A Diagnostic Study of Kyrgyz Republic’s Free Economic Zones and Industrial Parks This diagnostic study provides an overview of the features, functions, and effectiveness of the Kyrgyz Republic’s existing free economic zones (FEZs), its High Technology Park (HTP), and proposed industrial production zones (IPZs) in order to identify and correct their shortcomings and formulate guidelines in accordance with international rules and best practices, so as to enhance their contributions to the success of the country’s economic development strategy. In this diagnostic study, attention is focused mainly on FEZs and the HTP, as the IPZs have yet to be established. The main purpose is to highlight the principal features of the FEZs, the HTP, and the proposed IPZs; in the case of the FEZs, it also evaluates the zones’ performance, especially with regard to their objectives of attracting export-oriented activities and investment, including foreign direct investment (FDI), and creating highly paid employment. At the same time, this diagnostic study suggests how the FEZs and the HTP could be modified to improve their cost-effectiveness. 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, it remains home A DIAGNOSTIC STUDY 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. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping OF KYRGYZ REPUBLIC’s its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. FREE ECONOMIC ZONES AND INDUSTRIAL PaRKS APRIL 2018 CAREC SECRETARIAT www.carecprogram.org ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org A DIAGNOSTIC STUDY OF KYRGYZ REPUBLIC’S FREE ECONOMIC ZONES AND INDUSTRIAL PARKS APRIL 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 978-92-9261-156-9 (print), 978-92-9261-157-6 (electronic) Publication Stock No. TCS189295-2 DOI: http://dx.doi.org/10.22617/TCS189295-2 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. ADB recognizes “China” as the People’s Republic of China, “Kyrgyzstan” as the Kyrgyz Republic, and “Russia” as the Russian Federation. Printed on recycled paper iii Contents Tables, Figures, and Boxes v Abbreviations vi Currency Equivalents vi Executive Summary vii I. Introduction and Background 1 A. Background 2 B. Purpose 3 C. Main Aspects of the Free Economic Zones, High Technology Park, and Proposed Industrial Production Zones 3 D. Economic Environment 4 E. Contribution and Organization of This Diagnostic Study 6 II. Methodology and Key Concepts 8 A. The Crucial Role and Essence of Transparency concerning the Free Economic Zones, High Technology Park, and Proposed Industrial Processing Zones 8 B. The Vital Concept of “Incrementality” 10 C. The Importance of Total Factor Productivity and Its Proxies 11 D. The Role of Industrial Policy in Economic Development 12 E. Facilitation Measures versus Incentives 14 F. “Second-Best” Considerations 14 G. “Market Failure” and “Public Goods” 15 H. Trade Liberalization, Structural Reform, and Trade Adjustment Assistance 16 III. Global and Regional Developments, and Their Implications for the Free Economic Zones, High Technology Park, and Proposed Industrial Production Zones 18 A. The Kyrgyz Republic’s Membership in the World Trade Organization 18 B. The Kyrgyz Republic’s Membership in the Eurasian Economic Union 22 C. The Central Asia Regional Economic Cooperation Program Corridor, People’s Republic of China’s New Silk Road Initiative, and National Infrastructure Plans 25 IV. A Legislative and Institutional Framework for—and the Main Features of— the Zones and the High Technology Park 29 A. Free Economic Zones 29 B. The High Technology Park 38 C. Industrial Production Zones 40 D. The Main Features of the Kyrgyz Republic’s Zones and Park 46 V. Evidence concerning the Effectiveness of Free Economic Zones and Industrial Parks 60 A. Theoretical Observations concerning the Effectiveness of Incentives 60 B. Empirical Evidence from the Kyrgyz Republic 65 C. Empirical Evidence from Other Countries 70 iv Contents VI. Lessons from Other Countries’ Successes and Failures 73 A. Introduction 73 B. The Experience of the People’s Republic of China with Its Special Economic Zones 73 C. India’s Experience with Its Special Economic Zones 82 D. Cambodia’s Experience with Its Special Economic Zones 87 VII. Principles and Guidelines concerning the Design and Role of the Free Economic Zones, High Technology Park, and Proposed Industrial Production Zones 90 A. Introduction 90 B. Empirical Evidence concerning the Performance of the Kyrgyz Republic’s Free Economic Zones and High Technology Park 90 C. Lessons from Abroad 92 D. General Principles 92 E. Specific Guidelines 95 F. Concluding Remarks 98 Annex: Corrective Fiscal Incentives for Research and Development 102 v Tables, Figures, and Boxes Tables 1 Total Factor Productivity Growth in Member Countries of the CAREC Program and Eurasian Economic Union, 1999–2014 6 2 The Main Features of the Free Economic Zones, High Technology Park, and Proposed Industrial Production Zones 46 3 Aspects and Performance of the Free Economic Zones and the High Technology Park 53 4 Tax Preferences in the Kyrgyz Republic’s Free Economic Zones 55 5 Trade in Goods in the Kyrgyz Republic’s Free Economic Zones, 2010–2016 66 6 Flows of Foreign Direct Investments into the Countries of the Commonwealth of Independent States, 1994–2015 72 7 Incentives Granted to Companies in India’s Special Economic Zones Exemption from Import Tariffs (from the DTA and from abroad) 83 Figures 1 Methodology of the Diagnostic Study on the Kyrgyz Republic 9 2 Establishment and Corporate Governance of Free Economic Zones in the Kyrgyz Republic 35 3 Headline Corporate Tax Rates, 2015 62 4 Output Growth and Contribution of Labor Capital, and TFP for Cambodia, the PRC, and India 78 5 General Guiding Principles and Specific Guidelines 100 Annex Underinvestment in Research and Development and the Efficient Corrective Incentive 102 Boxes 1 The World Trade Organization’s Rules Pertaining to Free Economic Zones and Industrial Parks 19 2 Eurasian Economic Union Rules Pertaining to Free (Special) Economic Zones 23 3 Background of the Proposed Industrial Production Zones 42 4 The Textile Technopolis—First Attempt to Create an IPZ in the Kyrgyz Republic 45 5 The Effectiveness of Tax Incentives in Attracting Foreign Direct Investment 64 6 The First Modern Special Economic Zone—Shannon Free Zone, Ireland 74 vi Abbreviations ADB Asian