1.      Korean Experience on Special Economic Zones And its Implication

Economic development of the Republic of Korea during the last 40 years is generally characterized as an industrialization process led by large domestic enterprises. However, there has been another path through which Korea¡¯s national economy has developed. It was through establishing special economic zones (SEZs) where foreign firms are induced, and operating under a privileged condition. Masan Free Export Zone (renamed as Masan Free Trade Zone since 2000) established in the early 1970s and Incheon Free Economic Zone which began to be created from the beginning of the 2000s are two most well-known examples of Korea¡¯s SEZs.

History of Masan Free Export Zone (Masan FEZ) dates back to the latter half of the 1960s when the Federation of Korean Industries (FKI), an organization of large businesses of Korea, suggested creating special economic zones at Korea¡¯s seaside districts. Thereafter, a government-civilian committee was formed to work out a plan to establish SEZs in Korea. In late 1969, having considered many proposed sites, Korean government designated Masan as the first place where a SEZ should be established.

According to the ¡®Law on Establishment of Free Export Zone¡¯ enacted in January 1970,1 the main goal of the Free Export Zone was to attract foreign direct investment which should contribute to development of national economy by promoting export, increasing employment, and enhancing technology level of Korea. Free Export Zone was defined in this law as bonded area, where related laws and regulations are to be exempted or alleviated. Firms in the Free Export Zone may produce, process and/or assemble goods which should be in principle totally exported. In April 1970, the Administration Agency of the Masan FEZ opened and began to receive foreign firms¡¯ application to move into the Zone.

Today, Masan Free Export (Trade) Zone has grown to an industrial complex with more than100 ha extent. Since 1973, as much as 70 to 99 foreign firms have been working each year in the Zone. The majority of them were Japanese companies, while second largest number of foreign firms came from the USA. Whereas export volume of the whole Masan FEZ recorded 9.7 mil. US dollars in 1972, it grew to 2.4 bn. US dollars in 1995. The number of workers of the Masan FEZ reached its peak of 28,000 people in 1980. It decreased thereafter as the technological quality of the resident firms changed gradually from laborintensive to capital-intensive one.

The offshore processing by the resident firms in the Masan FEZ is regarded as the most remarkable success factor for the Masan FEZ.

The offshore processing means that the resident firms procure their parts and halffinished-products from the local firms and factories outside the Zone. Through this, local firms got the chance to increase employment and, more importantly, to enhance their level of technology. The offshore processing by resident firms of the Masan FEZ has grown continuously, settling the division of labor between firms inside and outside of the Zone. It is said that the ceaseless expansion of production and export volume of Masan FEZ, despite of the gradually decreasing number of employment in the Zone from the mid 1980s, was in a great part attributable to the expansion of the offshore processing. Since the end of 1990s, domestic firms were allowed to enter into the Masan FEZ.

Basic idea of the Incheon Free Economic Zone (Incheon FEZ) arose in the middle of the 1980s as a part of the ¡®globalization policy¡¯ of the Korean government. But this idea began to be materialized only after the 1997 financial crisis as a measure to strengthen inducement of foreign direct investment and openness of national economy.

In the ¡®Master Plan to realize the Northeast Asian Business Center¡¯ announced by the Korean government in April 2002, the idea of establishing special economic zones (SEZs) was included as one of the core contents. It was said in this ¡®Master Plan¡¯ that English should be the official language, foreign currencies such as US Dollar and Japanese Yen should be used freely, housing complexes and hospitals for foreigners should be set up to make a global-standard living environment in the SEZs. Additionally, the ¡®Master Plan¡¯ stressed the necessity of setting up an administration agency in each SEZ which provides the investor firms with ¡°one-stop-service¡± on tax, financing and employment. After that, in July 2002, an ¡®Action Plan to realize the Northeast Asian Business Center¡¯ was adopted by the Korean government which contained a long-term plan to develop 3 Free Economic Zones (FEZs) in Korea as Northeast Asian logistics centers. One of them was to be located in the Western part of metropolitan Seoul with Incheon as the center, and the other two were to be located in the Southeastern and the Southwestern ends of the Korean Peninsula with, respectively, Busan and Kwangyang Port as the centers. In the ¡®Law on Designation and Operation of Free Economic Zone¡¯ enacted in December 2002, Incheon was officially designated as the place for an FEZ together with Busan-Jinhae, and Kwangyang Port. They were planned to be developed in 2 or 3 stages.2

It is worth mentioning that the City of Incheon itself has greatly endeavored to be appointed as a FEZ. Already in June 2001, the City of Incheon has concluded a MOU with Gale & Wentworth Company, a US firm specializing on real estate development, to build an international business center in Songdo New Town which was originally developed by the City of Incheon as a housing complex area. The Songdo New Town (17.5 mil. m2), together with Yongjongdo(92 mil. m2) and the Gimpo reclaimed land (16 mil. m2), was included in the above mentioned ¡®Master plan¡¯ as a proposed SEZ site and became the heart of the Incheon FEZ project.

As of 2007, foreign investment to the Incheon FEZ reached 1.5 bn. US dollars. Some of the representative projects are as follows; A joint-venture company between POSCO and Gale named NSIC will start construction of international business center in Songdo New Town where 60 multistoried complex buildings are to be constructed in 5.5 mil m2 area. AMEC, a british company, is constructing Incheon Grand Bridge which connects Incheon Airport with Songdo New Town. American carmaker GM is building test track and R&D center in Cheongra Area of Songdo New Town.

Incheon International Airport in Yongjongdo which aims to become the Northeast Asian aerial logistics hub, is expected to be a new growth engine for Korean economy. Now, the second construction stage of Incheon International Airport is under way, and details of the third construction stage is being discussed and coordinated. A FEZ is constructed within the boundary of the Incheon International Airport where multinational firms such as KWE and Schenker as well as logistics giants such as DHL and TNT have already settled down.

Korean experiences show that, first of all, a clear vision and aim should be set before embarking on establishment of special economic zones(SEZs). The vision and aim should be worked out on the ground of the longterm targets of national economy. Korea established Masan Free Export Zone in the 1970s with the aim of attracting foreign firms, which would increase employment and export, and enhance technology level of Korea. Meanwhile, Free Economic Zones projected at the end of the 1990s were to induce investment of multinational corporations which could bring Korea capital and advanced know-how to develop into a global logistics hub.

Furthermore, a strategy to utilize national comparative advantages is needed to make a successful SEZ. In case of the Masan FEZ, chief and high quality local labor force was the appealing point for foreign firms, whereas Incheon FEZ¡¯s geographical location together with its excellent infrastructure, Incheon International Airport, was more attractive than others for the foreign investors.

Another point for a successful SEZ is the connection between foreign firms in the SEZ and local economy outside the SEZ. Without such a connection, the SEZ would degenerate to an enclave which hardly causes ripple effects on the national economy. Masan FEZ¡¯s case shows that expansion of out-of-zone (offshore) processing led not only to an increase in employment, production and enhancement of technology level of local firms outside the SEZ, but also created a division of labor between firms in the Zone and the outside economy, eventually bringing about a symbiotic relationship between them.

Finally, when many kinds of administrative regulations and restrictions are blocking inflows of foreign investment, SEZs could be utilized as a measure to set up a test place where such regulations and restrictions are not applied, and hence to alleviate foreign firms¡¯ hesitation to invest in those countries. It seems that the best way to remove administrative red-tapes in a SEZ is to provide one-stop-service for administrative procedure.

2.      Critical Evaluation of Proposed SEZ Sites in Uzbekistan

In order for Uzbekistan to select the most appropriate locations and forms for its own SEZs, the purpose of each SEZ should be clearly and properly set in advance. Furthermore, the purpose of SEZs could be properly

set only when it is in consistency with the goals of economic development, and reflect conditions and environment of the Uzbek economy.

The immediate goal of Uzbekistan¡¯s economic development seems to be industrialization of the national economy, and there are both advantageous and disadvantageous conditions for Uzbekistan¡¯s industrialization; rich endowment of natural and agricultural resources, relatively ample population, higher accessibility to neighboring countries could be regarded as most advantageous conditions, whereas weakness in manufacturing base, lack of experience in its own industrialization, and existence of Soviet industrial structure

and business practice are to be pointed out as most disadvantageous conditions for Uzbekistan¡¯s industrialization. Therefore, it could be generally said that the purpose of Uzbekistan¡¯s SEZs is to attract foreign direct investment in order to support industrialization of the Uzbek economy. In other words, Uzbekistan¡¯s SEZs should be the channels of foreign capital and advanced technology as well as know-how that could contribute to Uzbekistan¡¯s industrialization.

Mindful of the above mentioned, the authors of this report visited 6 places in different parts of Uzbekistan where SEZs are expected to be built up.3 Having recognized that each of 6 proposed sites has its own peculiarities as potential SEZ site, the authors reached a conclusion that all of 6 proposed sites are more or less lacking of basic concept as industrial clusters. Above all, it seems that most of the sites do not have a clear vision of development, based on conditions and environment around the SEZs and the national economy as a whole.

a.      Sergeli

It seems that the most urgent thing for Sergeli¡¯s proposed SEZ site is a clear vision as an industrial cluster in the future. Although the authority of Sergeli District regards the attraction of foreign direct investment as primary purpose of the SEZ, there seems to be no concrete idea of what kind of industries should be promoted in the SEZ by means of foreign direct investment, and how they could be connected with local industry outside the SEZ.

Considering this SEZ site¡¯s logistical strength and its linkage with the local economy outside the SEZ, it would be recommendable to attract foreign direct investment for food processing industry in this SEZ site. Food processing industry could be easily supplied with raw material from outside the SEZ, and, furthermore, would cause development of such industries as packing, transportation, retail and wholesale in the neighboring region around the SEZ site. Another hopeful-looking industry for the Sergeli SEZ site is the production of electronics and automobile parts. Backed by the logistical strength of this SEZ site, this kind of products could easily find a market near Tashkent area, and also be exported to neighboring countries.

b.      Chirchiq

Chirchiq has a relatively well-settled complex of chemical and machine industry which has been built since the Soviet time. For it seems to be essential to reorganize and to modernize these production facilities for Chirchiq¡¯s economic development, the government of Chirchiq city needs to draw up a master-plan first for long-term development of the city¡¯s economy. Strategies to establish a SEZ should be a part of this master-plan. For industrialization of Uzbekistan¡¯s economy, it is recommendable to develop a SEZ in a close linkage to surrounding local economy.

c.       Kogand

For Kogand as well, feasibility of reusing the extant industrial facilities should be examined in detail before promoting a new industrial cluster through establishment of a SEZ. On the other hand, it seems that long history of entrepreneurship and craftsmanship in Kogand region could (and should) play an important role for re-industrialization of this region. For example, it should be examined how the small and medium sized traditional enterprises and manufacturers in this region are to be cultivated as a supplier base for new industrial cluster, on which a SEZ could be established in an efficient way. Additionally, technology institutes seem to be needed in this region where young manpower can be fostered.

d.      Margilan

Margilan¡¯s basic conditions for industrial development are relatively good. This city has not only industrial fundaments such as electricity, water and road system, but also a long tradition of non-agricultural economic activities such as manufacture and commerce. Furthermore, Margilan is the home of cotton, silk, oil, natural gas, and a variety of mineral resources and agricultural products.

It seems that a successful SEZ in Margilan should be specialized in light industry, and aim at becoming the center of labor-intensive manufacturing industries in the whole Central Asia. Among labor-intensive light industries, textile industry including sewing (dressmaking) factories, food processing industries, and production of construction materials would be attractive fields for foreign investors. Especially, textile industry should be actively promoted, as Uzbekistan has great price-competitiveness.

There are also weaknesses for Margilan to develop a SEZ as industrial center. For example, seen from the perspective of global standard, transportation infrastructure around the Margilan region is not yet sufficiently developed to support an international industrial center. Also, directly backward-linked industries which could supply proper parts needed by firms in the SEZ are not yet developed. It is worth recommending Uzbekistan government to give attention to the firms in the SEZ as they are supplied with local resources stably at prices determined in the market. Development of textile industry in the SEZ, for example, would only be possible when they could get raw cotton at market price on a preferential basis.

e.      Samarkand

The authors are of the opinion that a SEZ should be set up to have the potential that Samarkand holds to develop as an international tourist resort realized. To continuously develop Samarkand¡¯s tourism industry, simple exploration tourism of historic ruins will not be enough. It must be combined with theme-park-type (or recreation-type) tourism. That means that diverse tour programs in the field of leisure, sports, folklore, epicurism, eco-tourism etc. must be developed in order to avoid the monotonous exploration-type tourist area in the Samarkand region.

In order to attract more tourists from West European and East Asian countries, bold investment must be made to develop high quality tourism products. In SEZ, not only foreign investment but also employment of for eign manpower must be allowed, and bringing in at least 3-4 world-renowned brand hotels is necessary. A worldwide publicity campaign for Samarkand region is necessary. To this end, holding a big-scale international event (performance, exhibition etc.) could be effective.

f.        Navoi

While countries such as Russia, Khazakhstan, Azerbaizan have been competing with each other to have an international logistics center in the Central Asia, Uzbekistan seems to be a latecomer in this field. Considering that demand for air-cargo in the Central Asian region comes mainly from transshipment, and, hence, is not very much high, one or two airports seem to be enough to cover the whole air-cargo demand in this region. This is not a positive condition for Uzbekistan to develop Navoi as a new international airlogistics hub.

Novoi¡¯s current industrial structure also seems not to be supportive to become an international air-logistics hub. Existing industries in Navoi region such as metal processing and chemicals have nationwide importance, and, therefore, should be further promoted. But those heavy industries hardly have backward linkage with air-cargo industry.

Accordingly, factors such as preoccupancy, volume of investment and political support are primary and decisive factors to determine a logistics hub in Navoi. Before everything, a massive investment is indispensible precondition. If Uzbek government has intension to develop Navoi as a new airlogistics hub, prompt and massive investment seems to be vital to equip Navoi airport with world-class facilities. Uzbek government also needs cooperation and collaboration with most advanced firms and specialists of the World. Incheon International Airport of Korean case could be a benchmark for Uzbekistan, and cooperation with Korean Air which has know-how in air-logistics and airport administration, and a logistics base in Central Asia would be recommendable.

3.      Institutional Arrangements for Establishing SEZs in Uzbekistan

To the authors of this report, it seems that the tax (or financial) incentives for foreign investors is not the most needed thing for successful start of Uzbekistan¡¯s SEZs.4 More urgently required thing is a firm will of Uzbek government and existence of official institutions and organizations which can execute the law in a proper manner to support foundation and operation of foreign firms in the early stage of SEZs. Also, an efficient and well-organized system of attracting foreign direct investment and providing one-stop-service for foreign investors in the SEZs is needed.

First of all, a special law (or laws) must be created. Although Uzbekistan has already enacted ¡°Law on Special Economic Zone¡± in April 25th, 1996, this law proved to be a dead letter, because, on the one hand, no effective mechanism to materialize this law was provided, and, on the other, the law itself was very vague in defining aim, function and administrative procedure of establishing SEZs. A new law (or a revised version of existing law) should clearly define the purpose of SEZ and regulate its creation, function, and administration fairly than before. Furthermore, this new law should be enacted as a special law which can be applied preferentially before other Uzbek laws.

Governmental designation of a new SEZ should be done in consideration of the following criteria.

- Feasibility and profitability of the SEZ development plan submitted by local government

- Low difficulty in securing necessary site and financing development costs

- Possibility of attracting foreign investment

- Practicability of plan for securing specialists and other manpower

- Ripple effect on national and local economy

- Business environment and living condition of surrounding areas near SEZ

- Plan on infrastructure construction such as great-sphere traffic and telecommunication network, water and electricity supply etc.

- Accessibility to neighboring countries

- Possibility to form a cluster with surrounding industries

To start with establishment of SEZs, a ¡°SEZ Committee¡± should be set up in the central government which deliberates, consults, and decides on policies related with SEZs. This committee is expected to deliberate on various legislative and administrative processes relating SEZ, to approve SEZ plans submitted by local governments, and to coordinate SEZ policy. Additionally, this committee should establish key directions of SEZ policy, and lead it. For example, this committee decides on target industries for different SEZs to evade functional overlapping of various SEZs.

The SEZ Committee should not be made up of government officials only. Figures from private businesses such as chamber of commerce and industry as well as foreign companies should also participate in the committee.

Together with the SEZ Committee as a deliberating and coordinating organization, a planning and administrative organization (for example ¡°SEZ Planning Office¡±) must be set up in the central government. This office should establish policies on long-term development of SEZ and related inducement of foreign investment. It should also practice deregulation and institutional improvement and be in charge of supervising and supporting localities. Besides, the SEZ Planning Office must develop a financial scheme to create SEZs as well as financial instruments to induce foreign investment. These kind of roles can¡¯t be carried by local governments.

In a bid to curb irregularities and corruption in the process of creating SEZs, a government organization, say ¡°Administration Inspection Office¡±, could be set up to supervise and inspect administration process relating SEZ in general. Especially in the early stage of SEZ creation, inspection will be needed to evade misfeasance and collusion with private companies by public service personnel. It should also be steadily monitored whether institutional improvement in SEZs is being carried on as it was planned.

In the localities where SEZs are created, ¡°Regional SEZ Authorities¡± should be set up. Within the framework of laws and regulations, Regional SEZ Authorities should manage SEZs of their competence by controlling development process of the SEZ, inducing foreign investment, and providing SEZrelating services. Also, Regional SEZ Authorities should form a dispute settlement organization to settle commercial dispute in the SEZ of their competence fast and in a fair manner. Independence and autonomy should be ensured for Regional SEZ Authorities to conduct their business with expertise and responsibility. A free hand in the personnel, organizational, and budgeting matter should be ensured to the Regional SEZ Authorities. Among others, it is important that the Regional SEZ Authorities are given the right to provide foreign investors with ¡°one-stop-service¡± of all administrative processes.

To operate efficiently, Regional SEZ Authorities should have professional subsystem to which departments for administrative supports, foreign investment inducement, institutional improvement as well as committees on

socio-cultural matters, technology education, preservation of environment, external relations etc.

It is important to establish a system that assigns roles to each organization responsible for promotion of foreign direct investment (FDI) and allows them to concentrate on specialized tasks. Organizations such as the Ministry for Foreign Economic Relations, Investments and Trade (MFERIT), UzInfoInvest(Information Support & Foreign Investments Promotion Agency), and Regional SEZ Authority should take its own role in promoting FDI, and a cooperative system among these 3 organizations should be established in order to link targeted industries¡¯ investment promotion to the appropriate areas such as education, labor, and scientific technology. 

MFERIT, in particular, should appoint leading industries that are attractive to foreign investors and target areas for FDI promotion. The government should further support those targeted areas and manage strategies for promoting FDI as a whole. As for UzInfoInvest, it is recommendable to dispatch a promotion team within this organization overseas, in order to actively promote investment opportunities in Uzbekistan, seek potential investors, and collect  information on FDI capital flow.

Each Regional SEZ Authority should appoint professionals as project managers (PM) for investment and encourage these project managers to effectively promote FDI. Effective FDI promotions should further be arranged, such as providing greater marketing discretionary power (cost of land, incentives, etc.) to foreign investors in the Regional SEZ Authority.

4.      Harmonization of SEZ Policy with International Trade Rules

It would be meaningful to examine whether domestic SEZ policy could contradict international trading rules. Among others, international trading rules based on the WTO (World Trade Organization) agreement are to be checked up, for the WTO is the only trade organization of global scale (150 member countries), and Uzbekistan as a applicant country for a WTO membership should be aware of the possibility that domestic SEZ policy could clash with WTO rules.

Besides WTO, there are currently hundreds of regional trade agreements all over the World. Uzbekistan has concluded a multilateral free trade agreement (FTA) with the Commonwealth of Independent States (CIS) countries, 10 bilateral FTAs with single CIS countries, and became a member of the Eurasian Economic Community (Eurasec) in 2006, of which is composed of 6 CIS countries, aiming not only at free trade among member countries but also at customs union and common economic zone in the long run. However, for it is known that any of currently existing regional trade agreements sets special restriction on export and import of the goods produced in SEZs, it could be safely said that no harmonization problem of domestic SEZ policy with international rules will arise when it comes to the regional trade agreements.

First of all, it should be examined whether Uzbekistan¡¯s SEZ policy measures contradict WTO¡¯s ¡®non discrimination principle¡¯ which is the most fundamental rule of WTO agreement. WTO¡¯s non-discrimination principle composes of two elements; the principle of ¡®most favored nation (MFN)¡¯ and that of ¡®national treatment (NT)¡¯. A clash with the MFN principle can be avoided if a government measure which brings benefit or restriction to companies in SEZ does not apply in a discriminatory manner among foreign companies in the SEZs. On the other hand, a government measure which brings benefit of restriction to the companies in SEZ should equally apply for both national and foreign companies if it will not contradict the WTO¡¯s NT principle.

It is important to judge whether a financial contribution by government or public body is a subsidy prohibited by WTO agreement. For example, infrastructure in general is not regarded as subsidy according to WTO agreement. Also, exemption or reduction of customs and indirect taxes upon export goods by government is not a subsidy. In general, cases where a governmental act does not confer a benefit pursuant to the Article 14 of WTO¡¯s agreement on subsidy and countervailing (SCM) are not regarded as subsidy as well.

In contrast, examples of typical export subsidies prohibited by WTO rule are, firstly, the exemption or reduction of direct taxes on export goods, and, secondly, reduction of indirect taxes on export goods to the extent exceeding the reduction span of the same indirect taxes on goods to be sold in domestic market. Also, financial contribution by government on condition of import substitution is a subsidy forbidden by WTO agreement. (subsidies on import substitution subsidies)

Harmonization of domestic SEZ policy with the WTO¡¯s rule on ¡®Trade related Investment Measures (TRIMs)¡¯ will be achieved if the ¡®National Treatment principle¡¯ and the general prohibition on quantitative restriction are observed.

Put together what is mentioned above, it is relatively easy to harmonize domestic SEZ policy with the WTO¡¯s ¡®non-discrimination principle¡¯ or regulations related to ¡®TRIMs¡¯, but harmonization with WTO¡¯s rule on subsidization seems to be more complicated. If Uzbek government wants to grant companies in SEZs benefit which is regarded as export subsidies, for example exemption of direct taxes, so must an exceptional status (total exemption or a waiver period) be conferred on Uzbekistan by WTO¡¯s Ministerial Meeting. domestic market. Also, financial contribution by government on condition of import substitution is a subsidy forbidden by WTO agreement. (subsidies on import substitution subsidies) Harmonization of domestic SEZ policy with the WTO¡¯s rule on ¡®Trade related Investment Measures (TRIMs)¡¯ will be achieved if the ¡®National Treatment principle¡¯ and the general prohibition on quantitative restriction are observed.

Put together what is mentioned above, it is relatively easy to harmonize domestic SEZ policy with the WTO¡¯s ¡®non-discrimination principle¡¯ or regulations related to ¡®TRIMs¡¯, but harmonization with WTO¡¯s rule on subsidization seems to be more complicated. If Uzbek government wants to grant companies in SEZs benefit which is regarded as export subsidies, for example exemption of direct taxes, so must an exceptional status (total exemption or a waiver period) be conferred on Uzbekistan by WTO¡¯s Ministerial Meeting. Otherwise, if Uzbek government considers that such benefit (subsidization) is indispensable, it must rule out the obligation of export performance (or import-substitution performance) on which such benefit is granted.

Finally, it should be noted that there has been no lawsuit in WTO filed against any government¡¯s measure related to SEZ policy so far. This suggests that WTO member countries have been reluctant in raising a formal complaint which would challenge SEZs in a particular country. Perhaps, th reason is that many member countries have their own SEZs and firms of many member countries are operating in SEZs of other member countries. This actuality surely provides an advantageous environment for Uzbekistan to establish its own SEZs. Otherwise, if Uzbek government considers that such benefit (subsidization) is indispensable, it must rule out the obligation of export performance (or import-substitution performance) on which such benefit is granted.

Finally, it should be noted that there has been no lawsuit in WTO filed against any government¡¯s measure related to SEZ policy so far. This suggests that WTO member countries have been reluctant in raising a formal complaint which would challenge SEZs in a particular country. Perhaps, the reason is that many member countries have their own SEZs and firms of many member countries are operating in SEZs of other member countries. This actuality surely provides an advantageous environment for Uzbekistan to establish its own SEZs.