Strategic Framework for Free Economic Zones and Industrial Parks in the Kyrgyz Republic Free economic zones that can be transformed into clusters of highly competitive traded firms can contribute significantly to industrial diversification and regional development of the Kyrgyz Republic. This strategic framework outlines strategies and policies for leveraging them to enhance productivity and promote regional development. The framework involves six pillars for integrating free economic zones and industrial parks: (i) using a sustainable development program with a mix of bottom–up and top–down approaches; (ii) enhancing the investment climate by ensuring the development of sound legal and regulatory frameworks, better institutional designs, and coordination; (iii) using a proactive approach with global value chains and upgrading along them by strengthening domestic capabilities; (iv) forming regional and cross-border value chains; (v) developing a sound implementation strategy; and (vi) establishing a sound monitoring and evaluation framework. About the Central Asia Regional Economic Cooperation Program The Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 11 member countries and development partners working together to promote development through cooperation, leading to accelerated economic growth and poverty reduction. It is guided by the overarching vision of “Good Neighbors, Good Partners, and Good Prospects.” CAREC countries include: Afghanistan, Azerbaijan, the People’s Republic of China, Georgia, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan. ADB serves as the CAREC Secretariat. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, STRATEGIC FRAMEWORK it remains home to a large share of the world’s poor. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. FOR FREE ECONOMIC ZONES Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical AND INDUSTRIAL PARKS IN THE KYRGYZ REPUBLIC MAY 2018 CAREC SECRETARIAT www.carecprogram.org ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org STRATEGIC FRAMEWORK FOR SPECIAL ECONOMIC ZONES AND INDUSTRIAL ZONES IN KAZAKHSTAN MAY 2018 ASIAN DEVELOPMENT BANK Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2018 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org Some rights reserved. Published in 2018. ISBN 978-92-9261-150-7 (print), 978-92-9261-151-4 (electronic) Publication Stock No. TCS189336-2 DOI: http://dx.doi.org/10.22617/TCS189336-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound by the terms of this license. For attribution, translations, adaptations, and permissions, please read the provisions and terms of use at https://www.adb.org/terms-use#openaccess. This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material. Please contact [email protected] if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo. Notes: In this publication, “$” refers to United States dollar. Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. The Asian Development Bank refers to “China” as the People’s Republic of China; “Korea” and “South Korea” as the Republic of Korea; “Kyrgyzstan” as the Kyrgyz Republic; “Laos” as the Lao People’s Democratic Republic; “North Korea” as the Democratic People’s Republic of Korea; “Russia” as the Russian Federation; and “Vietnam” as Viet Nam. Printed on recycled paper iii Contents Tables, Figures, and Boxes v Abbreviations vii Currency Equivalents vii Executive Summary viii I. Introduction 1 1.1 Background 1 1.2 Objectives 2 1.3 Definition of a Strategic Framework 2 1.4 Why a Strategic Framework for Free Economic Zones and Industrial Zones in the Kyrgyz Republic? 3 1.5 The Proposed Strategic Framework 4 1.6 The Conceptual Framework 5 II. Understanding the Development Patterns, Opportunities, and Challenges in the Kyrgyz Republic 9 2.1 Geography 9 2.2 History 10 2.3 Economic Challenges 11 2.4 Sociopolitical Challenges 23 2.5 Conclusion 25 III. Competitiveness Drivers: Factors that Hamper Business Competitiveness in the Kyrgyz Republic 26 3.1 What Are Competitiveness Drivers? 26 3.2 Analysis of Competitiveness Drivers in the Kyrgyz Republic 27 3.3 Conclusion 35 IV. Promoting Economic Zones: Toward a Virtuous Cycle of Competitiveness and Productivity 37 4.1 Free Economic Zones and Industrial Zones: Conceptual Clarification 37 4.2 Economic Zones and Sustainable Economic Development: Underlying Mechanisms 42 4.3 Economic Zones: Strategic Approaches, Critical Success Factors, and Development Outcomes 45 4.4 Free Economic Zones and Industrial Parks: The Relevance for the Kyrgyz Republic 48 V. Economic Zones in the Kyrgyz Republic: A Proposed Strategic Framework 50 5.1 Evolution of Economic Zone Policy in the Kyrgyz Republic 50 5.2 Performance of Economic Zones in the Kyrgyz Republic 52 5.3 Assessment of Free Economic Zone and Industrial Park Policies and Implementation 55 5.4 Strategic Framework 61 iv Contents VI. Pillar 1: Integrating the Regional Sustainable Development Program with Economic Zones 63 6.1 Toward an Economic Zone-Based Regional Development Strategy: A Cluster-Based Approach 63 6.2 Promoting New Clusters through Economic Zones: Alternative Models 66 6.3 Strategic Action Plan for the Kyrgyz Republic 68 6.4 Major Recommendations 72 VII. Pillar 2: Promoting Investment Climate in Economic Zones 73 7.1 Conceptual Framework 73 7.2 Key Features of the Strategic Pillars 73 7.3 Conclusion 80 VIII. Pillar 3: Promotion of Spillovers from Global Value Chain-Linked Investment 81 8.1 Broad Policy Framework 81 8.2. Minimalist Approach: Lowering Policy Barriers for Linkages 82 8.3 Proactive Approach 83 8.4 Focused Approach 84 8.5 Complementing Smart Industrialization with Agglomeration Economies 87 8.6 Conclusion 89 IX. Pillar 4: Augmenting Regional Value Chains and Cross-Border Chains 90 9.1 Relevance of Regional Value Chains 90 9.2 Facilitators of Regional Value Chains 92 9.3 Strategy for Zones to Promote Regional Value Chains 95 9.4 Managing Cross-Border Value Chains 97 X. Pillar 5: Implementing the Zone Strategy 102 10.1 Conflict and Ambiguity Model 102 10.2 Human Resources Capability Model: Human Resources Management 104 10.3 Institutional Complementarity Model: Complementary Institutional Support 106 10.4 Risk Management Model 107 XI. Pillar 6: Monitoring and Evaluation 109 11.1 Identifying the Questions to be Answered and Information Needed 109 11.2 Performance Indicators 110 11.3 Methodologies 111 11.4 Conclusion 115 XII. Conclusion 116 References 120 Contents v Tables, Figures, and Boxes TABLES Table 1: Types of General Industrial Zones 38 Table 2: Categories of Special Economic Zones 40 Table 3: Varieties of Free Economic Zones 40 Table 4: Step-by-Step Process to Attract Global Value Chain-Linked Investments 72 Table 5: Level of Economic Development of Eurasian Economic Union Members: 2015 94 Table 6: The Russian Federation’s Share in Exports and Imports of Its Eurasian Economic Union Partners: 2013 94 Table 7: Types of Free Economic Zone Stakeholders 105 FIGURES Figure 1: The Strategic Framework 3 Figure 2: Policy Circle of Special Economic Zones and Industrial Parks 6 Figure 3: Gross Domestic Product per Capita of the Kyrgyz Republic and Lower Middle-Income Countries and Areas, 1990–2015 12 Figure 4: Annual Gross Domestic Product Growth at 2010 Constant United States Dollars 13 Figure 5: Demand Components of Gross Domestic Product of the Kyrgyz Republic, 1990–2015 14 Figure 6: Total Natural Resources Rent (% of Gross Domestic Product) of the Kyrgyz Republic and Lower Middle-Income Countries 15 Figure 7: Remittances Received