a network
of highly skilled and successful business leaders. Its operations are characterized by a
simplified functioning environment shaped around streamlining overall operations (Jing and
Yong, 2014).
No levying of
Onsite Customs corporate tax
for 50 years
No bar on
permission to
capital
mortgage area JAFZA repatriation
INCENTIVES
No bar on
No import / re-
employment of
export duties
foreign workers
No tax on
No bar on
personal
currency
income
As per the law in vogue, foreigners can establish a business in UAE only with the partnership
of local citizens with minimum share of 51%. However, Jafza has its peculiar regulations
wherein foreigners can establish a business with 100% ownership / funding, without the
requirement of any local guarantor or joint venture. This helps a great deal in attracting
Foreign Direct Investment by making it a favourite investment destination. Few of such
preferential, incentive-oriented policies applied in Jafza are discussed below (Jing and Yong,
2014):
36
100% foreign ownership and investment is allowed.
Any international company commencing business in Jafza is exempted from income
tax for 50 years, the period is extendable to 65 years on request.
There are no restrictions on remittances of capital and the profit.
No income tax is levied on import and export goods.
Registration and other documentary formalities and procedures for commencing
business are simplified and facilitated by efficient management.
There are no restrictions on minimum capital investment.
Processes entailing staffing / recruitment of employees for the companies have been
simplified with minimal restrictions / limitations on the employers.
An efficient mechanism of economical, cost effective supply of energy has been put
in place.
Jafza has Light Industrial Units (LIU) which provide quality, thermally insulated custom-
built units obtainable on rent. These units also entail essential requisites for establishment of
offices and are of two types. These include units based on warehouse design for providing
storage facilities and factories aimed small scale production and assembling of various
products (PKF, 2018).
Land in Jazfa can be rented and leased but cannot be sold. The companies securing the
property on lease or rent can be used for all types of prescribed purposes like establishment of
offices, workshops and warehouses. In case a company decides to vacate the premises, the
area will again be offered for lease / auction. In the overall context, rents form leasing the
lands becomes the primary source of income for the Jafza authorities. This land management
mechanism not only ensures regular income for Jazfa authorities, in addition it also ensures
that national land stays intact while the underdeveloped areas are developed without causing
much burden on the national exchequer (Jing and Yong, 2014).
In order to facilitate the foreign companies as well as workers for investment and working in
Jafza, a number of steps have been taken by the government. These include simplification of
37
procedures for visa application, reduction of visa charges and provision of certain number of
free visas to companies according to the quantum of their investment (Jing and Yong, 2014).
Jafza authorities have arranged a wide array of value-added services, which help through
which help the customers in expanding their business with easy. Few of these services are
discussed below:
Apart from the facilities discussed above, another hall mark of Jafza‘s success lies in its
flexible licensing regime. For instance, National Industrial License is issued to international
manufacturing companies with 51% ownership rights. This license permits these companies
to enjoy similar status / privileges enjoyed by companies of AGCC (Cooperation Council for
the Arab States of the Gulf) Countries.
Jafza facilitates its clients by providing additional options on the classification of business
licenses, thus allowing them to carry out a variety of activities under the same license. Jafza
licensing regulations allow a company to carryout upto 7 business ventures under the ambit
38
of one activity group, up to 12 business ventures under the ambit of two different business
activity groups, or up to 17 business ventures under the ambit of three different business
activity groups (PKF, 2018).
39
References
"Dubai's economy: Growing up". The Economist. Dubai. 6 June 2015. Retrieved 26 January
2019.
Jafza. (2019). Our History, Vision & Promise | Jafza. [online] Available at:
http://jafza.ae/about-us/history-vision-promise [Accessed 15 Jan. 2019].
Li, J., 2014. The Successful Operation of Dubai JEBEL Ali FTZ on Shanghai FTZ
Development Enlightenment. International Journal of Business and Social Science, 5(6).
Li, J., 2014. The Successful Operation of Dubai JEBEL Ali FTZ on Shanghai FTZ
Development Enlightenment. International Journal of Business and Social Science, 5(6).
PKF International Limited, Official Brochure on Free Zones in the UAE, 2018
Shayah, M.H. and Qifeng, Y., 2014, October. Development of free zones in United Arab
Emirates. In First Middle East Conference on Global Business, Economics, Finance and
Banking, Dubai.
Sheriff, 2012, thesis, Egyptian free trade zones functions and its essential role on logistics,
The United Arab Emirate, Dubai social and economic data[R]. The people's Republic of
China Economic and Commercial Office of the Consulate General in Dubai, (August, 2012)
Yang Jinglei. Study on the strategy of port economy into the global industrial network --
Enlightenment from the port city of Dubai. Port economy, (April, 2010)
40
Chapter III
3-1 Introduction
In the last chapter we have learnt about the success story of Jebel Ali Free Economic Zone
(Also known as Jafza), established by Emirates of Dubai at the Western fringes of the state in
1985. Measures taken by the emirates from expanding its wings from provision of office
spaces and ware housing facilities to a rather modest number of companies i.e. 19 to bringing
at a position of one of the most convenient business hubs of the world. Jafza gradually
expanded the ranges and variety of services / facilities being provided to its clients to become
one of the largest free zones in the world.
In this chapter we will focus our research on studying the free zones experiences of
Kazakhstan. How Kazakhstan initiated the concept of free zones, what were the initial
outcomes and how did the country managed to overcome the issues to gradually expand its
free zones to the current levels of success.
Concept of economic zones in Kazakhstan dates back to late 1990‘s. These zones
were established to ensure social as well as economic development of the regions in
general and country, in particular. However, these zones remained unproductive and
thus gradually rolled back (Kazhyken, 2008).
A host of reasons identified by the specialists regarding the causes of failures of these
SEZs. Significant reasons included corruption, misuse of development funds, errors in
the planning process, infrastructural development programs, suitability of the selected
areas / regions in terms of location and size, insufficient logistical infrastructure
(Kazhyken, 2008, Nevmatulina, 2013).
41
Figure 3.1 Purpose of Creating SEZs
Attraction of
investments on the
Creation of production
accelerated
capacities.
development of
regions.
Development of
Producing competitive
modern market based
products for the world
management and
market.
entrepreneurship.
During November 2014, President of Kazakhstan launched a fresh policy for economic
development named "Nurly Zhol". This policy allocates the financing from the National Fund
for undertaking development of infrastructure in the field of logistics, manufacturing, energy,
utilities and housing, assistance to small and medium sized businesses and job creation. As a
specific measure for developing industrial infrastructure, the government declared the
allocation of 81 billion Tenge to complete the construction of infrastructure facilities in the
existing SEZs (JICA et al, 2015).
In Kazakhstan, the period of operation of SEZ is 25 years from its foundation. No matter
when a company became a resident of the SEZ, that SEZ will be abolished automatically
after 25 years from its foundation. After the abolition of SEZ, a company will have the right
to repurchase the site of SEZ according to the local land laws. The government of the
Republic of Kazakhstan develops a basic plan of the national policy with respect to the
42
establishment and activities of the SEZs. Ministry of Investment and Development (MID) is
responsible for the development and management of all SEZs (JICA et al, 2015).
In addition, for better management and operation of the SEZs, a management company has
been established in each SEZ. These management companies are either fully owned by the
state / regional authorities or partially owned by private companies. But even in the latter
case, the state or regional authority spends its budget for the infrastructure development by
holding a certain number of shares of the management company (JICA et al, 2015). The SEZ
Act 2011 defines the functions of the management company as follows:
Finalization and
Lease of the land and
Cooperation with the termination of the
infrastructure to the
national authorities agreements pertaining to
companies
business implementation.
There is a total of 10 Special Economic Zones in Kazakhstan. Each SEZ has been established
under a special presidential decree and having peculiar purposes. List and core goals of these
SEZs have been mentioned in figure 3.3:
43
Figure 3.3 SEZs in Kazakhstan
Pavlodar SEZ is to develop chemical and petrochemical sectors, with a focus on the
production of export-oriented products.
Ontustik SEZ is to develop enterprises that process cotton for the textile and garment
industries.
Astana – New City SEZ is to help accelerate the development of Astana city
All types of entrepreneurial activity in the SEZ are divided into the priority and
auxiliary activities. Basic distinction between the two is that agents of auxiliary
activity not covered by the special economic zone regime. Priority activity types are
that answer the purpose of creation of this particular zone. The goods in the zone have
a special status and are regarded as being outside the customs territory. On the export-
import operations can be established additional privileges and exemption from
customs levies and taxation etc (Nevmatulina, 2013). As of now, out of the 10 x SEZs,
envisaged basic infrastructure has been completed for six SEZs to include following (ADB &
CAREC, 2018): -
44
Burabay
Ontustik
Saryarka
Seaport Aktau
Khorgos-East Gate
Park of Innovative Technologies (PIT)
So far, the government has invested approximately T275 billion in basic infrastructures. The
other main features of the SEZs are as follows (ADB & CAREC, 2018):
45
Figure 3.5 Additional Features of SEZs in Kazakhstan
Development background, functioning details, goals and eligible activities for these SEZs are
briefly covered in succeeding paragraphs: -
Astana became the new capital of Kazakhstan in December 1997. Since the transfer of capital
to Astana, the city has been actively developed. As part of such urban development, the SEZ
"Astana New City" became the first SEZ which was established in June 2001, with the total
area of 7,562.3ha. It entails 6,531.1 ha of the new administrative and business centre, 598.1
ha of the first industrial zone, 433.1 ha of the second industrial zone, and 72.41 ha covered by
light rail system (JICA et al, 2015).
The SEZ is expected to contribute to improve the investment climate and benefit for both the
state and investors. The priority sectors for this SEZ include construction, machinery
manufacturing and light industry. Salient features of the SEZ are appended below (ADB &
CAREC, 2018):
46
Table 3.1 Salient Attributes of SEZ Astana
Salient Attributes
Law Presidential Decree dated 29 June 2001, No. 645
Core Objectives / To accelerate the city‟s development by drawing
Goals investments and using state of the art infrastructure
development technologies, create high-tech competitive
industries, and invent new products.
Year Created 2001
Area 7,562 ha
Management Public Institution ―Department of investment and
Company development of Astana city‖ serves as the management
company of SEZ Astana – New City.
Eligible Activities o Manufacturing of other nonmetallic mineral products.
o Production of machinery and common use electronic
devices.
o Production of rubber and chemical products.
o Production of items related to metallurgy industry and
electric lighting gadgetry.
o Production of food and stationary related items.
o Manufacturing of furniture, motor vehicles and railway
locomotives.
o Manufacturing of air and space aircraft.
o Other infrastructure related projects / products.
The SEZ "Innovation Technology Park" is in village called Alatau in the city of Almaty. It
was established in August 2003. It was called "Information Technology Park" at the time of
foundation, and then renamed the "Innovation Technology Park" in 2011 (JICA et al, 2015).
In the area of 163ha, companies in the fields of IT, telecommunication instruments and
electronics are primarily attracted to the SEZ. Infrastructure was developed in the first stage
during 2003-2011, and production facilities were established at the same time. (JICA et al,
2015).
As a result, the number of companies registered in the SEZ was increased, reaching more
than 150 as of May 2015. Among those companies, 70% of them implements the IT-related
projects, and 10% are the foreign companies. The Government aims to increase the number
of foreign companies to 60 and the total resident companies to 250 by 2020. In addition, one
of the most important issues for the SEZ is to increase the number of manufacturing
companies that can produce the exportable goods and earn 40% of revenues from the exports
in the future. The main project of the second phase is the construction of the oil and gas
47
research centre of information technology of the Kazakhstan-British Technical University. It
is a private research centre to be established at the expense of an oil company, and will
primarily conduct researches, development and engineering (JICA et al, 2015). Salient
attributes of the SEZ are appended below (ADB & CAREC, 2018):
Salient Attributes
Law Presidential decree dated 18 August 2003, No. 1166.
Core Objectives / To develop IT and other new technologies.
Goals
Year Created 2003
Area 163 ha
Management The management company is the Autonomous Cluster Fund, a
Company not-for-profit organization funded by the government.
Eligible Activities o Conducting R&D in the domain of IT,
telecommunications electronics, renewable energy,
instrumentation, resource saving and nature management.
o Designing, development and production of software,
databases and hardware related products.
o Provision of data centre services like storage and
processing of electronic information.
o Production of new technology using artificial
intelligence.
o Manufacturing of machines, gadgets and products to be
used in Information and Communication Technology
related industries.
o Manufacture of wireless communication equipment.
o Manufacture of electronic equipment like measuring,
optical, lighting devices.
o Planning and conduct of educational activities in the
domain of innovative technologies according to the
spheres ascertained by the government.
The SEZ "National Industrial Petrochemical Technology Park" was established in 2007 in the
Atyrau region, which is also called "the Oil Capital of Kazakhstan"; as it accounts for about
40% of the total oil production in Kazakhstan. It has two of the world-class oil reserves,
Tengiz and Kashagan, with the oil reserves estimated to be 4 billion tons (JICA et al, 2015).
48
Primary objective of this SEZ is to promote investment into the region by taking advantage of
the geographical and economic features of the Atyrau region. The Ministry of Energy of
Kazakhstan and the "United Chemical Company" hold ownership of the SEZ. The total land
area of the SEZ "National Industrial Petrochemical Park" is 3,476ha (JICA et al, 2015).
Salient features of the SEZ are appended below (ADB & CAREC, 2018):
Salient Attributes
Law Presidential decree dated 19 December 2007, No. 495.
Core Objectives / The National Industrial Petrochemical Park was created to
Goals develop projects in the petrochemical industry for hydrocarbon
processing; attract investment in petrochemical plant
construction on the basis of public–private partnerships; help
integrate Kazakhstan into international system of producing and
marketing the petrochemicals, conduct research and undertake
innovative scientific and technological projects; and train or
retrain specialists at petrochemical plants.
Year Created 2007
Area 3476 ha
Management The management company of SEZ National Industrial
Company Petrochemical Park‖ is 97.5% owned by the Ministry of
Energy, and 2.5% belongs to the United Chemical Company,
which is fully owned by Samruk-Kazyna, a state-owned
company.
Eligible Activities o Manufacturing of chemical products;
o Production of petrochemical products;
o Establishment of facilities intended for implementation
of priority activities in accordance with the design and
cost-estimate documentation.
The SEZ "Khorgos - Eastern Gate", is located on the border with China, was established in
November 2011. The SEZ "Khorgos – Eastern Gate," with its site area of 5,740 ha, consists
of the International Centre of Boundary Cooperation "Khorgos" (ICBC), the dry port,
logistics zone and industrial zone. Dry port is operated by KTZ Express in close cooperation
with the DP World, a Dubai-based experienced logistics management company. The SEZ
"Khorgos - Eastern Gate" is located on the Silk Road, a strategic distribution channel
between the East and the West. Salient features of the SEZ are appended below (ADB &
CAREC, 2018):
49
Table 3.4 Salient Attributes of SEZ Khorgos
Salient Attributes
Law Presidential decree dated 29 November 2011, No. 187
Core Objectives / Khorgos–East Gate‘s goal is to become an effective transport,
Goals logistics, and industrial hub.
Year Created 2011
Area 5740 ha
Management JSC ―Management company of SEZ Khorgos–East Gate‖ is
Company 100% owned by the Kazakhstan Railways Company (KTZH),
which is fully owned by Samruk-Kazyna, a state-owned
company
Eligible Activities o Warehousing, transportation, production of food, chemicals
and textile related items.
o Production of leather, mineral and finished metal products
less machinery.
o Construction of venues for conducting different
exhibitions, museums and other related infrastructure on
requirement basis.
The SEZ "South (Outustyk)" was established in July 2005 in the Sairam district, a district
which is relatively close to Shymkent, the biggest region of the country. The purpose of the
SEZ is to develop and strengthen competitiveness of cotton processing, textile, spinning and
garment industries, attracting world-famous textile manufacturing companies, and
introducing advanced technologies to improve productivity. The priority sectors of the SEZ
besides cotton processing and textile are carpets, leather products and paper manufacturing
(JICA et al, 2015). Salient features of the SEZ are appended below (ADB &CAREC, 2018):
50
Table 3.5 Salient Attributes of SEZ Ontustik, South
Salient Attributes
Law Presidential decree dated 6 July 2005, No. 1605
Core Objectives / The aims of Ontustik SEZ are to accelerate the development of
Goals the region; to promote the growth of cotton-processing
enterprises, and of the textile and garment industries in general;
to attract investment from international brands in Kazakh textile
products; create high tech industries; and to improve the quality
and expand the variety of manufactured textile products.
Year Created 2005
Area 200 ha
Management Akimat of South Kazakhstan oblast is shareholder of JSC, The
Company management company of SEZ Ontustik.
Eligible Activities o Manufacturing of finished textile products, except
apparel.
o Manufacturing of other knitted and knitwear.
o The production of clothing, except clothes made of fur
and leather.
o Spinning, weaving and finishing production.
o Production of nonwovens, except clothing.
o Production of wood pulp and cellulose.
o Other related facilities / products.
The SEZ "Chemical Park Taraz" is the newest SEZ, which was proposed by the Sovereign
Wealth Fund "Samruk-Kazyna" and established in November 2012. The Management
Company of the SEZ "Chemical Park Taraz" is 100%-owned by "United Chemical
Company,". The purpose of the SEZ is the development of the chemical industry. The size of
this SEZ is 505 ha, and it is in the Zhambyl region.
Apart from incentives such as the exemption of taxes and customs, attractiveness of this SEZ
would be found in the point that "Chemical Park Taraz" is located close to the production
area of natural gas and other resources of the chemical products, as well as the good
accessibility to the major potential markets – such as neighboring Russia, China, Uzbekistan,
Kyrgyzstan, and so on (JICA et al, 2018). Salient features of the SEZ are appended below
(ADB & CAREC, 2018):
51
Table 3.6 Salient Attributes of SEZ Taraz Chemical Park
Salient Attributes
Law Presidential decree dated 13 November 2012, No. 426
Core Objectives / The main aim of Taraz Chemical Park is the formation of new
Goals chemical-production facilities that apply highly effective
technologies to improve the quality and expand the variety of
manufactured textile products.
Year Created 2012
Area 505 ha
Management Akimat of Pavlodar Oblast is a shareholder of JSC, The
Company management company of SEZ Taraz.
Eligible Activities o Manufacturing of chemical and petrochemical products.
o Development of related facilities and infrastructure.
The SEZ "Burabay" was established in January 2008. The size of this SEZ is 370 ha and is
located in Burabay district of the Akmola region. The purpose of the SEZ is the development
of competitive tourism infrastructure which attracts local and foreign tourists. The
Management Company of the SEZ "Burabay" is the "Department of Regional Committee of
Tourism Industry of the Ministry of Industry (JICA, 2015). Salient features of the SEZ are
appended below (ADB & CAREC, 2018):
Salient Attributes
Law Decree of the President of the Republic of Kazakhstan
dated 15 January 2008, No. 512
Core Objectives / Burabay SEZ was created for developing a highly competitive
Goals tourism infrastructure to accommodate domestic and foreign
tourists.
Year Created 2008
Area 370 ha
Management Territorial body of the Investment Committee of MID serves as
Company the management company of SEZ ―Burabay‖.
Eligible Activities o Tourist services
o Development of tourist attractions including residences and
other entertainment and related facilities.
52
3-4-8 SEZ "Seaport Aktau"
The SEZ "Seaport Aktau" has been established in 2002 in the Mangistau region at the coast
of the Caspian. It produces approximately 25% of all oil production of Kazakhstan and is the
centre of the oil and gas industries of the country. Aktau seaport, which consists of 4 oil ports
and 3 dry cargo berths, can access to Iran in the south, Russia in the north, and Azerbaijan in
the West through the Caspian Sea, as the port of reshipment (JICA et al, 2015).
The SEZ has been expanded to 2,000ha due to the successful implementation of the three
companies. The SEZ consists of 6 separate sub-zones and the coastal zone. Infrastructure
development in the SEZ "Seaport Aktau" started in 2008. Salient features of the SEZ are
appended below (ADB & CAREC, 2018).
Salient Attributes
Law Presidential decree dated 26 April 2002, No. 853.
Core Objectives / Aktau Seaport SEZ‘s goals are to accelerate development in the
Goals region, preparing the country‘s economy for entry into in the
global economic system, create high-tech and competitive
industries, invent new products, attract investment, improve the
legal regulations on market relations, introduce modern
management, and address social problems
Year Created 2002
Area 2000 ha
Management Akimat of Mangistau Oblast is shareholder of JSC Management
Company Company of SEZ Aktau Seaport.
Eligible Activities o Manufacturing of wide range of electric products including
household electrical appliances to high powered electric
motors and generators.
o Production of leather, chemical, plastic products and
mineral products.
o Production of items related to metallurgical industry,
petrochemical products and basic pharmaceutical products.
o Establishment of related facilities and infrastructure.
Source: JICA et al, ADB & CAREC, 2018
The SEZ "Saryarka" is established in the Karaganda region, which positions manufacturing,
mining, agriculture, electric power, construction and building materials as strategically
important sectors for the achievement of economic growth in the region. Priority industries in
this SEZ are iron and steel, metalworking. They are especially interested in the production of
53
rare metals such as tungsten, vanadium and molybdenum (JICA et al, 2015). Salient features
of the SEZ are appended below (ADB & CAREC, 2018):
Salient Attributes
Law Presidential decree dated 24 November 2011, No. 181.
Core Objectives / Saryarka SEZ was created to develop the metallurgical and
Goals related industries. Basic aim is to attract international
manufacturers to ensure development of competitive, high-
value-added products in these industries. The overall process
will help integrate Kazakh products into the worldwide
production and marketing system.
Year Created 2011
Area 535 ha
Management Akimat of Karaganda Oblast is shareholder of JSC Karaganda
Company Invest, the management company of SEZ ―Saryarka‖.
Eligible Activities o The metallurgical industry, including production of metal
products, especially engines and turbines.
o Manufacturing motor vehicles, IT, electronic and optical
products;
o Production of industrial refrigeration and ventilation
equipment, purification apparatus for liquid minerals and
cleaning equipment for oil refining, chemical industry.
o Production of machinery for agricultural, mining
industry, and processing of food, beverages and tobacco
products.
o Establishment of related facilities and infrastructure.
The SEZ "Pavlodar" is established in the Pavlodar region sharing borders with Russia. In the
Pavlodar region, fuel energy, metallurgy and chemical industries have been well-developed,
and the processed products of these industries are exported to Russia, Italy, China, Turkey,
Japan, etc. Currently, 169 industrial-related projects are currently implemented in the SEZ
"Pavlodar" with the total of US $8.9 billion, within the framework of the "State Program for
Accelerating Industrial-Innovative Development of Kazakhstan in the 2010-2014". As one of
these projects, the SEZ "Pavlodar" was established in 2011, focusing on chemical and
petrochemical industry as a priority sector. The SEZ "Pavlodar" covers a total area of 3,300ha
(ADB &CAREC, 2018):
54
Table 3.10 Salient Attributes of SEZ Pavlodar
Salient Attributes
Law Presidential decree dated 29 November 2011, No. 186.
Core Objectives / Pavlodar SEZ‘s goal is to develop the country‘s chemical and
Goals petrochemical sectors, with a focus on the production of export-
oriented, high-valued-added products, using high-tech,
environment-friendly, and safe modern technologies.
Year Created 2011
Area 3300 ha
Management Akimat of Pavlodar Oblast is a shareholder of JSC, The
Company management company of SEZ Pavlodar.
Eligible Activities o Manufacturing of chemical products and petrochemical
products.
o Development of related facilities and infrastructure.
55
"National Atyrau AO SEZ Petrochemica December 3,4751. 21*
Industrial region. "Nint" (Min. l 2007 9
Petrochemica Energy) / industry
l Park" Min. Energy 51%,
TOO
"United Chemical
Company" 49%
Ontustyk" South-Kaz AO SEZ Light and July 2005 200 24
akhstan "Ontүstіk" (South textile
region. -Kazakhstan industry
region)
100% by region
56
3-6 Performance / Contribution of Kazakhstan‟s SEZs towards National
Economy
General Details
57
labour available.
Percentage of inactive women 34%
population
Percentage of inactive elderly 42.4%
population (ages between 55 years
to 64 years)
Percentage of enrollment in 87.3%
Primary education
Percentage of enrollment in 97.5%
Secondary education
Percentage of enrollment in 46.2%
Tertiary education
According to the CAREC and ADB diagnostic study regarding performance and effects of
SEZs in Kazakhstan (2018), the Astana–New City, PIT, and Aktau Seaport SEZs have met
with success, accounting for most of the goods produced in Kazakhstan‘s SEZs. Judging
from the most recent comprehensive data available (for 2015), the three successful SEZs, as
well as Saryarka, have more or less achieved their specific targets concerning production,
investment, and employment (ADB & CAREC, 2018).
FDI has accounted for more than half of total investment in the Aktau Seaport and Saryarka
SEZs, while it is 6% of total investment in the Astana–New City SEZ. In the case of the PIT
its investment has exceeded its target. Similarly, SEZ Burabay has achieved its targets
regarding production, investment, and employment. Among the other five SEZs, Ontustik has
exceeded its export as well as its production and modest FDI targets. The remaining 4 x SEZs
are vying to achieve desired results. Both the National Industrial Petrochemical Technopark
and Pavlodar SEZs have substantially exceeded their employment targets (ADB & CAREC,
2018).
While there is little data on exports from the SEZs, it would appear that they accounted for
0.08% of total exports in 2016. Astana–New City accounts for more than half of all the SEZs‘
total production, and its production is oriented entirely toward the domestic market,
particularly the new capital city‘s construction and development. The much smaller
production in the PIT is also apparently oriented largely toward the domestic market. The
SEZs‘ strong orientation toward the domestic market may be partly due to the various tax
preferences that enterprises have enjoyed in the zones (ADB & CAREC, 2018).
One of the main objectives of the SEZs is to attract new investment, especially FDI, together
with the technological progress and managerial know-how that FDI would bring (and which
are major sources of TFP growth). The SEZs, so far, have attracted 8% of total FDI in
58
Kazakhstan for 2015. The SEZs‘ orientation toward the domestic market may also be partly
due to local content requirements aimed at encouraging import substitution. In fact, all the
SEZs except for Taraz Chemical Park have local-content targets ranging from 18% to 100%;
these have largely been accomplished, and in some cases, considerably exceeded. Although it
is unclear how the targets were reached, it may have been due to local-content rules, to tax
relief, or to other forms of financial assistance that were contingent on local-content rules
(ADB & CAREC, 2018).
Kazakhstan has been listed by the World Bank in its report of ―Doing Business‖, 2017, as
amongst the 10 countries who have introduced most improvements in their business
regulations (World Bank, 2017). One of the significant steps in this direction was creation of
the concept of One-Stop-Shop for assisting investors regarding all facets of the investment
process i.e. from information till commencement of business including obtaining licenses etc
(OECD, 2017).
FDI.
Employment
Exports.
The current SEZ Act 2011 has the following objectives for SEZs: -
59
Introduce new technologies into sectors of economy and to regions.
Accelerate the development of modern, high productive, competitive industries.
The performance of SEZs against the backdrop of these three objectives has been assessed in
succeeding paragraphs.
Figure 3.7 SEZ Exports, Production, Investment, and FDI, 2002–2016 (T bn)
350
300
250
200
150
100
50
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Figure 3.7 presents a comprehensive picture of investment, production, FDI, and exports in
the context of SEZs. It shows that investment in SEZs increased more than 10 times from
T40 billion in 2003 to around T470 billion in 2015. Production also increased from less than
1 billion in 2004 to over 339 billion in 2016. However, increased investment and production
have not been accompanied by increased exports. Since 2011, there has been consistent
reporting of exports; their share has remained between 3% and 6% of total production
(OECD, 2018). Similarly, FDI inflows have been insignificant and inconsistent, with only 2
years (2007 and 2015) showing substantial FDI inflows. However, SEZs have been
instrumental in generating employment, which grew from a mere 29 to around 11,527 in
2016, at an average annual rate of 30.4% (OECD, 2018).
60
Figure 3.8 Annual Growth Rates in Exports, Production, Investment, and FDI, (2002–
2016)
14
12
10
0
2002 2004 2006 2008 2010 2012 2014 2016 2018
-2
Figure 3.8 presents the annual growth rates in exports, production, investment, and FDI. The
rates of growth have been close to zero. High initial growth rates can be attributed to low
bases. It is worth noting that the SEZ Act 2011 did not impact on the growth of production,
FDI, or even total investment. Even while production and investment grew, the growth rates
do not show acceleration. SEZs are set up mainly to promote private investment, in particular
FDI. However, the growth rate of FDI inflows have been hovering around zero. More
worrisome is the fact that even private domestic investment does not have substantial
presence in the zones. In fact, interviews with officials revealed that most investment in SEZs
comes from state owned companies, either directly or through daughter companies. Thus, the
government itself is a major beneficiary of lucrative incentives offered in the zones. It is not
clear if this investment is additional in the sense that it is induced by the presence of SEZs
(OECD, 2018).
Zone-Wise Analysis
Of the 10 SEZs, 3 have started their operations recently: Khorgos-Eastern Gate, National
Industrial Petroleum Park, and Saryarka. No data is available on Taraz SEZ. Of the
operational SEZs, Astana emerges the leader in terms of key indicators of investment,
production, exports, and FDI; PIT is the leader in employment generation. FDI inflows are
small in all SEZs, except for Astana and Aktau. The National Industrial Petroleum Park,
Pavlodar, and Saryarka have also been constantly attracting FDI. These SEZs are also
reporting exports, along with Astana and Ontustik. It must be noted that only three SEZs—
Chemical Park Taraz, Ontustik, and Pavlodar—have export requirements (ADB 2017).
61
Astana emerges as the leader in exports, and Technopark did not report any FDI or exports. It
is also noted that tax deduction per unit is inversely related to production. This is an
important observation, which implies that as production increases, the fiscal cost falls
(OECD, 2018).
Figure 3.9 Share of Exports, Production, Investment, FDI, and Tax Deduction of SEZs of
Kazakhstan - 2016
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Investment Production Employment Exports FDI Tax deduction per
unit of production
Khorgos Taraz Saryarka PIT Pavlodar Petrochemical park Burabay Astana Ontustic Aktau
Figure 3.9 summarizes the growth in production and employment of the six SEZs operating
in 2011. The two fastest-growing SEZs were Ontustik and Pavlodar, followed by Astana and
PIT. Of the remaining two, Aktau showed a decline in production but a rise in employment,
while Burabay was declining in both production and employment. While the average growth
rates in production look impressive, the base figures are rather small. These figures also hide
annual volatility (OECD, 2018).
The focus of SEZ policy in Kazakhstan has been to attract FDI to obtain technological know-
how. The underlying assumption is that FDI is accompanied by new knowledge,
technologies, products, and processes. Technologies and skills are expected to spill over, not
only to other zone firms, but also to entrepreneurs in the domestic mainland through vertical
(i.e., backward) and horizontal (i.e., forward) linkage effects, catalyzing productivity growth
(Johansson 1994). These effects are, however, contingent on the type of investment attracted
to SEZs (OECD, 2018).
62
Figure 3.10 Annual Growth Rates in SEZ Production and Employment, 2002-16
350
300
250
200
150
100
50
0
PIT Pavlodar Burabay Astana Ontustic Aktau
-50
Production Employment
63
As already stated, a large proportion of investment has come from state-owned companies.
This has severely limited the scope of technology transfers in the zones. There are also little
data available to assess the quality of FDI that is coming into zones. There are, however, a
few instances of technology creation in SEZs available from non-official sources (Figure
3.11). These examples are very few, but they are indicative of the potential of SEZs in
attracting new technologies. It is also indicated that there is a need to maintain more detailed
data on investment in SEZs to better inform policy makers (ADB & CAREC 2018).
There are little data to analyse the spill over effects from SEZs in Kazakhstan. However,
considering that SEZs have not generated substantial activity, this is a foregone conclusion.
As discussed in the previous chapter, the SEZ sector can play an important role in promoting
and strengthening technological capabilities. As an example, in 1991, only 2.8% of
Shenzhen‘s manufactured exports were high-tech. By 2004, they amounted to $30.6 billion,
accounting for 51.2% of manufactured exports (Lie 2006).
By 2007, in all large SEZs in the People‘s Republic of China, over 40% of the total industrial
output was from high-tech industries (Zheng 2010). But, SEZs must generate a critical mass
of economic activity to set the conditions for the subsequent process of growth. In
Kazakhstan, zones have yet to witness the flow of substantial private innovative investment
to make an impact on the process of industrialization (ADB & CAREC 2018).
Kazakhstan has adopted first-generation EPZs type SEZs with public ownership, small size,
and fenced-in boundaries. In what follows, the investment climate in these SEZs is analysed.
A dig into the literature reveals that the performance of SEZs and IZs is influenced by several
factors, which can be seen as a four-level hierarchy (Akinci and Crittle 2008, Madani 1999,
Yuan and Lorraine 1992, Sit 1988).
64
Figure 3.12 Critical Success Factors for Attracting Investments in SEZs
International
• Rise in global GDP.
• Commerce and FDI inflows
• Agreements for trade at multilateral and regional levels.
Macro
• instruments of the trade policy
• Political stability in the country.
• relative / competitive advantages
• Quantum / standard of industrialization in the country
• Government attitude and role
Micro
• State of the legal frameworks in place
• Incentive package being offered
• Zone infrastructure being established
• Standard of zone administration
Regional
• Overall economic infrastructure in the region.
• State of the infrastructure for connectivity and exports.
• Quality and quantum of the available labor
• Procedural delays / hiccups.
• Behaviour of the local governments
65
3-7 Why SEZ Experience in Kazakhstan has been Successful?
This part of the chapter will discuss different steps to include actions, legal and
administrative procedures introduced by the Government in Kazakhstan to make its SEZ
experience a successful one, especially amongst the developing world. Salient aspects are
discussed in the ensuing paragraphs: -
The SEZs in Kazakhstan are regulated by a set of specially introduced legal provisions /
instruments / legislation to ensure smooth functioning and commercial activities in the zones.
Significant types of legal provisions are listed below: -
These laws and regulations act in a manner to facilitate the functioning of SEZs with minimal
interference and ensuring ease of investment, setting up business by the foreign companies
(CAERC, 2018).
This program was aimed at addressing constraints relating to SEZ development such as
quotas and permits to attract foreign labour needed by companies operating in the SEZs, and
suggested ways to improve the efficiency of SEZ development. the measures intended to be
adopted in this program included ensuring stability of the legislation, preferential tax regimes
66
and establishment of unified authority for establishment and management of the SEZs. The
program is mainly aimed at stimulating diversification as well as competitiveness in
country‘s manufacturing industry. The program also aims to improve the Entrepreneurial
Code, amendments of the Code on Customs Affairs, the Tax Code and Legal provisions
related to SEZs,‖ in order to provide stability and guarantee the preservation of tax
preferences for SEZ participants during the entire SEZ operating period (CAREC and ADB,
2018).
On 20 May 2015, the President‘s Decree ―On the National Plan—100 Concrete Steps‖ was
issued. It calls for five institutional reforms (Figure 3.14): -
Formation of a
professional
state
apparatus;
Governmental
transparency Enforcement of
and the rule of law;
accountability
National
Plan -
100 Steps
Industrializatio
Unified nation
n and
facing the
economic
future; and
growth;
Step 63 of the National Plan specifies that two innovative clusters should be developed as a
foundation for a knowledge-based economy. The program is expected to establish two
innovation clusters as under (CAREC and ADB, 2018):
67
Nazarbayev University, in Astana, focusing on the development of basic and applied
science. The ―Astana Business Campus, will have research centres and labouratories
to carry out joint research projects and development activities, as well as the
commercialization of technologies they develop (CAREC and ADB, 2018).
The Park of Innovation Technologies (PIT), in Almaty, focusing on the transfer of
advanced technologies. This cluster joins participating enterprises of the PIT SEZ,
large research and education institutes in Almaty, and other legal entities. The PIT
will also try and seek to attract local and foreign high-tech companies for the
implementation of specific industrial projects (CAREC and ADB, 2018).
Several initiatives aimed at protection of foreign investors from various fears, act as a major
incentive for numerous international investors to invest in Kazakhstan. For instance,
―Entrepreneurial Code‖ introduced in 2016, entails comprehensive set of guarantees for
foreign investors including protection of their rights and property, especially related to the
Governmental actions. The Code provides degree of protection to the investors according to
the volume of investments carried out by them. Few additional measures are appended below
(CAREC and ADB, 2018): -
The objective of the Nurly Zhol State Program is to connect the regions of Kazakhstan by
modernizing the country‘s logistical, social, and industrial infrastructure. The program
emphasizes that industrial infrastructure is a prerequisite for the efficient operation of SEZs
and IZs as sources of economic growth in the regions, and notes that the underdevelopment
of Kazakhstan‘s infrastructure has had a negative impact on the implementation of
government programs aimed at diversifying the national economy (CAREC and ADB, 2018).
68
The priority of the Nurly Zhol State Program is to complete the construction of infrastructure
at various SEZs including the National Industrial Petrochemical Park and Khorgos-East Gate,
as it is believed that development of both these SEZs will promote the development of the
petrochemical industry and increase the transit potential. The National Industrial
Petrochemical Park consequently received funding of T68.5 billion from the National Fund
of the Republic of Kazakhstan in 2015, and T10 billion in 2016 (CAREC and ADB, 2018).
The government project Integrated Gas and Chemical Complex-Phase 1, in the National
Industrial Petrochemical Park, will get T35 billion from a single accumulative pension fund
created through the issuance of bonds by the Samruk-Kazyna National Welfare Fund. In
2015, the National Fund of the Republic of Kazakhstan allocated T12.35 billion to the
completion of the infrastructure of Khorgos–East Gate SEZ. Kazakhstan Temir Zholy, the
national railway company, is co-financing the completion of Khorgos–East Gate‘s
infrastructure under the Nurly Zhol State Program, contributing T23.7 billion during 2015–
2019. The infrastructure development projects like Nurly Zhol State Program using financing
from the National Oil Fund for the development of the infrastructure of the SEZs and
industrial zones can contribute significantly in the overall output of SEZs in Kazakhstan
(CAREC and ADB, 2018).
An investment friendly public – private partnership-based governance system for SEZs has
been put in place by the Government of Kazakhstan. After the Decree of the President
regarding the creation of a particular SEZ, the central government or akimat (local
government) makes a decision on whether to establish or participate in the
establishment of a management company for the SEZ. The central government, akimats,
nongovernmental legal entities and foreign legal entities with experience in SEZ operations
may become founders of the management company (CAREC and ADB, 2018).
If a SEZ is created on the initiative of the central government or akimat, over 50% of the
voting shares of the management company are owned by the state, unless otherwise stipulated
in the decree of the President on the creation of the SEZ. When a SEZ is created on the
initiative of a nongovernmental legal entity, at least 26% of the voting shares will be owned
by the state. The first meeting of the founders of a SEZ is then held within 30 days after the
government‘s decision regarding the extent of its own participation in the creation of the
management company. The board of directors of the management company then elects two
independent directors from a group of candidates recommended by the Single Coordination
Centre and by the National Chamber of Entrepreneurs of the Republic of Kazakhstan
(CAREC and ADB, 2018).
The National Chamber of Entrepreneurs serves as the head of the strategic planning
committee of the management company‘s board of directors. Next there is the process of
dividing up the voting rights among the management company‘s current shareholders.
69
Each SEZ is managed by a joint stock company that is owned by a government body or a
state-owned enterprise. The management companies of three SEZs are overseen by
government ministries: those of Burabay and the PIT by the Ministry for Investments and
Development (MID), and that of the National Industrial Petrochemical Park by the Ministry
of Energy. The PIT is managed by the Autonomous Cluster Fund,‖ which was created on 10
April 2015. Its activities are regulated by the Law ―On Innovation Cluster–Park of Innovation
Technologies (CAREC and ADB, 2018).
The Special Administrative & Legal Regime of the Special Economic Zones
A special legal regime applies to participants operating within the territory of any SEZ. The
special legal regime for SEZs entails a combination of terms and conditions regarding the
operation of SEZs, in accordance with the national laws on SEZs, taxes, customs, and land, as
well as the legislation on employment (CAREC and ADB, 2018).
Each SEZ has a detailed list of permitted activities. The current scope of activities reflects the
government‘s targeted sectors and priority areas. The special legal regime is applicable only
when a SEZ participant engages in the priority activities defined for that particular SEZ (and
consistent with the objectives of that SEZ‘s creation). If the SEZ participant derives more
than 10% of its revenue from any activity that has not been specified for that SEZ, then it
loses all its investment incentives, including the exemption from export duties and the CIT
(with the exception of the PIT, whose companies are allowed to earn up to 30% of their
revenues from activities that have not been specified). Consequently, a ―positive‖ list of
permitted activities limits the number of possible investors, as not all the activities of a SEZ
based company can be foreseen.
Public service centres provide SEZ participants with all the services they need, in accordance
with the ―one-stop-shop‖ principle. These services include registration of businesses,
licensing, and permission to export and import, among others. The purpose is to facilitate the
collection and preparation of the required documents. The one-stop shop is also part of the
government‘s effort to promote e-governance (CAREC and ADB, 2018).
Tax Preferences
SEZ participants enjoy an exemption from tariffs on goods imported into their SEZ territories
and then exported. There is an exemption for imported goods when these are (CAREC and
ADB, 2018):
Kazakhstan levies export duties on only a few goods. Goods exported from a SEZ to the rest
of the customs territory of the EAEU are not subject to export duties. However, goods
exported from a SEZ to a destination outside the customs territory of the EAEU are subject to
70
export duties. The VAT is zero for goods that are fully consumed during activities
corresponding to the reasons for the SEZ‘s creation and that are included in the list of eligible
goods established by the government. There was also a zero VAT for goods fully consumed
in the process of building the Astana– New City SEZ. But goods produced in the SEZs are
subject to the full VAT when sold in the domestic market. Companies operating in a SEZ are
exempted from corporate income tax (CIT), value-added tax (VAT), and property and land
taxes. Participants of the PIT SEZ are also exempted from social taxes for 5 years, on the
condition that payroll expenses comprise at least 50% of annual revenues and that 90% of the
payroll budget be spent on Kazakhstan residents (CAREC and ADB, 2018).
Non-Tax Incentives
According to MID‘s Strategic Plan for 2016–2018, two SEZs under the ministry‘s
management (Burabay and the PIT), as well as the IZ in the Alatau District of Almaty city,
receive funding from MID. In accordance with MNE data, in 2015, MID provided T4 billion
for the creation of a new IZ in the Alatau district of Almaty city. It budgeted T2.5 billion for
2016 for the new IZ. The State Program of Industrial-Innovative Development of Kazakhstan
for 2015–2019 suggests new mechanisms for funding the infrastructure of SEZs and IZs:
Bayterek National Managing Holding is borrowing from the National Fund through the
issuance of bonds to fund program activities. Public investment under the program is based
on two approaches: repayable and non-repayable. The non-repayable approach is being used
to finance infrastructure for SEZs and IZs, including allocations from the National Fund, and
to finance SEZ development and management (CAREC and ADB, 2018):
Land issues
According to its latest amendments, the SEZ Law allows the creation of SEZs not only on
state-owned land, but also on land that is privately owned by citizens and/or nonstate entities.
Private landowners may transfer land to the SEZ‘s management company for temporary
compensated use (rent) in accordance with their contracts. A company based in a SEZ can get
a free plot of land for the entire period of the SEZ‘s existence, with the right to purchase after
the expiry of the SEZ regime (CAREC and ADB, 2018).
71
Streamlined Procedures and Regulations
Every SEZ has a state revenue committee within the Ministry of Finance to deal with
customs and tax issues. Companies in the SEZs can invite foreign workers without requiring
work permits. There is simplified visa regime for citizens of 19 countries. The investor
service centres in each region provide public services to investors (CAREC & ADB, 2018).
Companies implementing a project included in the List of Priority Activities approved by the
government enjoy tax and nontax preferences. In order to qualify for tax and other
preferences, a company must have following attributes: -
Provide
Be newly
Have signed an investments in the
established (not
investment amount not less
more than 2 years
contract, and than the T2 million
old
monthly
Companies can use a ―one-stop-shop‖ to deal with matters concerning investors‘ questions
for the Committee on Investments (under MID), the simplified visa regime, and work permits
for foreign employees (CAREC & ADB, 2018).
72
Strategic Investment Projects
Companies implementing a strategic investment project receive an exemption from the CIT
for 10 years. There is also a zero rate for the property tax,
land tax, and land utilization tax (CAERC, 2018).
3-8 Conclusion
An endeavor has been made in this chapter to cover up salient aspects pertaining to the SEZs
development model adopted by Kazakhstan. How concept of SEZs in Kazakhstan, which
initially confronted failure has become a vibrant system after rectifying the shortcomings and
adopting the right kind of policies and incentives to make them successful. The factors
contributing towards the success along with few hiccups being confronted have also been
discussed in detail.
It can be accrued that the Government of Kazakhstan is making all out efforts to make the
country as one of the most investment friendly countries in the world. A huge amount of
capital has been invested for the development and subsequent processing, functioning of the
SEZs and IZs.
Dedicated companies for the establishment and operation of the zones, supported by the
federal as well as the local governments are playing pivotal role for enhancing the
productivity and attracting FDI in the country. Investment friendly policies, remodeling of
relevant rules and regulations, measures to enhance protection for the investors, simplified
and quick legal procedures for dispute resolution are the highlights of the Kazakhstan model
of the SEZs.
Next chapter will entail a detailed overview of the features entailed by the Shanghai SEZ,
China. All the factors contributing towards its success will be discussed, threadbare.
73
References
ADB. 2014. Economic Zones: Instruments for Regional Production Networks and
Supply Chains. Background paper for RCI Roundtable Conference. Manila. 17–18
November.
ADB. 2015. Asian Economic Integration Report 2015: How Can Special Economic
Zones Catalyze Economic Development. Manila. p. 30; and A. Karzhaubayeva. 2013. Special
Economic Zones in Kazakhstan. SEZ World Tracker. October. pp. 58–62.
Adilet, Information system of legal acts of the Republic of Kazakhstan. The law of the
Kazakh Soviet Socialist Republic ―On free economic zones in the Kazakh SSR,‖ dated 30
November 1990 (content in Russian only). http://adilet.zan.kz/rus/docs/Z900001200.
Akinci, G., and J. Crittle. 2008. Special Economic Zone: Performance, Lessons
Learned and Implications for Zone Development. Washington, DC: World Bank.
Asian Development Bank (ADB) 2015. Asian Economic Integration Report 2015:
How Can Special Economic Zones Catalyze Economic Development? Manila.
Asian Development Bank (ADB) 2017. Diagnostic Study of SEZs and IZs in
Kazakhstan, Asian Development Bank, Manila
Decree of the President of the Republic of Kazakhstan ―On Approval of the State
Program of Industrial-Innovative Development of Kazakhstan for 2015–2019,‖ dated 1
August 2014, No. 874.
74
Japan International Cooperation Agency (JICA), Mitsubishi Research Institute (MRI),
and Japan Association for Trade with Russia and NIS (JATRN). 2015. Strategy Planning for
Attracting Japanese Companies in Special Economic Zones in the Republic of Kazakhstan.
Tokyo.
Johansson, H. 1994. The Economics of Export Processing Zones Revisited.
Development Policy Review. 12 (4). pp. 387–402.
Lai, H. H. 2006. SEZS and Foreign Investment in China: Experience and Lessons for
North Korean Development. Asian Perspective. 30 (3). pp. 69–97.
Law of the Republic of Kazakhstan 2011 about Special Economic Zones in the
Republic of Kazakhstan‖ of July 21, Volume 469-IV.
Madani, D. 1999. A Review of the Role and Impact of Export Processing Zones.
Washington, DC: World Bank.
Ministry of National Economy of the Republic of Kazakhstan Committee on
Statistics. http://stat.gov.kz/
OECD (2016), Multi-dimensional Review of Kazakhstan Volume 1. Initial
Assessment, OECD Publishing, http://dx.doi.org/10.1787/9789264246768-en.
OECD (2017), Building Inclusive Labour Markets in Kazakhstan - A Focus on Youth,
Older Workers and People with Disabilities, OECD Publishing,
http://dx.doi.org/10.1787/9789264273023-en.
P. Mitra et al. 2015. Estimating Potential Growth in the Middle East and Central Asia.
International Monetary Fund (IMF) Working Paper No. 15/62. Washington, DC.
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The Economist (2017), Kazakhstan Country report,
http://country.eiu.com/kazakhstan.
The Economist. 2015. Special Economic Zones: Political Priority, Economic Gamble.
4 April. http://www.economist.com/news/finance-andeconomics/21647630-free-trade-zones-
are-more-popular-everwith-politicians-if-not.
76
Chapter IV
4-1 Introduction
In the previous chapter we have learnt about the free zone experiences of Kazakhstan. How
Kazakhstan initiated the concept of free zones, what were the initial outcomes and how did
the country managed to rectify the shortcomings and adopt the right kind of policies and
incentives to make them successful. The factors contributing towards the success along with
few hiccups being confronted have also been discussed in detail.
This chapter will focus on studying the Shanghai Pilot Free Trade Zone (SHPFTZ), China on
the similar lines. Different aspects of the SHFTZ, its salient features, preferential policies and
reasons for success are discussed in succeeding paragraphs.
The Shanghai Pilot Free Trade Zone also known as SHPFTZ, is termed as the first modern
free trade zone developed by China in the famous city of Shanghai. The zone symbolizes
efforts of the modern Chinese leadership to open up its economy for the global arena. Unlike
traditional economic zones Shanghai Pilot Free Trade Zone which are aimed at enhancing
economic activity at domestic and international level, SHPFTZ has been developed while
considering more far reaching aspects. Apart from the features similar than normal FTZs,
SHPFTZ presents three glaringly distinguishing aspects, which are peculiar to China
(Björkgren, 2015):
77
Figure 4. 1 Distinguishing Aspects of SHPFTZ
SHPFTZ offers
businessess across the
globe, a simple Platform
for hassle free penetration
in Chinese market
78
The zone was further expanded in April 2015, by incorporating 3 additional zones and an
overall area of more than 120 square kilometres. Summary is as under (FBIC, 2015):
79
Figure 4. 3 SHPFTZ Bonded Area and Zones
80
Figure 4. 5 Organization of Administrative Committee
HR Bureau
Economic development
Bureau
SHPFTZ Adminstrative
Financial services Bureau
Authority
Bureau of enforcement of
comprehensive regulations
81
Figure 4. 5Functions of administrative commitee
Lujiazui Financial and Trade Zone, spanning over an area of approximately 25 sq kms acts as
the principal functional zone for Shanghai World Financial Centre (SWFC). This area being a
comprehensive financial system in terms of financial markets, infrastructure and
environment, provides an opportunity for execution of multifarious financial functions under
one platform. Owing to a considerable rise in the usage of RMB (Chinese Currency) in the
international market, Lujiazui has been attracting increasingly high numbers of local as well
as international institutions (SHPFTZ, 2018).
82
Table 4.2 Institutions inside Lujiazui Financial and Trade Zone
Banks 214
Miscellaneous Institutions
Zhangjiang Park is considered as the most significant high-tech industrial zone in the region
covering a total area of approximately 80 sq kms. It was established in 1992, however, it has
gained the real impetus since the local government decided to lay more emphasis on this park
in 1999. Since then it has seen very rapid growth in the types on industries being established
in the zone. Kangqiao Industrial Park & International Medical Zone and Zhoupu Fanrong
Industrial Area were incorporated in the park in 2010 and 2012 respectively. Significance of
the zone can be ascertained from the fact that it is house to more than 10,000 outfits
83
belonging to diverse nature of industries to include IT, culture, biomedicine and
environmental protection industries (SHPFTZ, 2018).
The IT industry has seen a lot of interest by the leading local as well as global IT companies
and research and development institutions. The park houses R&D setups of 8 out of world‘s
top 30 and 11 leading Chinese IT related industries (SHPFTZ, 2018).
Bio-pharmaceutical Industry.
The Park has formed a dedicated setup for the pharmaceutical industry which house all the
necessary wherewithal and facilities required for R&D, manufacturing as well as marketing
the new medicines. Its success can be measured from the fact that the park is house to R&D
centres from top 7 international pharmaceutical industries. As a whole, the park entails more
than 400 pharmaceutical related R&D institutions (SHPFTZ, 2018).
The park is also home to few of the best-known international culture and creativity related
outfits who specialize in movie production digital as well as animations, TV, and other latest
media aspects like online games and creative designing. Since 2011, the park has been
designated by the Chinese Cultural Ministry as demonstration park for international culture
(SHPFTZ, 2018).
The park also lays special emphasis towards the R&D as well as production of the Green
industry. The top Chinese enterprises are working in the domain of water purification plants /
processes, energy conservation and development of biological fuels (SHPFTZ, 2018).
One of the most significant hall marks of the park is to act as an international innovation
centre in the field of science and technology. It focuses on creating entrepreneurship base for
following fresh areas of economies (SHPFTZ, 2018): -
84
Figure 4.6 New Areas of Economy
New technologies
New industries
New models
New businesses
The park has made significant headway in this field by establishing more than 20 universities
and research institutions, while simultaneously housing more than 400 R&D platforms of the
national as well as international stature (SHPFTZ, 2018).
The SHPFTZ bonded area was established in 2013 with an area of approximately 29 sq kms
and encompasses 4 main areas. This area is the test bed for execution of various reforms
related to governance, financial matters, FDI and tax policies. Areas of the zone are briefly
described below (SHPFTZ, 2018): -
Waigaoqiao FTZ was established in 1990 and covers an area of approximately 10 sq kms.
Designated as the foremost demonstration area for promotion as well as innovation in the
imports and exports. The Chinese central government has granted the zone with the status of
"National Base for International Cultural Trade" (SHPFTZ, 2018).
85
4-2-7 Waigaoqiao Free Trade Logistics Park
This park was established in 2003 with an area of approximately 1.03 square kilometers.
Augmented by the Waigaoqiao FTZ, the park has become a significant platform for
establishment of state-of-the-art global logistics industry. The park has unique incentives in
terms of using sea communication resources of Shanghai Port and the privileged policies for
FTZ (SHPFTZ, 2018).
Yangshan FPTA, was established in 2005 and covers an area of approximately 14 sq kms.
Owing to its significance as an integrated zone for both the port as well as the bonded area,
the FTPA is considered as a prominent distribution zone for the goods destined for EU and
USA. The zone has equal significance for both domestic market as well as international trade
(SHPFTZ, 2018).
Pudong Airport FTZ was established in 2009, covering an area of approximately 4 sq kms.
The zone has been planned as pilot project for airport services industries and activities related
to airfield logistics. The zone is a hub of distribution centres from the top logistics companies
across the globe. A chain of industries entailing the air distribution centres, finance & leasing,
express transshipment and display centres for luxury goods is also available in the FTZ
(SHPFTZ, 2018).
The Expo Area emerges as the significant feature of the latest developments in SHPFTZ. The
area is witnessing a rapid development of hubs of economy related to shipping, finance and
high-end service industries. The area comprises of 3 land parcels called Pudong, Yaohua and
Foreshore land parcels (SHPFTZ, 2018).
Pudong land parcel is a public activity centre which entails activities related to
culture and related exhibitions, tourism and entertainment.
Yaohua land parcel deals with activities related to entertainment and culture with
special focus on ecological tourism and modern living.
Foreshore land parcel aims to become a hub for multiple non-financial
organizations, sports facilities including media facilities.
86
4-3 Priority Focus Sectors
The Chinese authorities have focused on the services sector development in the SHPFTZ.
The objective behind this decision is to rise the domestic consumption and shift the focus of
economic growth from government led investment towards market driven factors. The six
service sectors prioritized in the development are appended below (Björkgren, 2015): -
Financial
Services
Social Shipping
Services Services
Cultural Commercial
Services Services
Professional
Services
Source: Björkgren, 2015
There are several factors which have contributed towards the success of SHPFTZ. Few of the
significant ones are discussed below:
„Negative List‟:
The Negative List is the official document which identifies limitations levied on industries,
businesses and investments in the zone (Björkgren, 2015). The firms or businesses placed on
Negative List are not eligible for the incentives offered to the companies not available on
87
negative list (Lu, 2014). Negative List is one of the most significant attractive features of the
SHPFTZ, its salient aspects are mentioned below:
It implies that SHPFTZ permits / facilitates investment in all sectors less few on the
Negative List
for the sectors not on the negative list, the zone reduces the registration / business
comeencement steps to a bare minimum level
For the business / trade / production in the unrestricted sectors, foreign investors are
treated at par with the domestic ones
This type of approach , although practised in the other parts of the world, has been
adopted by China for the first time, as China has been following a "Postive List
Approach" which restricts foreign investment in very few sectors
The list specifies the sectors where foreign investment is either encouraged, restricted
or prohibited. Related sequences of actions and incentives are also specified against
each catagory.
China has introduced relaxed visa policies for the foreign investors as well as qualified
individuals applying for visa or residential permits for China in general and SHPFTZ, in
particular. The SHFTZ companies have the permission to provide electronic visas to the
highly qualified individuals, who will then be given visas on arrival. Similarly, entry and exit
procedures are also been managed in SHPFTZ (Leclaire and Shira, 2015).
Financial leasing companies for a major portion of SHFTZ apparatus, therefore, several
preferential policies have been adopted to facilitate these companies. Few significant ones are
mentioned below (Leclaire and Shira, 2015): -
Commercial factoring has been permitted to the leasing companies, but it has to be
relevant to their core business.
88
Various facilities like encouragement in financial leasing for oversees to enhance
the global outreach of RMB have been offered to leasing companies.
Financial leasing companies have the permission to open a special account for
cross-border RMB and they can freely seek money from abroad.
SHPFTZ has reduced long traditional procedures of business registration to very basic and
simple filing procedures. The simplified processes help the investors in saving the time as
well as finances (ECA, 2015).
Several positive reforms at policy level have made customs clearance process in SHPFTZ as
simple streamlined and faster. These reforms include online declaration, establishment of
89
One window operation for filing processes, introduction of faster declaration, inspection and
clearance processes. The process is further streamlined at Pudong Airport, where overseas
cargo is processed within 24 hours of receipt. These steps once combined together have
simplified and expedited the processing of custom clearance of goods from SHPFTZ (ECA,
2015).
One of the most significant provisions entailed in the SHPFTZ business environment is
related to hassle free movement of capital within the country and abroad. The processes have
been simplified in a manner that the investors can tranfer their capital between their offshore
and SHPFTZ accounts, without any hinderance, thus addressing one of the biggest challenges
being confronted by the businesses in China (ECA, 2015).
SHPFTZ offers, as part of its innovative policy in financial matters, the opportunity for the
integrated usage of Chinese currency into their overall operations with remarkable ease. The
step facilitates businesses to carry out their business functions in a more efficient in terms of
capital efficiency, smooth and cost-effective manners (SHPFTZ, 2018).
SHPFTZ lays a special emphasis on the e- commerce and a major step to facilitate foreign
enterprises in this field entails lifting the restrictions on them for independent businesses.
Now the foreign companies in the field of e-commerce can operate independently instead of
the previous condition of making a joint venture with a local Chinese company. Additionally,
there is no geographical restriction on these services, as these can be provided to the entire
country from SHPFTZ without any extra taxes (ECA, 2015).
SHPFTZ offers special incentives for the outbound investments to make it a great attraction
for the related businesses. Some of these incentives are discussed below (ECA, 2015): -
SHPFTZ has streamlined and made the process of record filing very quick.
Similarly, the automation-based integration enables a single submission to the
banks to cover all related formalities, in this regard.
SHPFTZ offers special accounts for remittances of funds out of China for the
purpose of investments are very reasonable rates.
SHPFTZ also allows the businesses based in the zone for offshore borrowing of
Chinese currency for the purpose of investments inland and abroad.
The zone also permits the businesses based inside the facility to offer external
guarantees without getting approval beforehand.
The policy changes also facilitate Chinese citizens and companies to invest abroad
with far more ease, irrespective of the area of investments.
90
Taxation:
The SHPFTZ provides specific tax incentives on selective aspects for both individual as well
as company level taxation in terms of income tax, VAT and other customs duties as well as
taxes. Few of these are discussed below (ECA, 2015): -
SHPFTZ offers the provision of paying certain types of corporate income taxes in
easy installments.
Similarly, Individual income taxes especially for the stock‘s businesses can also
be paid in installments.
SHPFTZ offers exemptions on the customs duties especially for import of
different type equipment / machinery required to be imported by the
manufacturing industries installed inside the zone.
The zone also has the provision of refunding taxed levied on exports under a
special scheme.
Movement of money to and from China has remained a major issue for the foreign
enterprises located in China. However, SHPFTZ has introduced some policy changes which
have eased up the process to a considerable extent. Few of these measures are mentioned
below (ECA, 2015):
All the banks operating in SHPFTZ, must establish a special and independent
accounting system for the companies functioning inside the zones.
A special type of accounts called Free Trade Accounts (FTAs), have been opened
in SHPFTZ, these accounts facilitate the businesses to easily transfer money
abroad or with in their multiple free trade accounts.
SHPFTZ regulations also permit the transfer of funds between the free trade
accounts and the main personal accounts of the companies. Whereas, the
maximum amount of money transfer has been capped at 50,000 US dollars,
anywhere outside the zone.
SHPFTZ permits the companies to raise financing in local or foreign currencies
without seeking approval, beforehand. Similarly, limits of borrowing have also
been doubled from the previous limits.
SHPFTZ has waived off the lower limit foreign currency deposits previously kept
as USD 3 Million.
91
Shipping, Logistics and Customs:
Reforms and policies in these areas have been given special emphasis owing to their
overarching impact on all types of businesses and industries functioning inside the SHPFTZ.
Few of the incentives are discussed below (ECA, 2015):
Ship Transport
Customs
Customs related incentives offered in SHPFTZA are discussed below (ECA, 2015):-
SHPFTZ allows a time cushion of 2 weeks in which the companies can seek a
delay in the customs formalities from the date of arrival of these goods in the
zone.
Procedural formalities for the overseas shipments have also been reduced, and
these can now be delivered using a mere shipping bill.
Different types of paperless declarations can be made online.
There are several other incentives to the importers and exporters in terms of
timings of inspections, customs declarations and maximum duration for transfer of
goods outside the zones.
Opening-Up Measures
One of the biggest advantages SHPFTZ offers is regarding the frequency as well as quantum
of openness of its service and manufacturing industries. This can be gauged from the fact that
since 2013, the zone has offered 54 opening up measures for various industries, the quantum
as well as frequency of these opening up measures is only being practiced in SHPFTZ
(SHPFTZ, 2018).
92
4-5 Contributions of SHFTZ to the Chinese Economy
In 2010, the Jinqiao Economic and Technological Development Zone, Jinqiao Economic and
Technological Development Zone (South Park) and Nanhui Industrial Park gained positive
momentum of economic growth and various economic indicators achieved rapid growth year-
on-year and set a record high. Achievements / contribution of these two zones towards the
economy are mentioned in the table below (SHPFTZ, 2018): -
Similarly, contributions by the Pudong Airport Industrial Park towards the economy are
mentioned in the table below:
93
4-5-2 SHPFTZ - The Best Performer in Attracting FDI in FTZs of China
Almost all FTZs in China have received high rates of FDI along with a greater number of
foreign investors and enterprises. However, SHPFTZ has been the top performer in both the
departments i.e. it has attracted the greatest number of foreign investors and maximum
amount of FDI. Details are shown on the chart below (Shira, 2016):
498 501.7
500
418
400
189.4
200 151
100 68.9
0
Shangai FTZ Tianjin FTZ Guangdong FTZ Fujian FTZ
According to the data described in the table below, it can be ascertained that the capital flows
of China have raised since the introduction of the SHPFTZ. Before commencement of the
SHPFTZ, the volumes of inflows and outflows used to be approximately 300 to 400 billion
USD. It can be observed that beginning from the fourth quarter of 2013 (i.e. after SHPFTZ),
the capital outflows have gradually raised to 620 billion USD. Far sharper rise is observed in
the capital inflows, which have raised from 402 to 636 billion USD (Yao & Whalley, 2015).
94
Table 4.6 Capital Inflows since Establishment of SHPFTZ
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
2013 2013 2013 2013 2014 2014
Assets (Capital Outflow) 457.30 227.65 482.50 555.19 602.64 620.95
Direct Investment 67.89 79.61 73.99 126.36 93.20 90.56
Portfolio Investment 22.44 22.95 17.93 40.83 40.33 26.20
Other Investments 366.98 125.09 390.58 388.01 469.12 504.19
Reserve Assets 157.08 47.07 97.57 130.99 125.90 22.75
Liabilities (Capital inflow) 368.81 199.92 402.49 428.28 508.83 636.56
Direct Investment 35.96 33.99 39.83 53.10 39.53 51.24
Portfolio Investment 8.36 12.98 7.90 14.36 17.99 11.65
Other Investments 324.48 152.95 354.76 360.83 451.31 573.67
Salient features of economic performance of SHFTZ during the past few years are
summarized below (SHPFTZ, 2018):
95
Figure 4.10 Economic Performance of SHPFTZ
Percentage of foreign comapnies has raised to four times i.e. 20% from 5% in 2013.
A total of 49000 FTA accounts for individuals / companies involving 130 countries
opened
Paid-in foreign capitalraised to 16.7 billion USD, i.e. Double the amount collected
before establishment of SHFTZ.
During 1st half 2017, In the first half of 2017, SHFTZ's imports and exports value
raised to 100 billion USD
Total imports in 2017 totaled to 446.02 billion yuan, i.e. 48 % of Shanghai's total
import value
Growth in exports by 8.5 % to 196.68 billion yuan, i.e. 31 % percent of the total
exports of Shanghai
SHFTZ has enhanced economic development of Pudong New Area. GDP maintaining
a growth rate of more than 8% while FDI has raised above 37%
Similarly, imports and exports of SHPFTZ have always been on a gradual rise, which is
playing a positive role in Chinese economy.
96
Figure 4.11 Imports / Exports of SHPFTZ
1600
1460
1400
1350
1200 1180
1000
800
762 742
600
400
200
0
2014 2015 2016 2017 2018
Since the establishment of SHPFTZ, there has been a gradual rise in the yearly throughput of
the Shanghai port. This aspect is reflective of the performance and increased utility of this
port by various users. Overall impact of the increased throughput is the rise in the economic
activity in SHPFTZ (Hong, 2018).
97
Table 4.7 Rise in Yearly Throughput of SHPFTZ
98
4-6 Conclusion.
SHPFTZ emerges as one of the most successful Free Trade Zones of the Modern era. As
reflected from its title, it was established as a ―Pilot‖ FTZ, where the Chinese government
wanted to experiment reforms of various types and at various tiers.
The reforms at the governance, administration, management along with the steps taken to
open up Chinese economy by offering numerous facilitates and incentives to local as well as
foreign businesses has paid off. China has offered similar incentives in its other FTZs which
is a good omen, not for the Chinese economy alone, rather for the Global economy in
general.
Now we have discussed three case studies, where FTZs have been made successful by using
different policies which have been tailored to suit the ground realities of the respective
countries. An endeavor will be made in the next chapter to apply these ingredients of success
to Algerian economy and formulate a suitable FTZ model for the Algerian economy.
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Chapter V
5-1 Introduction
The chapter aims at ascertaining the relevance of FTZ model for Algeria while studying the
successful FTZ models discussed in the preceding chapters of this thesis. A systematic
approach has been adopted to draw the relevant conclusions by initially carrying out an
overall economic overview of the Algerian economy; its key facets, challenges, and
hindrances for establishing FTZs.
I will be reviewing the historical development of the Algerian economy as a basis of FTZs
policy. I will than, look at the competitive advantages of the Algerian economy and its
international trade pattern. This will be done by looking at the geo-economic location of
Algeria, trade of balance, natural and human resources, and other factors affecting FDI in the
country. Furthermore, I will shed light on other competitive advantages of the Algerian
economy. This section presents the macro-economic and structural interventions in the
development planning system that were seen to be fundamental for FDI and FTZ
The third and most significant section discusses why reversion to FTZ model is important for
Algeria and its economy in the light on contemporary experiences. The section further goes
on to discuss recommendations / steps for making its own experience a successful one basing
on positives learnt from the three case studies.
At the time of Algerian independence on the 5th of July 1962 it had an underdeveloped
colonial economy (Constitution of Algeria, 1963). The economy was characterized by little
exports and many imports in even good to satisfy basic needs. Majority of its population
worked mainly in the agricultural sector (Guillot, 1960:11). Its pre-independence economy
was composed of a labour market made up of two groups. These comprised of the Europeans
Labour market and the Muslims (Lambert, 1962). Its immediate post-colonial economy was
characterized by a weak human capital that was a result of asymmetric education (Darbel and
Rivet, 1962). The Algerian economy has had several phases of economic planning that tried
to diversify its economy and remove dependency on hydrocarbons.
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This led to self-organization of Algerian farm workers into committees of self-management
of farms that had been left by European farmers.
It can be cogently argued that industrialization was Algeria‘s policy since independence. This
is affirmed by the 1976 National Act. This Act states that Algeria was to follow
industrialization as a national development strategy to aid industrial sectors. This was mainly
focused on chemical, steel and hydrocarbon industries that are assumed to have potential
external impacts on other sectors of the economy. Industrialization was also chosen as a
strategy because it was a mean of reducing unemployment that had been inherited from
colonialism. Although industrialization policy aimed at the chemical industry, hydrocarbons
industry, goods industry, and iron and steel industries, it was supposed to an impact on
agriculture (Mohammed, 1993). This was because these industries were supposed to produce
goods as in-puts in agriculture.
From 1967, the development plan of the Algerian economy followed a centrally planned
command system. This saw it first four-year development plan from 1970-1973. It is through
this plan, that the country was able to attract huge investments. These investments were
financed through oil revenues at an average investment rate around 28.3 % from 1970 to
1973.Later, this was to rise to 40.4 % from 1973 to 1978, getting to a peak of 47.8 % in 1978
(World Bank, 2003:12).It is this foundation that opened up to the policy of import
substitution that ensued into heavy manufacturing in Algeria. This led to rapid development
in manufacturing leading to high levels of employment in country. However, the
employment was mainly public and industrial controlled by state enterprises (Zoache, 2012).
Although, Algeria tried to liberalize the economy, trade remained dominated by the state as it
was a central planned economy. At this level, the economy was organized in such way that it
allowed for an increase in the export of its local products. But state-run companies were
given a monopoly and protection over imports of products in their areas of trade. For
example, steel monopoly was awarded to the National Steel Association (SNS) and the
National Society for Mechanical Engineering (SONACOME) had a monopoly over imports
of mechanical engineering products (Benis, 2004).
The efforts to reform foreign trade started in early 1980s increased with the fall of the oil
prices in 1986. This established a system of export diversification and amended the law that
had allowed the state to be the only monopoly in foreign trade. It was during this period that
licenses to import goods without a payment receipts were first issued. This made it possible
to import goods without payment in foreign currency from the Central Bank. The
deterioration of the economy resulting from the decline in the oil prices led to extensive
reforms and propelled privatization to become an urgent matter. This was aimed at
encouraging other exports so that they would bring in more foreign reserves. There were
other polices that were implemented to liberalize the economy during this period and these
included: -
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(1) Introduction of tax incentives in 1986 to improve the price competitiveness of
exports. They also involved an exemption from the tax imposed on the portion of
industrial profits attributable to export as well as exemption from payroll-based lump-
sum payments.
(2) Establishment of an export subsidy that was intended to reduce the effects of the
overvaluation of the dinar exchange rate. This was set depending on the type of
product and the status of integration.
(3) Creation of foreign exchange accounts for export companies and for important
companies to pay for their imports
(4) All new exports received a subsidy on the 50 % freight of the goods to be
exported.
(5) For foreign companies and experts that were operating in Algeria repatriation
period for foreign currency incomes was given a period of four months.
The 1990s-oil slump led to instability in the political and social context of Algeria with
serious political troubles from 1997-1998. This turmoil led to economic downturn in the
country ensuing into a deficit and public debt. This period was characterized by rising public
debt, inflation and high levels of unemployment together with poor growth. This economic
situation had a negative effect on the manufacturing sector. The sector could not be sustained
and therefore Algerian public enterprises experienced enormous losses, which led widespread
unemployment. It is during this period that the country tried to implement International
Monetary Fund (IMF) stabilization programs. These entailed a microeconomic stabilization
program that lasted one year and a structural adjustment program, which took a period of
three years.
Although these programs were meant to revitalize the Algerian economy, it still experienced
a recession with high levels of unemployment, a huge unbalanced balance of trade and high
levels of inflation. This period was characterized by high levels of unemployment close to 30
%, a budget deficit of around 8.7 % of GDP and a rapid growth of the money supply (+21
%). During the stabilization programs by the IMF and the World Bank Algeria could obtain
loans from the Paris club to stabilize its economy. During structural adjustment programs the
country promoted economic liberalization policies of privatization, reduction of tariffs,
control of wages and reduction in investment expenditures (Greater Algiers index). It is these
programs that marked Algeria‘s transition from a socialist command economy to a market-
oriented economy (Ozzzir, 2009).
This period was marked by structural adjustment programs especially aimed at the external
payments‘ crisis. This was a result of dealing with the weakening of the country‘s external
financial status that led to rearrangement of debt repayment aided by the International
Monetary Fund (IMF). During this program foreign trade and policy had to be reformed by
introducing fundamental changes. These changes included a full liberalization of imports and
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making easy access towards foreign currency. This allowed for Dinar to be easily converted
with the view of regulating imports into the country (Dahmani, 1999).
The Central Bank of Algeria in 1994 changed the needs for financing imports by making sure
that a banking domicile was a necessary requirement (Bank of Algeria, 1994). In addition,
commercial banks were given an oversight over import dealings, this saw an enactment on
how a number of import transactions were to be carried out. They included cash
transactions, debit payments from the foreign currency account and from supplier credit lines
for exports together with government credit. The process of liberalizing the economy
continued in Algeria culminating into negotiations with the European Union. To complete
the process of liberalization, in 2002 a committee recommended Algerian accession to the
World Trade Organization. The process was further cemented by Ordinance No. 01-02 of 20
August 2001, which reduced customs tariffs putting it at a maximum rate of 30% (Bakir,
2012).
Furthermore, the government started a new industrial export strategy in 2007 through the
Ministry of Industry. This was aimed at re-industrialization policy as well as boosting and
diversifying the exports. The objectives of the policy were:
Following these policies and structural adjustment programs, the Algerian economy became
more stable. This was sided by an increase in oil prices, which led to a favourable balance of
trade with excess liquidity in the banking system. The objective of the Algerian government
was to liberalize its economy so that it could initiate the growth of the private sector. The
realization of this objective was aided by the peaceful period the country was enjoying and an
increase in the oil prices. The increase in the oil prices from US $ 13 per barrel in 1998 up to
$60 in 2005 facilitated the stabilization of the economy. In addition, the increase in oil prices
lead to more flexibility and liberty for the government to proceed with the reforms of the
economy. Consequently, the country launched an Economic Recovery Program (ERP) for
2001-04.
This was aimed stimulating aggregate demand as well as containing the rising levels of
unemployment by government investment in infrastructure to improve agricultural
production. This led to a reduction in the national unemployment levels through increased
construction and agricultural work. Although government policies had a positive impact on
unemployment, it did not have a positive impact on manufacturing. During the same period,
the Algerian government tried to promote private investment both in small and medium
enterprises. It is during this period that Algeria started using the finances from its
hydrocarbons to finance industrial development in the country (Bonin, 2009).
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5-2-3 Algeria‟s Economic Diversification Policies post 2000
In cooperation with Algeria‘s global partners, the state designed four transformation or
modernization programs which focused on several business categories
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For instance, in 2008, the Algerian-French Export Consortium (CALFREX) was
formed by the National Agency for the Promotion of Foreign Trade (ALGEX) and the
National Chamber of Agriculture in Algeria, and the Optima export association in
France. This aimed at supporting the sale of agricultural goods as exports. The
motivation for the partnership was through a collection of Algeria n exporters and
French suppliers located in Marseille. This Consortium was formed to act as a public
limited corporation: the Algerian commission owns 60% of the Consortium while the
French owns 40%.
The Consortium consists of three groups with two being in Algeria and the other one
is based in France. They try to improve the value of agricultural goods by making sure
that products are branded properly and marketed around the globe. In 2013 the
United Nations Industrial Development Organization (UNIDO), two agri-food export
associations were set up i.e. the General Industrial Agri-food Products Consortium
(GIPA) for animal proteins, and the Algerian Agro-cereal Consortium (AAC) for
cereal foodstuffs.
The Algerian Agri-food Industry Consortium (ACIA) was founded in 2014 and it includes 45
firms and encourages the export of agri-food stuffs. It conducts advertising events as well as
product classification for its stakeholders. In 2015, many trade carnivals were prepared by
this consortium and it has previously given aid to eighty firms. This was followed by a
formation of a consortium focusing on date fruit trade in Tolga in Biskra province with
twelve producers.
Nonetheless, the country‘s logistics competence seems to be fragile as Algeria is graded the
140th out of 150 nations under the World Bank's Logistics Performance Index (Barkir,
2012). The country‘s logistics‘ ability is challenged by two major limitations:
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(including transport operatives, taxes, banks, clearing and forwarding
representatives, technical control superintendents and port employees);
The Algerian Chamber of Commerce and Industry (CACI) has set up a team to
enhance logistics and transportation to support and restructure logistics abilities
and diminish logistics-associated charges.
In May 2016, the Algerian government approved a three-year economic approach known as
new growth model. This strategy is based on the belief that the oil prices will always be rising
by at least 10% annually through 2019. According to Pera (2017) this strategy has enabled
the country to come up with the following economic objectives:
The beginning of 2017 has seen the government enact policies of attracting FDI by opening
up the economy to the foreign investors. This has been through facilitating investors and
assuring them of repatriating their profits. This strategy has been adopted in line with the
Algerian‘s policy of economic liberalization and privatization (UNECA, 2017).
In order to establish the completive advantages of the Algerian economy to attract more FDI
into the future FTZ, I will be looking at the geographic and economic status of the country,
its human resources, in addition to the infrastructure development and other competitive
advantages.
Nestled against the Mediterranean coast of North Africa, People's Democratic Republic of
Algeria was born in 1962 when it retrieved its independence from France following a seven
and half year war.
It has borders Western Sahara, Libya, Morocco, Mali, Mauritania, Niger and Tunisia by land
and Spain and Italy by sea
Algeria is made up of 48 provinces and more than 1,500 communes with a 2019 population
estimated at 42.68 million, making it the 34th most populous country. It is also the 10th
largest country in the world and the largest country in Africa
Due to its geographic or economic status, Algeria could be one of the best places for FTZs
because it represents the link between Europe and Africa.
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Figure 5.1 Algerian Map
Source: https://images.app.goo.gl/GewvAhh4R8DjMfaA6
With a manageable population in economic terms of about 42.68 million. Algeria is one of
the most sparsely populated countries in the world with just 15.9 people per square kilometre
(38/square mile). The capital and largest city is Algiers.
The major factors Algeria can consider beneficial is its geographic location of being situated
at the middle of the Maghreb nations (Aptheloz and De Saint-Laurent, 2004). Depending on
Europe, Africa and Arab states, Algeria is strategically located for the sustainable as well as
improvement of its investment prospects comprising FDI. Definitely, Algeria‘s strategic
situation enables it to simply have access to prospective neighbouring markets, and calls for
export based FDI strategies, which permits Algeria to exercise networking partner
relationship with EU to form a Free Trade Zone (UNCTAD, 2004).
Nevertheless, the contemporary socio and geopolitical scenario of Algeria have been difficult
to maintain because of the lack of proper and centralized force that can provide the decision-
making processes in the country.
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Algeria's economy is dominated by its export trade in petroleum and natural gas,
commodities that, despite fluctuations in world prices, annually contribute roughly one-third
of the country's gross domestic product (GDP)
Petroleum and natural gases are the country's most important mineral resources. Algeria
currently exports about 90% of its crude oil to parts of Western Europe. Its largest gas and
petroleum deposits are found mainly in the Eastern Sahara and these are transported to
various seaports by means of pipelines
The country has some of the most important oil fields that are generating 22 billion USD for
its economy. The proved reserves are estimated at more than 12 billion barrels of crude oil
and 4.5 trillion cubic meters of proven natural gas in the country of which 45 billion is
exported (OPEC, 2019). The amount of balance and levels of the reserves that Algeria holds
are tremendous.
The energy area is a component of business interest for external investors, and Algeria is
ranked as the third biggest provider of natural gas globally and as the fourth energy provider
to the European Union (EU). Basically, Algeria has been a steady supplier to the European
Union for over 30 years (http://www.oilandgasinternational.com).
The Oil and Gas Journal (2007) indicates that, Algeria comprises approximately 12.3 billion
barrels of confirmed oil properties and is ranked the 3rd biggest on the African continent after
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Libya and Nigeria. On the other hand, the report indicates that Algeria‘s resources are still
not entirely explored with respect to possible forthcoming hydrocarbon findings. Through
this key factor, it is necessary to note that energy capacity comprising of oil and gas, has been
vigorously supported by the government of Algeria. This practical strategy concerning energy
growth in the country could act as a model for other upcoming companies.
The following map shows the Major Oil and Gas Fields Infrastructure
In summary, the country is rich in the natural reserves of oil and gas and this can keep the
Algerian economy stable.
The country has enough human resources comprising of 65.5% of Algeria‘s population which
consists of people with the age of 15 to 64 years (i.e. 11,777,618 females and 11,976, 965
males) and these are ready to study and become professionally experienced. The country
approximately has 70% of the educated individuals and 40,000 learners are registered in
fourteen institutions of higher learning per annum nationally.
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Figure 5.4 Labour Force Participation Rate in Algeria
In the case of the labour force, Algeria‘s capability is at more than 12 million in the country.
The labour force‘s participation remained at 41.8 per cent in the previous fiscal years with the
unemployment rate at 11 per cent by the end of the 2017 fiscal year (CIEC, 2019). This
means that the country has large population with no employment perspectives.
Unemployment rate was 11 per cent by the end of the 2017 fiscal year (CIEC, 2019). This
means that the country has large population with no employment perspectives.
These numbers show just how much the economic situation is bad. Especially when
producing jobs for the Algerian citizens.
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The present status of such low numbers has the main reason being related to the
unavailability of the required skill labours as per the economy of the country. Meaning that
the country and its dependence on hydrocarbon has limited the levels of the experts that are
important for the country‘s economic diversity. Conversely, there is a high brain drain that
has led to the migration of the Algerian population to other areas.
The low labour expenses may be considered as one of the major factors favouring the
Algeria‘s competition and encouraging overseas financiers. Nevertheless, it should be noted
that, the Guaranteed National Minimum Wage (SNMG) is responsible for determining
remunerations in Algeria, for a job period of forty hours.
Algeria underwent a massive investment and development campaign to bring the country into
the present global competitive level.
Algeria has established road network of primary; Motorway and secondary road system to
104, 000 kilometres.
Algeria‘s rail network used to be in a deplorable condition. However, enormous investments
and influx of development in the infrastructure has been witnessed in the past two decades.
The state-owned company has been investing in such an amount that the railway network is
now considered the best in Africa. By the current statistics, the overall network has been on
more than 112, 000 kilometres rail network (OBG, 2019b). Algeria‘s most ambitious of these
development plans is the mending up the old and destroyed railways tracks. As well as the
project of Relizane-Tiaret-tissernsilt railway line of 185-kilometer track. In addition, it has
plans to build more lines and enhance the network with an investment of 47 billion USD
investment and budget allocations (OBG, 2019a). These investments and the amount of the
concentration that the country has placed upon the infrastructure development for
transportation and other related fields is one of the largest competitive advantages.
The other important competitive advantage is the development and establishment of water
management. In recent years, the country has been investing hugely and heavily into the
infrastructure of providing the water resources for citizens and businesses. The result of such
investments by end of the year 2023, Algeria is going to have 139 Dams in its place (OBG,
2019a). The development of these dams will also lead to further integration of electricity into
the national grid that will enhance on further economic ability. Desalination and water
treatment plants have also been installed that includes the Magtaa plant near Oran that shall
contribute profits of as much as 15 million USD annually. This plant is the world‘s largest
ultra-filtration membrane that has a capacity of 50, 000 cubic meters of water filtered daily
(WT, 2019). Overall, Algeria‘s competitive advantage has been greatly stressed from the
development of these initiatives for gaining water management infrastructure.
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In summary, to ensure economic sustainability of the country, Algeria has accomplished a
fashionable infrastructure system which keeps developing slowly and entails the following
components.
Ports cover 1000 kilometres especially at the coast (Mediterranean Sea) because
of Algeria‘s location. This makes some of the ports to be dedicated for mainly the
export of petroleum goods while others are used mostly for fishing and tourism
activities.
Airports: Algeria has 51 known airports and 30 deal with aeronautics while 12 are
responsible for international trips.
Universities: Algeria‘s literate population comprises about 70% for instance 14
universities admit 40,000 students per annum nationwide. More universities and
vocational trainings are being setup.
Another major competitive advantage that Algeria has is the development in the education
sector.
In the 90s, with high petroleum prices, the country thrived with the development in the
economy, and the most important of the investments attained was the development of the
universities and the scientific and educational fields as well.
Santander (2019) has identified that investments in Algeria has been reaching toward
important agreements in the education sector in the country since 2016. These included the
investments form Saudi Arabia, UAE.
Moreover, Turkey has been showing interest in investing into the country, there are have
been creation of the Turkish-Algerian Business forum that took place in 2018. This
investment and the setting of the business forum pushed into the development of the genesis
centres in the urbanized cities like Algiers, Oran, etc.
In short, the above competitive advantages were the reasons why we say several investors
from the European countries like Italy, Spain and France.
Focusing on Algeria between 1996 and 2006, the World Bank‘s annual report 2007
emphasizes a positive assessment in political indicators for government control which is due
to the above-mentioned economic and political stability.
(http://www.worldbank.org/wbi/governance/)
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Currently, as the OECD has declared, Algeria is regarded as a low -risk nation, and with a
better political situation, both internally and externally.
Since 1990s. Algeria has signed numerous joint venture contracts and agreements for dual
levy evasion, with several countries worldwide. Through regional integration, Algeria is
among the partner states of the Arab Maghreb Union (which comprises Libya, Algeria,
Morocco, Mauri-tania and Tunisia), importantly expanding export prospects for Algerian
goods. Furthermore, Algeria is among the member states of the African Union as well as the
New Partnership for Africa‘s Development.
In addition, during 2001, Algeria signed a contract with Unites States (the Trade and
Investment Framework Agreement (TIFA), thereby successfully establishing a new
commercial link between the two states. Algeria too acknowledged a treaty, as a control of
the European Unions‘ motivation to ensure resilient linkage with her neighbours in Eastern
Mediterranean Sea and Southern Africa. It is anticipated that this treaty would lead the
country to apply new investment developments, particularly in its banking and monetary
structures, eventually increasing FDI entries into its economy (KPMG, 2009).
Furthermore, the ascension of Algeria into the World Trade Organization (WTO) is important
for the nation and would result into a stable integration of the Algeria into the global
economy (WTO, 2008). This will improve on the climate for investment in the country.
Certainly, through the new developments, the domestic economy has generated
competitiveness in the private sphere. Additionally, in the area of intellectual asset
ownerships or entitlements, the guidelines have begun to be consistent, regarding global
values recommended by the TRIPS Agreements, hence generating new investment forecasts.
Algerian growth is mainly influenced by reliance on the hydrocarbons composed of oil and
gas exports. This saw the growth at 2.8% in 2013, which was followed by a decline in the
economic out-put by 5.5% of the GDP from the hydrocarbon sector. It can be argued that the
hydrocarbon sector has been falling for almost nine years. The decline has been a result of
an immediate impact on the decline in energy production as well as an indirect impact of the
increasing internal demand for energy use. As a consequence, by 2013, the hydrocarbon
sectors contribution to the economic development of the country was at 1.9%.
By 2014, there was a sharp decline in by at least 40% in oil prices with a barrel of oil at an
average $55 compared to $111 in 2011. Conversely, growth as a result of an increase in the
prices for hydrocarbons rebounded in 2013, which led to an increase in the economic growth
of the country. However, the growth in the country was mainly a result of a strong domestic
114
demand driven by public spending. This was in investments such as public investment,
redistribution policies, and public-sector employment, civil service as well as wage increases.
This saw a composite public spending rising to 6.8% by 2014 with the household
consumption rising up to 5.3% (Algeria, Ministry of Finance Directorate, 2014).
This was on the background that the government had formulated ambitious five-year
development plans. These plans aimed on State-funded structural investments mainly in
housing and infrastructural projects. Given, the falling oil prices, these plans were realized
through major budget deficit increases at around -15.5% of GDP. The areas with the highest
rates of growth were agriculture at 7.6% transport at 6% and trade followed by construction
at 6% and 5.3% respectively. As a consequence of relying on hydrocarbons, Algeria enjoyed
a trade balance surplus of 1.89 billion DA in 2011. However, its exports fell by 34.6% while
imports increased by 54% in 2015.
Algeria has put in place different types of types of approaches that can help to establish an
open investment climate in the country (Jameh, 2008). It should be acknowledged that these
approaches are progressively significant due to the fast speed of globalization and
technological advancement that resulted into liberalization of companies and trade guidelines
in the third world nations. In general, and specifically for Algeria, the greatest significant
policies implemented to encourage investment include the following:
5-4-1-1 Privatization
The declaration of the privatization governing policy executed in 1995, trailed by the new
legal framework (Ordinance N.01-04, August 20, 2001) marked the country‘s shift to the
market economy. For instance, the privatization of one thousand and two hundred (1,200)
government commercial businesses demonstrates this shift obviously as a plan concerning
FDI desirability and is backed by the fact that presently all public business companies qualify
for privatization (Meyer, 2009).
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other than public enterprises, ownership: All or part of the social capital of companies owned
directly or indirectly by the state and or legal persons under public law, transfer of social
shares, or subscribe to increase the capital; Assets constituting an autonomous business of
State-owned companies‖ (http://www.mppi.dz).
In addition, It must be mentioned that, in line with the 2nd section 2001 Ordinance regarding
the increase of external investment involving FDI, complete or incomplete privatization is
regarded as an investment activity with a support to a domestic firm‘s investment in currency
or in kind, and in a complete or incomplete privatization (KMPG Guide, 2009). Furthermore,
the norm of freedom has been acknowledged by the 2001 ordinance and this paves the
ground for investment in different areas. This provides for some proportion of the resources
seized by external investors (apart from hydrocarbons, which require foreign financiers to
possess no more than 71% of capital).
Various recommendations were embraced by the National Council for Investment since 2004,
in the speeding rate of privatization, for better dynamism in the inquiry of new collaborations
and for the inaugural of holdings, in order to change it to an actor in the privatization course
through encouraging public businesses to start up their investment to the private sector, both
local and overseas, via the Economic Policy Review (EPR). This policy also offers incentives
to financiers, both local and external, and puts new regulations to support investment. The
management of foreign direct investment in Algeria is subjected to the control of the
following agencies: The Ministry of Participation and Investment Promotion and the National
Agency for Investment Development (ANDI), the National Council for Investment (CNI).
Currently, Algeria is considered as the only nation in the Maghreb, whose economy is
altering, particularly through privatization strategy to influence different sectors and shows
the degree of transparency of the state, (Aptheloz and De Saint-Laurent, 2004). Meanwhile
from 2005, 350 public enterprises have initiated their private investment and 100 public
enterprises were privatized in mid2008 (http://www.mppi.dz).
The capital incentives are predominantly associated with taxes they take into consideration
investors businesses and provide for contracts on entire or portion of the tariffs in a specific
time frame or for a fixed period. These are known as tax discounts or exemptions during the
short or long period of time and differ according to the investment sector. Specifically, in
Algeria, the National Agency for Investment Development (ANDI) offers some of the
commercial tax incentives to encourage overseas investors, which can be shortened by the
General Regime: the regions to be developed and the Investment Agreement Regime.
Furthermore, incentives are offered to businesses whose production and business are export
based. Additionally, Algeria‘s 5 free trade zones where businesses are exempted from entire
levies, taxes and other charges (http://www.mppi.dz).
116
5-4-1-3 Structural and Legislative Framework Development
Nevertheless, among the successes of Algeria in this sector is the National Agency for
Investment Development (ANDI) and this is a state agency with a managerial style, made to
assist both local and foreign investors. This body was formed in 1993 pursuant to the Law of
Investment Development in Algeria, and through the years, this body has turned to be a
simple reference for both local and foreign investment having key position, appreciations to
the panoply of rules guiding investment. On this note, Algeria started currently trying to offer
a suitable investment environment with several opportunities for support and incentives to
interest external investors by establishing legal and legislative ways of simplifying the course
of investment and safeguarding investors and their businesses.
According to OEC 2018, as of 2017 Algeria had a negative trade balance of $9.5B in net
imports. As compared to the trade balance in 1995 when it still had a negative trade balance
of $2.89B in net imports.
117
Figure 5.6 Algerian Trade Balance 1995 -2017
The above chart shows that the export was dominating until recent years, when during the
period 2012 / 2017 the exports of Algeria have decreased at an annualized rate of -12.2%,
from $70.5B in 2012 to $37.4B in 2017, making it the 56th largest exporter in the world. and
the 94th most complex economy according to the Economic Complexity Index (ECI).
The economy of Algeria has an Economic Complexity Index (ECI) of -0.812 making it the
94th most complex country. Algeria exports 24 products with revealed comparative
advantage (meaning that its share of global exports is larger than what would be expected
from the size of its export economy and from the size of a product‘s global market).
118
Figure 5.7 Algerian Exports 1995 -2017
During the period 1995-2017 period, Algeria‘s top exports were petroleum Gas ($15.6B),
Crude Petroleum ($12.8B), refined Petroleum ($6.89B), Carol Tar Oil ($427M)
and Ammonia ($425M).
Ant the top export destinations were Italy ($5.36B), Spain ($4.72B), France ($4.23B), The
united states ($3.7B) and Turkey ($2.27B).
119
Figure 5.9 Algerian’s Trade Top Destinations
In 2017 Algeria also imported $46.9B, making it the 51st largest importer in the world.
During the last five years the imports of Algeria have decreased at an annualized rate of -
2.5%, from $53B in 2012 to $46.9B in 2017. The most recent imports are led by Cars which
represent 3.76% of the total imports of Algeria, followed by Wheat, which account for
3.62%.
The top import origins of Algeria are China ($7.78B), France ($5.12B), Italy ($3.62B), Spain
($3.21B) and Germany ($2.93B), and Its top imports were Cars
120
($1.76B), Wheat ($1.7B), Refined Petroleum ($1.56B), Concentrated Milk ($1.2B)
and Packaged Medicaments ($1.17B).
In Algeria, appreciation goes to the desirability of the hydrocarbons department including the
changes implemented by the state presently, FDI influxes are improving significantly,
however not as adequately as equated to the prevailing prospective. Specifically, the robust
export performance introduced to Algeria by export based FDI including the energy sector,
mining and extractive companies has certainly facilitated Algeria to improve its export
arrangement and create progressive influence through capital influxes, foreign currency and
tax incomes (http//www.promex.dz., 2008).
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Table 5.1 Algerian Foreign Trade Figures
The latest report that has been submitted by United Nation‘s Organization for Trade and
Development (UNCTAD) gave a good insight into the situation regarding Algeria. According
to the UNCTAD (2019) report, the foreign direct investment inflow for Algeria has been at
positive 1.2 billion USD. This amount is quite low in comparison to 2012 when it was a
positive 1.5 billion USD. This decrease in foreign investment is mainly regarding the
development of the Arab spring that resulted in their loss of foreign investors. However, with
the present status, it seems that the country can reach the former numbers. In the case of the
FDI outflow, the country is experiencing a negative sign of 4 billion USD (WEF, 2019a).
This means that the domestic investors are taking efforts and are trying to generate
investment from the domestic market rather than the foreign.
122
Figure 5.12 Algeria Country Report
This shows that the domestic markets are starting to gain back the confidence of the local
investors. Therefore, the growth in this confidence will lead to the development of the
increase in the forging investment. Thus, there will be a positive sign of the country and its
path towards reaching the progressive and stable economic situation
The assessment of FDI flows to the country between the years 2000 to 2006 provides only a
small outlook of the effects of foreign companies, especially FDI, on Algeria‘s economic
development, encompassing funding (credit), technology transmission, and occupation,
balance of payment and production expansion, as well as export size. However, the
assessment of these improvements shows a sign of Algeria‘s future opportunity to expand in
different areas including the following.
Since the introduction of the Algerian economy to FDI, the investment rate (percentage of
GDP) has undergone a remarkable improvement, attaining 44% in 2000 (UNCTAD, 2014).
For the time being in the same year, the impact of FDI on gross fixed capital formation
(GFCF) was very small at 3.8% only. It should be noted that, the higher percentage of saving
in the country has now been utilized to support investments. Subsequently, the assessment of
the similar source summarizes that FDI is not a vital factor of financing businesses in Algeria.
The financial and banking departments have experienced some reforms; however, it should
be noted that, they continue to be old-fashioned in their management systems. This has not
123
been fast in improving current service delivery and giving new goods and services to their
customers. Currently, however, and since the introduction of the Regulations on Currency
and Credit in 1990, banks have been progressively resorting to private financiers both to
provide trading licenses to several private financial institutions, domestic and external.
For more economic consistency, financial and banking structures have to be designed widely
and transformation needs to influence administration, productivity, efficiency and marketing.
Currently, several developments were initiated to result into enormous financial
improvements (IMF, 2013). Therefore, this development trend shows that the government‘s
interest is to develop a modern and vibrant financial and banking system through
privatization, specifically a great indication to external financiers.
Furthermore, external investors find huge, untapped and uncompetitive market. In this
respect, Algeria is a very interesting market for telecommunication and Information
Communication Technology fields with government control on the fixed telephone system as
well as other associated services. Nevertheless, this area experienced important changes and
in 2000, the country has put in place a fundamental change with regulations impacting on the
post and telecommunications that changed the ordinary management structure into profitable
business with shares.
The most obvious issues in technology transmission are those resulting from privatization. In
Algeria, foreign companies have introduced their skills and knowledge to allow changes the
previous government-owned companies into economical and privatized businesses.
Additionally, in terms of transparency to external investors, the telecommunications
department has been exposed to rivalry in mobile telephone, and a permit has been approved
to Orascom, a foreign private firm from Egypt. This department has also gained from this
participation of foreign companies into the area of fixed networks that previously were very
insufficient, irrespective of the high demand. Definitely, Algeria had merely 2.6 million fixed
networks in the year 2002 for 30 million people, signifying a tele-density rate of 6%,
however it obtained a rate of 10.2% in 2003, a robust development, (UNCTAD, 2004). Thus,
the liberalization tendency began especially in 2003, with the consent of the 3rd mobile
telephone license to foreign financiers, followed by the introduction of the government
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telecommunications control, Algeria Telecom‘s funds to private sector in 2004, and
encouraging rivalry for the fixed telephony department in 2005.
Financial data has shown that FDI serves an important role in creating employment
opportunities for both skilled and unskilled labour, thus basically reducing joblessness.
Specifically, in Algeria, despite current developments, unemployment rate in 2006 was
relatively high, impacting negatively about 12.3% of the lively inhabitants, though it has
reduced than in the past years. On the other hand, several jobs have now been generated,
thanks remarkably to the local private department which serves an important part in creating
large prospects for employment chances in all divisions of the country.
Conversely, FDI has created few employment prospects since it mainly exists in the energy,
mining and banking sectors. And, studies have shown that these FDI sectors only create few
employment opportunities, (UNCTAD, 2004). Nevertheless, the telecommunications and
manufacturing departments have created numerous employment opportunities. Generally, the
CEO of ANDI noted that, FDI in the country was assessed clearly in 2006 in respect to
employment generation, making 81,000 jobs with stock choices and 202,534 overall jobs by
FDI ventures.
Given the structure of international trade, the Algerian government has tried to diversify its
economy from relying heavily on hydrocarbons. This has seen the authorities shifting their
focus on investment Policies.
The increased inflation rate and the unemployment rate in Algeria made the country focus on
the establishment of free trade zones (Aptheloz and Saint-Laurent, 2004).
Besides this, among the other reasons for taking the initiatives of free trade zones in the
country are associated with promoting the exports in order to further develop an efficient
relationship with the other countries as well as the provision of foreign currency.
The need to develop FTZs have become imperative in recent years than they have been in the
previous years.
As previously discussed, the current trade deviation is such that the country is under a severe
trade deficit.
125
The latest report indicates that it has a negative balance of trade with as much as 18 billion
USD in the previous economic reports released (OEC, 2019). The total of 90 per cent of the
export is solely related to oil exports, while 60 per cent of all the income is generated from
this (SG, 2019). Falling oil prices have led to the development of severe crises like the
situation in the country. Therefore, with the large deficit in between the export and import,
the country‘s need to develop the free trading zones became a necessity. This way it can also
improve on the employment opportunity in the country as it will enhance the business sector.
The free trade zones were also encouraged for attracting investment in the country thus
ensuring its development through the investment made by both national as well as foreign
investors (Stevenson, 2014; Pera, 2017).
Five zones in Algeria were planned; these were in the four coastal cities of Ghazaouet,
Mostaganem, Annaba, and Skikda together with the southern border town of Tamanrasset. In
addition, a ―cyber city‖ is being developed on the outskirts of Algiers (Christiansen, 2009).
It is clearly stated in Ordinance 01-03 that the zones are essentially meant to make a special
contribution to the government. However, with the new liberalization policies, this has now
been abandoned in favour of an open policy for investment.
So far only one FTZ has been established in Algeria based in Bellara, located next to the port
of Jijel (Christiansen, 2010). It started in 1997 as a traditional duty-free area next to the port,
but authorities had the intention of developing it into an export zone attracting light industry
from abroad and drawing on locally available primary resources such as agriculture, fisheries,
and forestry. The zone is about 523 hectares however; its cumulative investment and the
number of companies involved are not well known (Chrissstiansen, 2010).
Source: http://logistical.dz/wp-content/uploads/2016/08/18.jpg
126
5-5-1-2 The Algeria-China Jiangling Potential FTZ
The Algeria-China Jiangling Free Trade Zone is to be developed without any local partners
by Jiangling Automobile Group from Nanchang, Jiangxu province and Zhongding
International Group.
This Chinese company has more than 40 sales agents in Algeria. Zhongding International
Group is tasked for construction and engineering of Pingxiang Coal Group (PKCC). This has
been operating in Algeria for over 17 years in the construction industry.
The Algerian zone was projected to have a total investment of US$556 million and a land
area of 500 hectares, with a first development phase on 120 hectares. It planned to attract 30–
50 Chinese enterprises into an industrial park focusing on automobiles and construction
materials.
However, establishment of this FTZ has been in limbo since 2008 because of changes in
Algerian investment laws, which require to be jointly owned by an Algerian national
(Brautigham, 2009).
In a move to liberalize its economy, the Algerian government has passed different ordinances
specifically designed to improve the investment climate in the country. Therefore,
investments have been recommended in specially designated geographical areas. These
schemes enjoy benefits of the general regime as well as benefits that pertain to exemption
from customs duties on goods and services even if they have been imported or obtained
locally when they are used for the benefit of investment. In addition, the scheme enjoys an
exemption from property on transfer tax on real estate purchases that are used as part of
investment.
The scheme also provides benefits for VAT on goods and services that are utilized in the for
the benefit of investment. More exemptions are offered in fixed duties at a reduced rate of
0.2% when registering Articles of Association of the company as well as capital gains. The
state is also able to offer support in some infrastructural expenses that are fundamental for the
execution of the investment (Aberrahmane, 2010). Investors taking part in this scheme enjoy
a ten-year tax exemption that covers the company profit, the professional activity as well as
the land taxes (Mohammedi, 2010). In case, the investment is very important for the country
an Investment Scheme Agreement is carried out between the two parties.
The investment agreement is advantageous in that during the investment period because it
enables the investor a tax-free period. The investors also receive exemption from all kinds of
duties and levies on all that might have been imported or even locally procured. They are
127
provided with services that involve exemption for transfer duties that accrue on real estate
acquisitions as well as advertising.
It is these measures the government uses to provide incentives to investors so that they can
stimulate growth in specific areas. In additions, these measures are intended to create long-
term relations between the Algerian government and the companies. Through these
relationships, the government is able to stimulate domestic training of the population, build
local infrastructure and stimulate local markets. Conversely, Ordinance 01-03 has attempted
to identify investors that will have a long-lasting impact on Algeria. Ordinance 01-03 targets
companies that can have a long-term impact with Algeria and at the same time a legal
framework for the investment to take place (UNCTAD, 2003).
The framework that governs the tax exemptions for FTZs is provided by Ordinance 03-02 of
July 19, 2003 however, it seems that the Algerian government has not put into practice its
plans of designing Special Economic Zones (Algeria-US Dept. of State, 2016). The legal
framework of this rule contains features that govern the customs-free zone. It states that a
FTZ can be set up on land, which is fully owned by a private person or co-operate entity
(Ordonance 03-02, 2003).
Broadly, this law applies to any entity in Algeria; this can be a resident or non-resident in the
country. Among the incentives, in establishing these zones are that there is need for
authorization to establish one. However, one only needs to declare the investment to the
National Investment Authority showing that the investment is made in convertible currency
or dinars.
Although the Algerian government has not relied heavily on FEZs, it has shown that they are
an important strategy for attracting investment in the country. Although the FTZs in Algeria
operate outside the customs area they are still subject to Algerian exchange control laws. In
addition, the law allows that at least 50% of the goods and services produced in the zone can
be sold freely within the customs area.
The business transactions in the FTZ areas are carried out in foreign exchange. The Algerian
Central Bank is involved in the process of foreign exchange, however, the trades in duty free
areas including the other areas are considered as foreign trade activities.
The Algerian government has decided that the foreign traders can set up storehouses while
the foreign investors, in the free trade zones, will not be responsible to pay either custom
duties or taxes (OCED, 2004).
The framework of investment will facilitate the exemption from tax for the real estate
purchases as well as on transfer in payment return. Besides this, for articles of the capital rise
and incorporation, the request for fixed registration tax will be allowed to a much lower rate
of 5 per 1000 (OECD, 2003). Benefits of VAT on goods and services have also been offered
with more freedom in some of those particular areas with fixed duties. Such exemptions are
128
provided at much reduced rates of 0.2% during registration of the company's Articles of
Association.
On the imported products that may be utilized in investment directly, only 3% of the custom
duty has to be paid.
The Algerian government also offers investors with reasonable support in terms of offering
expenses to be utilized in the development of infrastructure (Aberrahmane, 2010). The
businesses, for a time frame of at least three years, will also be permitted for benefits on
investment success. Furthermore, it has further been decided that the investors that will take
part in the scheme development will be offered with the benefit of exemption from tax
including the tax on land owned by the companies, their professional activities and profits for
a period of ten years (Mohammedi, 2010).
In agreement with the law in place and depending on the decision of the agency, the
investments, maybe for a period of 5 to 10 years since when its operation is commenced from
contractual expenses, commercial and manufacturing activities or profit taxation. In addition
to this, after the operating period, the investors will receive 50% of a reduced rate on
reinvested profits (Tahir, 1999).
Concerning the export processing zones, open permission has been granted to the firms
especially on the investments as allowed by the Algerian Central Bank. Such investments
might be considered in export processing zones that are characterized, according to the
demands of custom procedures, by either storage, imports, exports or re-export activities. As
only those investments in these zones are allowed that are carried out in foreign exchange,
they are further exempted from levies, custom taxes, duties or fiscals. There, however, are
certain exceptions associated with the dues and contributions to the social security system
(official) as well as the duties and taxes on a vehicle that are utilized for the purpose of
promoting tourism in the country (OCED, 2003).
Foreign investors in such zones will not be obliged to pay taxes as well custom duties.
Foreign traders may set up customs storehouses to store merchandises for sale in the country
(OECD, 2004). In such areas, business transactions are conducted entirely in foreign
exchange cited by Algerian Central Bank. Trade among firms in the duty-free area and those
established in other parts of the nation will be regarded as foreign trade activities in terms of
present investments.
Businesses created in specific areas which are categorized as places to be supported or areas
of commercial development with some of the benefits discussed below. The businesses will
be permitted for a maximum time frame of 3 years from the time of the Agency‘s notice and
the subsequent benefits on success of the investment.
Excused from the tax on transfer in return for payment, for all real estate purchases, done
within the framework of the investment (OECD, 2003)
Request of the fixed registration tax at low rate of 5 per 1000 for articles of
incorporation and capital rise.
129
Having responsibility of entire or partial liability by the public, after
assessment by the agency, for payments on the infrastructure required for
the success of the investment.
Exemption from Value Added Tax on products and services utilized
directly in the success of the investment, whether they are purchased from
other countries or got from the local market, as the products and services
are planned for implementing processes independent of VAT.
Application of the low rate of 3% customs duty on imported products
utilized directly in the success of the investment.
Such products might be sold off or transferred in agreement with the law in place, after
confirmation by the responsible organ. Depending on the Agency‘s decision, the investments
might be provided with the following exemptions:
These zones only allow investments that are carried out in foreign exchange quoted by the
Central Bank of Algeria. Therefore, these investments are exempted from all fiscal, para-
fiscal and custom taxes, duties and levies however, with exceptions of the following:
Duties and taxes on the motor vehicles for tourism purposes other than
those related to the operation;
130
Contributions and dues to the official social security system.
That said and regardless of these incentives there are many obstacles and challenges to any
future FTZ in Algeria.
According to the 2019 WEF report, the competitiveness of any country is based on the
following important pillars. These are; institutions, infrastructure, macroeconomic
environment, health and primary education, higher education and training, goods market
efficiency, labour market efficiency, financial market development, technological readiness,
market size, business sophistication and innovation.
Figure 5.14 Points Marked on Each Pillar with Comparison to Rest of Middle East
According the report Algeria is positioned at 86th out 137 countries in the global
competitiveness. Therefore, Algeria should make many efforts in diferents areas if it has
serious intention to increase FDI .
In line with previous analysis of the Algerian economy, the proposed FTZs can not play a
mojor role in increasing FDI because they are faced with many challenges and obstacles
which can can be sumarised in the below diagram
131
Figure 5.15 Obstacles of FTZs in Algeria
Pandemic Corruption
When it comes to trading and constraints that can hamper in the success of the FTZs, its
corruption from all levels of government bodies is the source. This is the existing loophole
where government officials can be part of corruption with impunity (Bakari, 2017).
Corruption‘s main source is people‘s inability to achieve their financial requirements, as well
as the weak law enforcement agencies (Uslaner, 2017). This difficulty in handling and
maintaining prevalent inefficiency and patronage in the public administration is an
exceptional reason that is creating barriers (Souag and Assaad, 2018).
132
The annual Global Competitiveness report is one of the most important economic
measurements of the world, especially that it measures different sectors, including quality of
institutions, infrastructure, information technology, macroeconomics, health, labour market
skills, the commercial and financial sector, business sector and innovation capacity
133
34 Portugal 70.2 -1 +0.5
35 Slovenia 69.6 +1.1
36 Malta 68.8 +0.3
37 Poland 68.2 +0.2
38 Thailand 67.5 +2 +1.3
39 Saudi Arabia 67.5 +2 +1.6
40 Lithuania 67.1 -2 +0.7
41 Slovak Republic 66.8 -2 +0.6
42 Latvia 66.2 +1.4
43 Russian Federation 65.6 +2 +1.7
44 Cyprus 65.6 -1 +0.9
45 Indonesia 64.9 +2 +1.4
46 Mexico 64.6 -2 +0.5
47 Oman 64.4 +14 +3.4
48 Hungary 64.3 +0.9
49 Mauritius 63.7 +0.8
50 Bahrain 63.6 -4 -0.2
51 Bulgaria 63.6 +1.2
52 Romania 63.5 +1.3
53 Uruguay 62.7 -3
54 Kuwait 62.1 +2 +0.5
55 Costa Rica 62.1 -1 +0.4
56 Philippines 62.1 +12 +2.3
57 Greece 62.1 -4 +0.3
58 India 62 +5 +1.2
59 Kazakhstan 61.8 +0.7
60 Colombia 61.6 -3 +0.1
61 Turkey 61.6 -3 +0.2
62 Brunei Darussalam 61.4 +2 +1
63 Peru 61.3 -3 +0.2
64 Panama 61 -9 -0.6
65 Serbia 60.9 +5 +1.7
66 Georgia 60.9 +1 +1.0
67 South Africa 60.8 -5 -0.1
68 Croatia 60.1 -2
69 Azerbaijan 60 -4 -0.2
70 Armenia 59.9 +2 +1.0
71 Montenegro 59.6 +2 +1.4
72 Brazil 59.5 -3 -0.2
73 Jordan 59.3 -2 +0.1
74 Seychelles 58.5 +10 +3.3
75 Morocco 58.5 +2 +0.8
134
76 Albania 58.1 +4 +0.8
77 Viet Nam 58.1 -3 +0.1
78 Trinidad and Tabago 57.9 -2 +0.1
79 Jamaica 57.9 -1 +0.5
80 Lebanon 57.7 -5 -0.1
81 Argentina 57.5 -2 +0.1
82 Dominican Republic 57.4 +1.8
83 Ukraine 57 +6 +3.1
84 Macedonia, FYR 56.6
85 Sri Lanka 56 -4 -0.4
86 Ecuador 55.8 -3 +0.4
87 Tunisia 55.6 -1 +1
88 Moldova 55.5 -1 +0.9
89 Iran, Islamic Rep. 54.9 -1 +0.4
90 Botswana 54.5 -5 -0.5
Bosnia and
91 54.2 -1 +0.3
Herzegovina
92 Algeria 53.8 +0.3
93 Kenya 53.7 +0.4
94 Egypt 53.6 +0.4
95 Paraguay 53.4 +1 +0.5
96 Guatemala 53.4 -5 -0.1
97 Kyrgyz Republic 53 +3 +1.1
98 El Salvador 52.8 +0.4
99 Mongolia 52.7 -4 -0.2
100 Namibia 52.7 -1 +0.3
101 Honduras 52.5 +2 +1.2
102 Tajikistan 52.5 -5 -0.6
103 Bangladesh 52.1 -1 +0.7
104 Nicaragua 51.5 -3
105 Bolivia 51.4
106 Ghana 51.3 -2 +1.4
107 Pakistan 51.1 -1 +1.3
108 Rwanda 50.9 -1 +1.3
109 Nepal 50.8 -1 +1.3
110 Cambodia 50.2 -1 +0.8
111 Cape Verde 50.2 -6 +0.4
112 Lao PDR 49.3 -2 +0.7
113 Senegal 49 -2 +0.6
114 Cote d'Ivoire 47.6
115 Nigeria 47.5 -3 -0.5
116 Tanzania 47.2 -2 +0.8
135
117 Uganda 46.8 -4 -0.2
118 Zambia 46.1 -3 +0.6
119 Gambia, The 45.5 +0.8
120 Eswatini 45.3 -4 +0.2
121 Cameroon 45.1 -3 +0.2
122 Ethiopia 44.5 -2 +0.6
123 Benin 44.4 -1 +0.8
124 Burkina Faso 43.9
125 Mali 43.6 -4 -0.1
126 Guinea 43.2 -3 +0.3
127 Venezuela 43.2 -10 -1.9
128 Zimbabwe 42.6 -4 +0.6
129 Malawi 42.4 +1.8
130 Lesotho 42.3 -4 +0.9
131 Mauritania 40.8 -3 +0.1
132 Liberia 40.5 -2 +0.6
133 Mozambique 39.8 -8 -2.1
134 Sierra Leone 38.8 -3 +0.1
Congo, Democratic
135 38.2 -8 -2.6
Rep.
136 Burundi 37.5 -4 -1.0
137 Angola 37.1
138 Haiti 36.5 -5 +0.7
139 Yemen 36.4 -4 +0.98
140 Chad 35.5 -6
Key
Europe & North America
East Asia & the Pacific
Eurasia
Latin America & the Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Among the sub-indicators on which the architects of the competitiveness index were based,
the country occupied a very backward position in the spread of corruption by its 96 globally,
and also in the area of budget transparency (116).
136
In censorship and disclosure criteria, Algeria ranked 131 globally, the same rank on what the
country put in place in the development of legislation to combat conflicts of interest.
34% of Algerians said that all or majority in the public sector were
involved in corruption, while 41% said that only some were involved,
and in response to the question of the study: Do you think the
government's efforts are good or bad in fighting corruption?
69% of Algerians said the government's record was bad, and 14
percent of the country's government sector employees said they had
paid bribes in the past 12 months.
On the most corrupt sectors, the 1,200 respondents in the poll said that
tax officials top the list, followed by Members of parliament,
government officials, local council members (39%), and then corporate
executives.
Corruption is prevalent in the private economic sectors and in the government sector,
particularly in the area of energy which is the backbone of the Algerian economy.
The leaks of Panama also mentioned the names of 79 individuals and economic institutions in
Algeria involved in these practices, including owning companies in tax havens in Africa such
as Guinea and Nigeria, and in Europe such as France, Italy and Spain, and in Arab countries
such as Egypt and the UAE.
Furthermore, the website of the Alliance on 10 September 2018, indicated that the Algerian
Government had embarked on an investigation into Money laundering practices following
information disclosed by the press investigation.
The authorities ' investigations included the use by an Algerian businessman of two
companies registered in tax havens to inflate the import of dried milk bills to Algeria, in order
to benefit from the largest amount of government aid earmarked for this vital nutrient, which
has been the result of millions of dollars in the state treasury.
According to Corruption Perceptions Index and despite the work of many governments tried
to fight corruption and increase transparency, Algeria remains highly corrupt.
137
Figure 5.16 Corruption Perceptions Index 2017
Source: TI 2017
Since 2012, several countries declined in a region stricken by violent conflicts and
dictatorships, corruption remains endemic in most Arab countries while assaults on freedom
of expression, press freedoms and civil society continue to escalate. In this environment, it is
no surprise that 19 of 21 Arab states score below 50. However, the below table shows that
Algeria is taking small steps towards fighting corruption and increasing transparency and
integrity.
Algerian‘s
33 34 36 36 36 34
Score
Source: TI 2018
Despite some incremental progress Algeria is still failing in the fight against corruption.
Powerful individuals in Algeria have actively influenced government policies and diverted
public funds and state assets for their own self-interest and enrichment at the expense of
citizens. This reduces anti-corruption efforts to merely ink on paper, where laws pass, but are
rarely enforced or implemented
Algeria‘s main negative indicators alleged by Algeria were the quality of infrastructure (the
country, occupied 88 globally), and at the level of human resources skills also at 88 globally
and dynamic of action at 113 globally.
138
5-5-4-2 Complex, opaque bureaucracy
The worst problems in Algerian‘s business environment are administrative red tape,
excessive administrative procedures for business operations, arbitrary interventions of
Governmental administrative bodies, government officials harassing and creating difficulties,
and lack of transparency and accountability of government administrative agencies
Similarly, Algeria has a complex and opaque bureaucracy, witnessed in several methods of
initiation. The VAT on several items ranges from 7 to 17 per cent, depending on the product
(GCA, 2019). This creates reluctance in purchasing which means inability for government to
earn. Moreover, changes or notifications are not done with public knowledge or prior
notification.
The worst problems in Algerian‘s business environment are administrative red tape,
excessive administrative procedures for business operations, arbitrary interventions of
governmental administrative bodies, government officials harassing and creating difficulties,
and lack of transparency and accountability of government administrative agencies.
Algeria has ineffective associations and poor business services which are seen imperatively in
customs clearance, time taken by a foreign country to operate and receive their products into
their hands ranges between weeks to months. importers are required to provide government
certification of conformity and quality from the independent third parties in Arabic, there is
also the need for the inclusion of the ―Visa Fraud‖ note that indicates product inspection has
been successfully conducted (Export.GOV, 2019).
It is only through this process the company can release their product from clearance. This
delay vital time and productivity. In the end, harming business activities in market and in the
long run, the economy of the country is suffering.
Algeria‘s market capacity has been known to be quite low in terms of competitive ability.
The pillar of innovation and sophistication factor for business is the lowest with 124th global
ranking. As earlier discussed, the country has a good market capacity, their inability to
efficiently develop market and labour has led to the tremendous loss in the ranking.
Additionally, their financial market is also significantly low at 135th, making it extremely
difficult for the financial sector to aid the businesses in setting up their businesses through
loan and investment opportunities (WEF, 2019). This shows that there is a lot of potential in
the market of Algeria. However, due to the lack of development and improvement in the
existing market; it has not been able to remain competitive. As the world has reached a digital
139
age, Lake (2017) explained that it‘s the best time to address the issue of the lack of
infrastructural availability on the internet users in the country because of small infrastructure.
Using this and integrating education with the contemporary requirements, it will be able to
quickly develop into a better system with higher capacity. In other words, the diversity in the
economy and country‘s concentration on education can change the situation.
Algerians lack access to investment capital that can be seen due to high dependence on oil.
Historically, high oil prices were what led to their development and stable economy. This led
to false hope of continuous prosperity which meant that inefficiency and narrow versioned
officials were unable to diversify their economy (D‘Amato and Del Panta, 2017). This is the
source of the harmful economic situation in present state. Algeria requires high levels of
investment capital to ensure new business development opportunities to be harnessed.
Collateral and land-use regulations make it quite difficult for enterprises to access bank loans
so that many enterprises have to borrow money from informal markets at very high interest
rates establishing business associations is quite difficult because of complicated procedures
involving multiple agencies and steps, possible denials on the grounds that an association in
that field already exists.
Once established, they do not operate effectively because they lack the necessary resources
such as funding, qualified staff, and training, and they receive no standard privileges such as
tax exemptions on income from core activities and tax deductions for dues paid by members.
At present, many business associations are neither able to provide business services
adequately nor satisfactorily represent their members‘ interests. Business services are weak
due to government misperceptions about the role of business services in the economy, the
excessive number of internal service provisions made because of quality concerns, difficult
regulatory framework, and lack of specialized capabilities and /or customer orientation
among providers.
There is high deficiency of properly trained educators, which is why the country has an
inadequate education system. Algeria has witnessed increased enrolment with rise in
education expenditure by government. In total, more than 500, 000 children lack proper
education from the ages of 5 to 14 (Bernaoui, Issolah and Hassoun, 2015). Such barriers are
due to inadequacy in infrastructure for education. There is no proper implementation in
education policy in schools. Overall financial and political management of the education is
inadequately controlled due to non-centralised budgeting system. Generally, the education
funding is placed at 7 percent of the GDP, yet inefficient in giving quality education as the
international test scores recorded being lower than 20 percent (Soledji, 2019). This resulted in
lack of skilled and trained individuals. The current percentage of 6 per cent in unemployment
is dangerously reaching to higher levels as the country is not able to control these issues
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(Madoui, 2015). Algeria‘s high unemployment ratio is regarding ineffective education, thus
making it incapable of providing required level of education.
Algeria‘s education system has been unable to provide the training needed to help
people succeed in business. In other words, graduates cannot meet the demands of the society
in the new competitive and increasingly globalized business environment
In Algeria, criminal and civil laws are not separated and are often ambiguous. Its
business laws and policies have various conflicts and inconsistencies; consequently,
maintaining conformance with applicable regulations requires much time and
vigilance. Moreover, decrees and statements from the central government are rarely
specific enough. Hence, considerable authority for the interpretation of laws rests
38 with the designated authorities. The matter becomes even worse when new laws and
policies, many of which do not supersede old ones, are promulgated.
Many regulations, especially tax and customs regulations, are designed to control
rather than facilitate firms‘ development
Access to information and their channels are not effectively established in Algeria. A need to
address this lack of information is important. By integration of the mobile network with 4G
and 5G network, it is possible. Rural regions of the country do not have facilities due to lack
in infrastructure of telephones and optic cables. Overall, people in rural regions live a more
primitive life, thereby, less likely to attain global educational levels.
Algeria has a corrupt, inefficient and highly opaque government systems, making very hard
for businesses to grow. The statistical analysis of the country has shown that it is ranked as
the 87th most competitive country in the world. In terms of the basic requirements of the (1 as
worst and 7 as best) pillars, the country has their institutions ranked at 99th while the
infrastructure of the country is marked at 105th. Additionally, Algeria is ranked in the bottom
when there is the consideration of the market. Although they are ranked at 37th in market
size, it is being ranked at 135th in goods and labour market efficiency (WEF, 2019). These
rankings show that the country has a lack of the basic requirements to expand its economy
and provide the platform for development. In short, the country lacks the necessary aptitude
which will help them establish the infrastructure for the zones of free trade that can compete
with other FTZs.
Algerian managers operate with far less information than managers in other countries would
tolerate. They face serious shortages of key information about products, markets,
technologies, trends, etc. simply because up-to-date and high-quality information sources are
rare in Algeria and managers‘ ability to search for information is restricted by many barriers
Finally, and sum up this section, I can say that the most important and the largest value is
based on the inefficiency in the government and its bureaucracy (WEF, 2019b). In other
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words, it is the inability of the political forces to conduct and apply the proper changes and
values that are needed to develop on the situation. This, in retrospect, has been followed
directly by the corruption in the government and the government officials. Therefore, the
overall necessity that the government of Algeria requires to understand is that their FTZs, to
become the beacon of progress in the country is only through the addressing of the two of the
most profound problems. The publications that were made by the World Economic forum is
particularly surrounding the global competitive index (GCI).
5-6 Why Reversion to FTZ Model is Important for Algeria? – Lessons from
Contemporary / International Experiences.
As we are aware that Algeria has put the idea of establishing FTZs on its territory on the back
burner. However, there are so many compelling reasons to encourage the Government and its
economic team to have a relook onto the idea. This relook is necessary because as non-
adoption a FTZ system can result into putting the Algerian economy at relative disadvantage
than the countries with almost similar potential but they are accruing more economic benefits
by embracing the latest business trends in the world; FTZs being the most significant model.
We will discuss the aspects in detail once we ponder upon applicability of our three case
studies to the Algerian economy. However, for now if a single most compelling logic for
adoption of FTZ model is to be presented, it can be China. An almost closed economy like
China, with all its peculiarities and differences from the contemporary economic models, had
to adopt FTZ model to embrace the latest trends. Tremendous economic diversification
opportunities afforded by Shanghai Pilot Free Trade Zone (SHPFTZ) have already been
covered in the previous chapter. More importantly number of FTZs dealing with varying
nature of economic activities have been introduced by China. Similar policies have been
adopted by other developing countries especially Kazakhstan and UAE, both of whom rely
heavily on the energy sector as a pillar of economy.
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Succeeding paragraphs will emphasize on the need for development of FTZs for Algeria, and
what has been missed out so far by non-adoption of the model, basing on historical examples
and current global trends towards adoption of FTZs with varying degree of the scope of work,
by the countries across the world.
Significance of FTZs in global economy can be simply ascertained by examining the growth
this concept has witnessed both in terms of numbers as well as diversification of the
economic subjects being dealt by the zones. With the initial traces of successful zones
observed as early as 300 BC in the Greek era, the concept has been validated across ancient
and current civilisations like Roman Empire down to modern states (Haywood, 2000).
Another relevant conclusion drawn from the historical evolution of the FTZ concept is its
linkages with the countries having ports. Most of the countries having ports like Algeria have
been adopting some form of FTZ or Free Ports system to boost their economy. Similarly,
historically speaking the concept of FTZ, which was attributed / practised mainly by the
developed nations prior to 1920s, have mainly been owned and adopted by the developing
nations since then.
Consistent expanding adoption of the FTZ model by the developing countries cannot be
without success as well as positive contribution of the system to their economies. This is a
great attraction for developing countries like Algeria who have huge potential to benefit from
adopting the FTZ model.
Number of Free Trade Zones in 1970s was approximately 50, which expanded to about 100
in 1984, more than 200 in 1993 (Bolle and Williams, 2012). The figure has swallowed to
about 3,500 FTZs situated in 135 countries across the globe. In other words, number of FTZs
have witnessed phenomenal increase of approximately 18 x times, since 1993. These zones
are accommodating work force to the tunes of approximately 66 million individuals, across
the world. Majority of these FTZs are situated in developing countries, with the largest once
located in China, Singapore and the United Arab Emirates (UAE).
The rising numbers coupled with the growth and the fact that these zones are mainly situated
in the developing countries make a perfect recipe for the other countries like Algeria to have
a relook towards their approach towards FTZs.
FTZs are particularly advantageous for developing countries like Algeria. As discussed
during the economic overview of Algeria in the initial segment of this chapter, Algeria
confronts economic issues which are quite similar to most of the developing nations. Lack of
economic diversification limited or declining FDIs, limited exports, and limited employment
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opportunities for the citizens are the main economic challenges confronted by the developing
countries.
According to many experts who have analysed the existing FTZ models, FTZs have played a
great role in addressing these issues for different countries especially the developing ones.
Therefore, it can be accrued that by non-adopting the FTZs countries like Algeria may be at a
relative disadvantage and may be on the losing end. Few of such aspects having relevance to
Algeria have been summarized below:
FTZs facilitate countries to expand and diversify their economies, thus improving
overall economic outlook. Countries like Algeria can particularly benefit from the
FTZ experience of Oil rich countries like UAE and Kazakhstan, that how they have
used their respective FTZs, especially Jabel Ali Free Zone (Jafza), to diversify their
economies towards multi-dimensional facets.
Test Bed / Pilot Platforms for New Economic Reforms for the Developing /
Host Countries
Algeria which has been striving hard over the past few years to work out appropriate
set of policies to drive the economy towards a consistently positive and vibrant
direction, can utilize its FTZ(s) on the similar lines. The country may experiment
various kinds of economic, fiscal, monetary, trade, tariffs and other related policies
inside its FTZs to work out the best possible sets of policies
As discussed earlier, the existing FTZs have accommodated more than 66 million
workforce across the globe. This number is on a gradual rise with the ever-increasing
number of FTZ across the world. Apart from the growing number, training, skill
development and exposure of the local workforce with the international experts,
managers and staffers also helps in value addition of the local workforce.
This value addition benefits both individuals as well as countries by increasing their
demand both locally as well as globally, which brings in foreign remittances. Country
like Algeria can particularly benefit from this provision in terms of employment
generation as well as value addition to their employees.
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Attraction of New and Enhancement of Existing FDI in the Host Countries
As most of the FTZ programs are being established in the developing countries with
the aim of attracting new FDI while reinforcing the existing investment opportunities
available in the country.
For instance, Jafza initiated its operations by providing office spaces and ware
housing facilities to a rather modest number of companies i.e. 19. However, it has
been gradually expanding the ranges and variety of services / facilities being provided
to its clients to become one of the largest free zones in the world (The Economist,
2015). Owing to multifarious advantages / incentive being on offer (details in the
succeeding parts of this chapter); Jazfa has been turned into one of the most valued
business destinations in the world (Shayah & Qifeng, 2015). From the modest figure
of 19 companies, today Jafza houses an astounding number of companies (more than
7000) operating within its localities, and the figure is ever expanding. As of now,
Jafza acts as a hub of numerous business owned and operated by citizens more than
100 countries. With a fabulous value for trade amounting to 87.6 billion dollars, its
accounts for over 32% of FDI and 50% of total exports of Dubai (Jafza, 2019).
Similarly, SHPFTZ and Kazakhstan‘s Free Zones are also contributing considerably
towards the overall increase in FDI as well as other economic activities in their
respective countries. It is anticipated that Algeria can also benefit from the successful
experiences of China, UAE and Kazakhstan by molding its policies in favour of
establishing FTZs inside its territory with right kind of environment, policy
framework and appropriate incentives.
In the developing countries who possess an efficient FTZ system, a gradual rise in the
overall foreign exchange earnings has been observed. The zones act to elevate the
local value addition and enhance local purchases of zone-based goods and services.
Moreover, owing to increased export earnings, resulting into decline in the overall
cost of imports for local buyers is also likely to be have positive impact on the
exchange rate (Aggarwal, 2007). Both these aspects are of prime importance to
Algeria which aims at enhancing the foreign exchange earnings as well as improving
the exchange rates. Therefore, adoption of a FTZ model is likely to help Algeria in
addressing these issues.
Apart from other economic benefits FTZs have played a pivotal role in the
technological advancement and in turn up gradation of industrial output of the host
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countries. Overall process entailing diversification of export bases also lead to
upgrading the skill element of their output. These zones also help in generating
transfers of technology and knowledge spill-over which results in production of non-
traditional goods by local companies (Tiefenbrun, 2012).
During discussion on the case studies of China, UAE and Kazakhstan, we have
observed that hundreds of multinational firms, corporations and outfits have
established their offices inside SHPFTZ and Jazfa. These firms include the topmost
performers of their respective domains. Quite understandingly once these forms who
are global leaders in their respective fields operate under the ambit of a FTZ inside a
particular country, they tend to leave their footprints in every walk of life. The overall
process results in immense betterment for the host nation‘s economy.
This facet may have the prime significance for Algeria because introduction of FTZs
is likely to add much needed impetus in the industrialization and technological
advancement of the local industries as well as work force.
The reasons discussed in the above-mentioned paragraphs lead the researcher to believe that
by delaying the adoption of a viable FTZ model, Algeria is certainly at the losing end of the
scheme of things. The rapid pace with which developing countries are introducing FTZs with
innovative ―incentive packages‖ for both local as well as foreign investors, is leading them to
accrue the economic benefits discussed above. However, the quantum as well as efficacy of
these economic incentives is subjective and mainly depends upon the policy framework and
efficiency of the operating / management mechanisms being adhered to by the respective
governments / FTZ authorities. The next section will now focus on the recommendations or
key take – aways from the three case studies discussed in the previous chapters and their
applicability to the Algerian FTZ environment.
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Step 1: Create A Congenial Environment to Attract Investors – Provide State of
the Art Infrastructure and Allied Facilities.
Once we consider the success stories of FTZs like Jafza, we find them at the pinnacle
for providing these facilities. Being situated in Dubai, state of the art logistics
infrastructure is considered as Jafza‘s main source of attraction. Besides, Jafza is
located between two largest international logistic enablers i.e. World‘s 8th largest port
and biggest Cargo airfield. Cutting edge facilities like custom built office spaces,
warehouses, office spaces and land for large-scale manufacturing / extensive
warehousing, distinguish it from other zones in the region.
Shanghai Pilot Free Trade Zone (SHPFTZ) and Kazakhstan‘s free zones have catered
for similar arrangements for setting up their zones and aimed to provide best possible
facilities inside their respective zones.
Best possible location, infrastructure and facilities are the foremost and the
fundamental requirements for any successful FTZ. Algeria needs to take a leaf out of
the book from any of the three case studies discussed. The existing FTZs can be
tailored to meet the above-mentioned requirements while all future FTZs can be built
while analysing the infrastructural advantages offered by these FTZs.
The best possible way forward for Algeria can be to select a high priority ―Pilot‖ zone
on the lines of SHPFTZ, equip it with the state-of-the-art infrastructure and allied
facilities which are at par, and even better, than the ones provided by the existing
zones. Make it a ―poster child‖ or icon for the new look for the Algerian economy and
then cash on its experience for developing the remaining zones.
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Step 2 - Establish of a Fully Empowered / Autonomous FTZ Management
Authority.
It can be concluded from all the three case studies that authority responsible for
running affairs of FTZ assumes pivotal significance towards success or failure of that
zone. Ideally a fully empowered zone authority comprising of all stake holders i.e.
Govt officials (Political hierarchy, bureaucrats) and private sector representatives be
established. This authority should be fully empowered towards policy making, budget
and other related aspects.
The foremost example in this regard is again attributed to Jafza. In order to streamline
the management of Free Trade Zone and allied ports in a specialized manner,
Government of Dubai decided to establish Dubai Port Authority, in 1991. In order to
avoid long bureaucratic red tapes, time delays and corrupt practices, hierarchy of the
port included only 2 x directors and 3 x deputy directors for effectively managing the
affairs of the ports and free zone. Functions of banking, customs, transportation and
public security were also unified under this authority, to ensure minimal red tapes for
the investors / businesses. The port authority is autonomous in taking decisions
regarding Land procurement, nature, type and quantum of industries and to determine
/ implement costs of various services being offered by the FTZ for clients.
These examples have lessons for Algeria to follow, once the government decides to
undertake a FTZ program, it has to formulate an autonomous, empowered and
competent authority or committee to oversee the affairs of the zone. Degree of
autonomy and freedom enjoyed by the authority is directly proportional to the success
of the zone.
This is the most significant aspect contributing towards success of FTZs in China,
UAE and Kazakhstan. All three countries have enacted peculiar legal and regulatory
frameworks for their respective zones which are mainly aimed at facilitating the
foreign investors. The companies established, doing business in the zone, especially
the foreign firms need to be ―felt at home‖ by offering a relaxed set of regulations,
lenient customs / excise procedures and overall minimal bureaucratic hiccups.
Establishment of ―One Window Operation Centres‖ and ―help desks‖ to in Jafza,
SHPFTZ and Kazakhstan‘s zones have facilitated corporations in their business
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ventures can help a great deal in attaining investor‘s confidence which is critical for
FTZ success.
All the three case studies have exemplified the significance of these legal and
regulatory measures. Investors are most concerned about the safety of their
investments and the privileges during litigation matters. Any zone authority which
inspires the investors to believe that their legal rights are protected, and they won‘t
face any unjustified treatment in case of legal issues, is likely to gain the confidence
of investors. Algeria can learn from their experience to formulate such laws and
regulatory regime which can be termed as ―investor friendly‖ and hence can result
into attracting large number of foreign investors, which can provide much needed
impetus to the economy.
Once we have a look at all successful FTZs in the world, especially the three case
studies which have been evaluated during the course of research, one can easily say
that the single most compelling reasons for success of these zones is the package of
incentives that are offered by the zones especially to the foreign investors. It is quite
simple to understand that in order to motivate an investor to pull out his hard-earned
money from one country and invest it in a new country needs to have a really
attractive and incentivised package. This is what has been adopted by these countries
to make their zones successful.
Special Administrative Regimes for the zones have been introduced by these
countries. These regimes entail incentives like reduction / exemption on various taxes,
tariffs, duties on various products and activities carried out inside the zones.
Similarly, facilities established inside all the three zones, on the principle of One Stop
Shop cater for all needs of the investors under one roof. All zones, especially
SHPFTZ have considerably reduced the procedure involved for establishing a
business and thus the time period has come down to a very few days. Financial and
fiscal liberties enjoyed by the companies inside the zones in terms of usage of
currency, opening up of special accounts inside the zones have also led to huge
success of the zones. Very liberal policies related to Visa, manpower and labour have
also played a very pivotal part in enhancing the attractiveness of zones for the foreign
investors.
Algeria can take a leaf out of these zones by introducing an incentive framework
which is comprehensive, attractive and peculiar to Algeria‘s own ground realities. If
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the country is successful in achieving this objective, there is no point that Algeria‘s
FTZs won‘t meet success like the case studies.
Once we study the three case studies, one step which has been taken by both
Kazakhstan and SHPFTZ is to link its academia with the innovation processes taking
place in the zones. This single step is highly beneficial for their respective countries
because it effectively finances, patronizes and indigenizes numerous processes, which
hitherto has been adopted by only the foreign experts. By effectively linking academia
with the economic activity, this has direct bearing on development of knowledge
economy base of their respective countries.
Similarly, SHPFTZ has gone miles ahead and have made significant headway in this
field by establishing more than 20 universities and research institutions, while
simultaneously housing more than 400 R&D platforms of the national as well as
international stature.
Algeria can follow these footsteps to connect its higher education institutes and R&D
institutions with its zones to benefit from the expertise of the multinational
corporations and institutions. This will result in immense benefits for the Knowledge
economy of the country as well.
Apart from the purely economic benefits the zones are very effective in terms of
helping the host government to promote its own culture as well as creative industries.
SHPFTZ is a living example of the same as it is also home to few of the best-known
international culture and creativity related outfits who specialize in movie production
digital as well as animations, TV, and other latest media aspects like online games and
creative designing. Since 2011, the park has been designated by the Chinese Cultural
Ministry as Demonstration Park for culture.
By establishing zones, Algeria can reap benefits in terms of not only promoting its
culture and creativity, but it can earn revenues by attracting foreign tourists.
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5-6-5 Miscellaneous Recommendations for Overall Improvement of
Algerian Economic Outlook
1- The Algerian government must take long-term action to establish transparent and
accountable institutions, prosecute wrongdoing and allow for citizen engagement and
participation. Civil society has a crucial role to play here.
2- Secure political freedoms with heightened accountability and better protection for
whistle-blowers, journalists and activists.
3- Review electoral laws to ensure parliament is strong and effective, with a special
focus on transparent political campaign financing.
4- Enable local and foreign investors to capture international business opportunities by
relaxing tax and foreign currency control as well as introducing further reforms to
reduce bureaucracy and remove protection for state-owned enterprises with regards to
export.
5- Select specific areas to initiate experimental free zones in Algeria, such as
Mostaganem in the West and Annaba in the East. This requires a comprehensive
planning process that includes the provision of high-quality services. This entails
prompt ports and airports preparation and providing the regions concerned with the
best available equipment. In addition to the necessary means of transportation,
loading, unloading and lifting, preparation of land in accordance with the current
development in all fields, especially wired and wireless communication and lastly
safety and security including road networks leading to these zones‘ construction and
fortification.
6- Identify all fields and activities in which investment will be permitted; based on their
integration with existing projects that serve the national economy.
7- For Algerian FTZs to be competitive in the international market, the quality of the
Algerian labour force must improve. The government should open its education
system to allow market-driven curricula in higher education and vocational training
institutions, rather than dictating that they follow rigid content guidelines that must be
approved by the Ministry of Education, Ministry of Vocational Genesis, and the
Ministry of Higher Education.
8- Create an efficient banking system, a clear economic policy, and a realistic tax
system.
9- Join the Open Government Partnership (OGP), a multilateral network of governments
and civil society organisations committed to fighting corruption. OGP is an important
platform that promotes transparency worldwide.
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10- Encourage domestic investment as international investors will not invest unless the
participation rate of local investors is significant. The level of local investment is a
good indicator of internal stability.
11- Help to reduce the LFI search costs by providing quality information rather than
censoring what information they can access. Since businesses are increasingly using
the internet to find customers and gain market information, the government can
provide news feeds for market updates and develop e-portals for business matching.
In fact, LFI are always watchfully waiting for quality information from the
government, but currently information too general and often at macro level.
12- Ensure that as soon as any free trade zone begins operations that the FTZ managing
authority should evaluate and follow up the project activity and address any
deficiency or deviation, as well as follow up on the levels of achievements of these
projects in order to take strict measures with the investors who delay activities or do
not adhere to their agreements.
13- Algeria must promote the participation of civil society and protect activists and
journalists in exposing and fighting corruption. Cracking down on political dissent,
enabled by draconian laws such as anti-terrorism and cybercrime laws, must end.
Without serious reform, corruption will continue to flourish, further exacerbating the
political and economic instability of the region and hindering its social and economic
development.
5.7 Conclusion
This chapter has endeavoured to highlight the significant aspects of Algerian economy
through a detailed overview from different angles. An insight into the socio-political and
economic scenario of the country has been carefully and elaborately discussed, with an aim to
find out obstacles which led the government to postpone the idea of introducing FTZs in the
country. Furthermore, this chapter gradually and systematically shifts its focus on the core
idea of this thesis and that is ―to encourage the Algerian government to have a relook on its
policies and introduce FTZs while learning from successful examples as discussed in the
thesis‖.
Although there had been some progress towards the FTZ program in the past, there is still
need by Algeria to identify more specific zones for tax breaks and other incentives to allow
more foreign investments in the country. This is necessary given to what happened to the
Algeria-China Jiangling Free Trade Zone, which stalled because of the law that requires joint
partnerships with locals. Their investment policy still needs to be more open and to create
more incentives in attracting investors in the country. It is through such an open policy that
they will implement their policies on FTZS and spur industrial development in the country
On one hand the Algerian government started many industrial export strategies through the
Ministry of Industry. This was aimed at re-industrialization policy as well as boosting and
diversifying the exports outside hydrocarbons so that they would bring in more foreign
reserves. And on the other hand, the industrial structure is currently old fashioned with the
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new technological advancement including industrialization. For this purpose, in various
sectors, Algeria should invest in industrial development and improve local market
productivity and exports.
The existence of natural resources is a key advantage for Algeria‘s economy. The country‘s
natural resource endowments like oil, gas and others that are largely not fully exploited
especially phosphates and iron ore is a component of business interest for external investors,
and Algeria is ranked as the third biggest provider of natural gas globally and as the fourth
energy provider to the European Union (EU). Therefore, if it combines this with its
geographic location of being situated at the middle of the Maghreb nations it can make them
a good selling point for any future FTZ
The most important of the scenarios that Algeria should tackle and try to curb the pandemic
of corruption in the country by enforcing harsher and more severe punishment for the
perpetrators. In this way, the businesses and the prevalent problems can be lessened. At the
same time, the government should quickly take on the necessary steps that will diversify the
economy. For instance, they should improve on their agricultural industry and fulfil their
needs as per the requirements. As a whole, the diversification can improve their ranking in
the global competitiveness and thus improve on the situations like the rising unemployment.
This chapter focuses on emphasizing need of introducing effective, viable and competitive
FTZs in order to address these problem areas. It is quite evident from the fact that since 2013,
numbers of free zones around the world (especially in the developing countries) have
increased by approximately 18 times the figure before 2013. Such is the growing impact of
FTZs on the economies of the host countries that almost every country is trying to establish
maximum possible zones inside their territory to benefit their economy in multiple spheres.
An endeavour has been made to motivate Algerian Government by illustrating rationale
based on International experiences that why reversion towards a FTZ model is important for
Algerian economy to prosper. Benefits of the zones on the local economy in terms of raising
FDIs, human resource development, diversification of economy and numerous socio-cultural
impacts have been elucidated to support the point of view. This entire discussion entails
inbuilt points which allude towards how Algeria might have been at loss by not embracing
the idea.
Consequent to above, an effort has been made to render recommendations / steps which
Algeria can learn specifically from the countries discussed as case studies in the previous
chapters. Different initiatives introduced by these countries like setting up a peculiar
administrative / legal frame work peculiar to the zones, how the zones have been managed to
yield the desired end results, special incentive regimes like exemptions / reductions on taxes,
duties…. .etc. and other measures which Algeria may adopt in case it decides to opt for an
FTZ model have also been discussed.
In a nutshell, taking into account the financial considerations attained by Algeria throughout
the previous years, it can be summarized that the commercial and financial situation is
increasing effectively and that this contribution shows that Algerian market is committed and
prepared to allow foreign businesses, involving FDI throughout top economically active
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areas. Thus, it can be summarized that overall economic situation in Algeria is ripe for
reinvigoration of an effective FTZ program to boost its economy.
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Conclusion
Following extensive research on this topic, we have come to the following conclusions:
When analysing data on the Algerian economy, it was evident that the Algerian governments
approach to FDI had never changed and oil was always one of the major exports; however,
fluctuating oil prices, plus an extremely high dependence on it was the reason that the
economic stability cannot be maintained in the country This creates other constraints for the
economy of Algeria with non-assuredness in the future‘s stability, this may be the reason why
the FTZ never saw the light.
There is no doubt in the fact that FTZ model can meet setbacks at certain occasions for
certain countries. Like what happened in the case of Kazakhstan, their FTZ experience of
1990s failed, not because FTZs were not relevant to the environment in the country. Rather
the issues were in the domain of policy making and its implementation. Instead of totally
abandoning the concept, once the country assessed their shortfalls in a realistic manner, and
made remarkable pertinent changes in their FTZ mechanisms. Once the required corrections
in the domains of policy making, infrastructural development, site selection, charters of the
zones and financial management were put in place by the government, FTZs in Kazakhstan
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have gradually commenced paying desired dividends. All three countries discussed as the
case studies are maintaining effective trade / economic relations on bilateral as well as
multilateral levels, however, these relations have no negative impact on their FTZ
development.
This similar situation can be applied to Algeria, who can re-assess the overall applicability
environment of the FTZs for the country and find out a viable model suitable to the Algerian
conditions and thus mitigate the losses incurred by the country by not adopting this model
and gain all the advantages while maintaining all the obligations under the existing bilateral,
regional and global obligations being the member of various agreements as well as economic
The review and discussion of various aspects of this subject has produced general results,
results specific to JAFZA, SEZ and SPFTZ, and results specific to Algeria.
General Results
1- FTZs are geographic areas where business and trading activities are being carried out
which have peculiar, often different, sets of laws regarding taxation and custom
regulations.
2- It is apparent that even though tax exemptions have provided a huge motivation for
investment and funds runoff to FTZs, the provision and availability of infrastructure
will always be a greater motivational factor. Likewise, the actual success of any FTZ
on the extent to which the authorities in charge of their management are able to
follow up and monitor project activities, whilst addressing any shortcoming or non-
compliance as well as observing and monitoring execution rates and readiness to
impose strict sanctions on investors who may not be willing to abide by the set rules
and regulations
3- Any country trying to adopt this kind of special customs system must answer one
fundamental question: do I have all elements needed for a successful FTZ?
4- The most important factors contributing to the financial success of any FTZ is its
geographic location. A free trade zone should be well located, well equipped, and
well administered. The location of facilities should be such that they can easily serve
markets to support a zone-based operation. Transport facilities which link the zone,
whether locally or internationally with the market and suppliers, are a significant
aspect of this.
5- Facilities inside the free trade zone should be at least adequate and should preferably
equal to the quality of facilities outside the FTZ
6- The FTZ should be administered efficiently, removing any complicated rules. This
means that administrative restrictions and controls should be kept to a minimum, in
order to speed up the processing of documents and carrying out of required
processes.
7- The FTZ system generally has a positive effect on the hosting country‘s economy, as
FTZs are an important resource in gaining access to foreign exchange, lowering
unemployment rates and reducing their balance of payments deficits, Nevertheless,
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FTZs can have negative effects if hosting countries do not control free trade zones
from the outset and can lead to a dysfunctional employment structure, the
emigration of skilled labour thus leading to a shortage of labour in a specific country,
which may in turn hinder the economic development of areas abandoned by those
workers.
8- The FTZ is not established in order to facilitate import into the hosting country, or to
invade national markets, but its goals are determined in the framework of the export
process, and export free zones are considered the best types of free trade zones, due
to the availability of jobs, increased production capacity, as well as its contribution to
deploying advanced technology from industrialised countries.
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provides clear definitions for the role of these economic zones with marked
borders.
9- The data analysed on SEZ shows that an increasing number of foreign companies
are venturing into Kazakhstan and seeking to hire local workers. This is expected
to foster development and the introduction of the entrepreneurial culture in return
for the experience and knowledge offered by the investors
10- China‟s SPFTZ is a type of service platform dominated by the consolidation of
diverse government systems. It has been demonstrated that the adoption of this
one-stop service platform supports the activities of different companies by ensuring
a high level of synchronisation to achieve optimal efficiency.
11- The secret of the success of the SFTZ is due to the continued support of the
Government, the expertise, competence and accuracy of Chinese workers, in
addition to the interaction of those regions with the Chinese economy where they
play a leading role in economic development.
12- The main factor contributing to the success of the SFTZ is the feasibility of the
registration of new businesses and administration systems.
These findings have several implications for the research community, policy makers, and
future managers of Algerian FTZs., and can be summarised in the following results:
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6- In the absence of separation of powers, and without strong and transparent public
institutions and accountability mechanisms, the introduction of anti-corruption laws
and regulations becomes more lip service than real and much needed political and
institutional reform. Fighting corruption in Algeria requires serious and genuine
political will for change and reform. To break away from politically corrupt
institutions, Algeria must take long-term action to establish transparent and
accountable institutions, prosecute wrongdoing, and allow for citizen engagement
and participation. Civil society has a crucial role to play here.
7- The structural barriers affecting growth in Algeria and the birth of any FTZs are the
lack of access to credit, poor anti-corruption control systems, a stiff labour market,
and an inadequate legal system.
8- The contemporary socio and geopolitical scenario of Algeria have been difficult to
maintain because of the lack of a proper and centralized force that can provide the
decision-making processes in the country. This also includes the lack of proper
methodology to take up the FTZs in Algeria like in other Northern African and
Middle Eastern countries.
9- Enormous investments and influx of development in the infrastructure has been
witnessed in the past two decades. Algeria has established a road network of
primary; motorway and secondary road system of up to 104,000 kilometres, and a
rail network of more than 112, 000 kilometres. Algeria is now considered as the
most solid nation in the whole of Africa. This is one of the largest competitive
advantages to attract investors to the FTZs
10- Algeria developed new dams as well as desalination and sewage water treatment
plants. Massive investment and budget allocation have been made with regards to
developing infrastructure. In 2005 for instance there were 75 dams. However, new
investments ensure the setup of 9 new dams by 2023, and this will meet any
industrial needs for future FTZs in the country.
11- The existence of natural resources is a key advantage for Algeria‘s economy. The
country‘s natural resource endowments like oil, gas and others that are largely not
fully exploited especially phosphates and iron ore is a component of business
interest for external investors, and Algeria is ranked as the third biggest provider of
natural gas globally and as the fourth energy provider to the European Union (EU).
Therefore, if it combines this with its geographic location of being situated at the
middle of the Maghreb nations it can make them a good selling point for any future
FTZ
12- The structural characteristics of the Algerian economy will allow this country to be
one of the most suitable areas not only for the assembly, supply and repair of ships
but also for transit trade as well as for establishing heavy, petroleum and
petrochemical industries.
13- The Algerian‘s laws and decrees that had been issued with regards to FTZs
essentially do not rely on a precise definition of free trade zones, nor the main and
strategic objective before which they were established. This can be
counterproductive and has been considered a barrier to the success of the FTZs
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14- The excuse given by the Algerian government for abandoning the FTZ has no
justifications as many other members of WTO and other countries which signed
free trade agreements , had a very successful FTZs and use these zones as an
influencing factor when negotiating free trade deals
Although this research has achieved the objective of confirming the hypothesis stated at the
thesis‘ induction there is still much work to be done for a comprehensive understanding of
this subject.
Our access to the above results in this research makes us stand before several other issues
related to the free trade zones system; I am hoping that these questions can provide other
researchers with a ground for deeper research in this field.
Question 1. How can you turn around a FTZ from failure to success?
Question 2. What are the financial and economic valuation measures that can be
used to analyse the profitability of free zones?
Research Recommendations
For Algeria to fulfil its dream in creating successful FTZs, make the best use of some of its
geographical poles, encourage its anti-corruption policies and reassure LFIs, there needs to be
a severe change in the way it approaches institutions, political rights, checks and balances and
other pillars of democracy. To this end, I make the following recommendations:
2- Reduce LFI marketing costs. The government should launch campaigns to promote
Algeria‘s image in areas where it has comparative advantages. It should also have
policies to protect investors against political risks.
3- Help to reduce the LFI search costs by providing quality information rather than
censoring what information they can access. Since businesses are increasingly using
the internet to find customers and gain market information, the government can
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provide news feeds for market updates and develop e-portals for business matching.
In fact, LFI are always watchfully waiting for quality information from the
government, but currently information too general and often at macro level.
4- For Algerian FTZs to be competitive in the international market, the quality of the
Algerian labour force must improve. The government should open its education
system to allow market-driven curricula in higher education and vocational training
institutions, rather than dictating that they follow rigid content guidelines that must be
approved by the Ministry of Education, Ministry of Vocational Genesis, and the
Ministry of Higher Education.
5- Execute an effective legal and judicial system that protects investors against arbitrary
actions and enables them to enforce their rights easily and quickly.
6- Create an efficient banking system, a clear economic policy, and a realistic tax
system.
7- Encourage international investors to work within the proposed FTZs, especially those
who have investment in this kind of special customs systems by giving them
profitable opportunities similar to those available in FTZs in other countries.
8- Establish experimental free trade zones in desert regions because of possible market
in neighbouring countries.
9- Identify all fields and activities in which investment will be permitted; based on their
integration with existing projects that serve the national economy.
10- Encourage domestic investment as international investors will not invest unless the
participation rate of local investors is significant. The level of local investment is a
good indicator of internal stability.
11- Secure political freedoms with heightened accountability and better protection for
whistle-blowers, journalists and activists.
12- Review electoral laws to ensure parliament is strong and effective, with a special
focus on transparent political campaign financing.
13- Ensure that oversight agencies and judicial institutions are independent to help rebuild
trust between the people and the government.
14- The Algerian government must take long-term action to establish transparent and
accountable institutions, prosecute wrongdoing and allow for citizen engagement and
participation. Civil society has a crucial role to play here.
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15- Algeria must promote the participation of civil society and protect activists and
journalists in exposing and fighting corruption. Cracking down on political dissent,
enabled by draconian laws such as anti-terrorism and cybercrime laws, must end.
Without serious reform, corruption will continue to flourish, further exacerbating the
political and economic instability of the region and hindering its social and economic
development.
16- Algeria should explore of the African Free Trade Agreement (FTA) and its accession
to the Chinese silk initiative to seek markets and investors for any future free zones.
17- Algeria should provide guarantees for possible investors by signing international
treaties and agreements that prevent expropriation or nationalization.
18- Providing political will that completely eliminates dependence on hydrocarbons and
opens borders will have a major impact on the success of any future FTZ.
19- It is necessary for Algeria to harmonize its investment strategies and the investment
objectives of local and foreign investors if it decides to go back to FTZ system.
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