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DOI: 10.36172/EKONOMISTI

E      ISSN 2346-8432
Print ISSN 1987-6890







Journal number 4 ∘ Aytakin Gasan Akhundova ∘
THE USE OF SPECIAL ECONOMIC ZONES FOR THE EFFECTIVE DEVELOPMENT OF THE TOURISM INDUSTRY IN THE REPUBLIC OF AZERBAIJAN

Abstract: An essential role in the development of the world economy in the second half of the 20th century is played by the creation of free (special) economic zones (FEZs), which ensure the intensive development of the national economy and are an effective tool to attract foreign investment and new technologies. The article discusses the concept of free economic zones (FEZ) and describes the strategic objectives of the formation and development of special economic zones. The diversity of the organizational structure of free economic zones in the Republic of Azerbaijan is studied, and industrial parks and industrial quarters as well as the legislative base of their functioning are analyzed. Also, an analysis is made of the creation of SEZs in the form of tourist and recreational special economic zones in the regions of the republic and their advantages for elaborating the tourism sector in Azerbaijan.

Keywords: free economic zones (FEZ), state support, tourism development, creation of tourist and recreational special economic zones, legislative framework, investment.

 

Introduction

        A characteristic of the operation of the world economy and international economic relations of the second half of the XX century is the formation of free (special or special) economic zones (SEZs) that provide the development of the national economy and are effective means to attract foreign investment and new technologies. As a rule, the construction of FEZs is aimed at solving specific and general economic, industrial, foreign trade, social, regional and scientific and technical tasks. Furthermore, the development of SEZs helps to implement strategically essential programs and projects based on international cooperation. In the UN documents, they are described as one of the accomplishments of the second half of the XX century.

         The Kyoto Convention of 1973 "On Simplification and Harmonization of Customs Procedures" described a free zone as a part of the territory of a country where goods are considered as objects located outside the national customs territory, and thus are not subject to regular customs control and taxation [1].

         The functional structure of the FEZ is remarkably different. It is a fact that today there are more than 4 thousand FEZs in the world as FEZ of different types has become widespread both in developed, developing, and backward countries. According to experts, 40-45% of the world trade turnover is planned to run through free economic zones. As a result, it is expected that the number of employees in such zones will exceed 5 million people, and the profit margin is going to be 30% and higher per year. The objectives that countries set for the creation of SEZs are very diverse. Sure, they depend on the level of socio-economic, scientific and technological development of the countries managing them. Hence, the reasons and objectives of their formation in each case may differ from each other.

Regulatory framework for the creation of free economic zones in Azerbaijan.

         The decision to create free economic zones in the modern economic history of Azerbaijan was taken after the transition of the national economy to market conditions. Nevertheless, the creation of special zones in Azerbaijan was not done consistently enough, since there was no necessary regulatory framework to handle this issue.

         On March 6, 2007, the Decree of the President of the Republic of Azerbaijan "On the establishment of special economic zones in the Republic of Azerbaijan" was published to provide favourable conditions for the development of the economy of the country and its particular regions, both stimulating investments and directing them to priority areas, opening new jobs, using advanced management experience, offering competitive goods and services [2]. Thus, since that time, various legislative acts and resolutions regarding the activities of FEZ in our country have been adopted in our republic.

         On April 14, 2009, the Law "On Special Economic Zones" and the corresponding Presidential Decree on its implementation were adopted in Azerbaijan. This Law regulates legal and economic relations concerning the formation and development of special economic zones in the Republic of Azerbaijan and establishes rules for the organization of entrepreneurial activities in these zones. And according to this law, a special economic zone is a limited part of the territory of the Republic of Azerbaijan to which a special legal regime is applied to do business there [3].

          Besides, as per the amendments to the Tax Code, residents of industrial parks and technoparks will be exempt from paying income tax, land tax, property tax, and customs duties when importing machinery, installations and technological equipment for a period of 10 years from the date of registration. Currently, benefits for residents are valid for 7 years from the date of registration. The benefits came into force on January 1, 2013. Thus, preferences for companies that are already residents will be extended until January 1, 2023 [4].

          The global financial and economic crises of 2008-2009 and 2014-2015 brought an understanding that it is necessary to develop the non-energy sector of the country's economy. That is why the priority tasks facing the free economic zones in the Republic of Azerbaijan are not the development of the oil sector, but the acceleration of the industrialization of our country, a significant increase in the level of entrepreneurial activity in the country, an increase in scientific and technical developments, the expansion of innovation, and an increase in the welfare of the population. The development of the high-tech sector - ICT, logistics and tourism can also be called a priority.

Industrial parks and industrial quarters of Azerbaijan.

Today, 6 industrial parks are operating in Azerbaijan:

-        Sumgait Chemical-Industrial Institute (created in Sumgait under the Decree of the President of the Republic of Azerbaijan dated December 21, 2011);

-        Balakhani (created in Baku by the Decree of the President of the Republic of Azerbaijan dated December 28, 2011);

-        Mingachevir (created in Mingachevir by the Decree of the President of the Republic of Azerbaijan dated February 26, 2015);

-        Garadagh (created by the Decree of the President of the Republic of Azerbaijan dated June 3, 2015, on the territory of the Garadagh district of Baku);

-        Pirallahi (created under the Decree of the President of the Republic of Azerbaijan dated September 14, 2016, on the territory of the Pirallahi district of Baku);

-        Biyan (created by the Decree of the President of the Republic of Azerbaijan dated October 28, 2019, on the territory of the Agdash district of Baku).

           Hence, the role of industrial parks in the national economy is increasing every year. Investments in industrial parks have already reached 23.8% of total investments in the non-oil sector. Till today, their residents have produced products worth 6.3 billion manats (3.7 billion dollars), and exported - 2 billion manats (1.17 billion dollars) [5].

Thus, for the development of small and medium-sized businesses, industrial quarters are also becoming crucial, the benefit of which is the creation of the essential internal and external infrastructure for enterprises.

Today, there are 4 industrial districts in the republic:

-        Neftchala Industrial Quarter, signed by the Decree of the President of the Republic of Azerbaijan dated February 2, 2015;

-        Masalli Industrial Quarter, signed by the Decree of the President of the Republic of Azerbaijan dated June 13, 2016;

-        Sabirabad Industrial Quarter, signed by the Decree of the President of the Republic of Azerbaijan dated November 27, 2017.

-        Hajigabul Industrial Quarter, signed by the Decree of the President of the Republic of Azerbaijan dated July 25, 2017

The regulatory framework is the Decree of the President of the Republic of Azerbaijan No. 288 dated October 8, 2014. "On the establishment and organization of the activities of industrial quarters of districts" and "Approximate Regulations on industrial quarters", approved by Resolution of the Cabinet of Ministers of the Republic of Azerbaijan No. 186 dated May 13, 2015. An industrial quarter is a territory that has the essential infrastructure for entrepreneurial activity, used by representatives of small and medium-sized businesses to produce products and provide services [6]. The State policy of the Republic of Azerbaijan is aimed at the organization of industrial quarters in each region of the Republic.

         In addition to the development of industrial and technological parks, efforts are also being actively taken in our country to create a free economic zone, which will boost the competitiveness of the economy and will strengthen Azerbaijan's position as a logistics and transport centre.

         To this end, on May 22, 2020, the President of the Republic of Azerbaijan signed a decree "On the establishment and organization of the Alat Free Economic Zone" [7]. The total area of the Alyatskaya FEZ is 850 hectares.

         It should be noted that the FEZ is being implemented in the village of Alat based on an order of the president signed in March 2016, which also includes the territory of the new Baku International Sea Trade Port. And the law on the FEZ, defining its special status and legal regime of functioning, was approved by the country's parliament in 2018, after which work began on the construction of the zone. The Free Zone, located at the crossroad of the East-West and North-South transport corridors, will operate as the largest logistics centre in the Caspian Basin.

          Industrial parks are also planned to be created in the liberated territories of Azerbaijan. Especially, these are the Aghdam Industrial Park and the Araz Valley Economic Zone Industrial Park. And as per the decree of the President of Azerbaijan dated December 10, 2021 "On some measures to accelerate economic development in the territories liberated from occupation", extra benefits will be provided to entrepreneurs who will carry out their activities there. Here we are talking about customs and tax benefits for the import of materials, benefits related to production activities, wider access to financial resources and state support [8].

Use of special economic zones for the development of the tourist industry of the Republic of Azerbaijan.

          The formation of special economic zones has a wide and very successful practice of application in the development of the tourism industry, even though tourism has become one of the industries in history most affected by the COVID-19 pandemic. Thus, according to UNWTO, international tourist flows have dropped 7.5 times more during the current crisis than under the impact of the 2008 recession [9].

Nevertheless, it should be noted that tourism, being one of the most dynamically developing and highly promising sectors of the economy, has entered the XXI century as the most actively progressing sector of world trade in services. It is the third largest export category (after fuels and chemicals), and in 2019 it accounted for 7% of world trade [10].

As mentioned earlier, the tourism industry in the Republic of Azerbaijan is recognized as one of the priority sectors of the economy. In this regard, state programs and legislative acts have been developed for the development of tourism in the Republic of Azerbaijan, and state investment in the tourism industry of Azerbaijan has increased. In particular, on June 4, 1999, the law "On Tourism" was adopted by President H. Aliyev in Azerbaijan stimulated the development of the tourism industry, becoming the foundation and core of the legal system in the field of tourism in Azerbaijan [11].

Two state tourism development programs for 2002-2005 and 2010-2014 also played an important role in the development of tourism in the country. Besides, the development concept "Azerbaijan 2020: look into the future" also reflects the mission and goals for the development of the tourism sector in the country. It is encouraging that in the "Strategic Roadmap" for the national economy, issued by the decree of the President of Azerbaijan I. Aliyev dated December 6, 2016, which includes 11 directions, one of the directions is the "Strategic Roadmap for the development of the specialized tourism industry in Azerbaijan". These documents represent the legal basis for the formation of the tourism industry in Azerbaijan that meets modern economic, social and environmental requirements, and ensures the transformation of the tourism industry into one of the pillars of the development of the state's economy [12, p. 324].

Azerbaijan has a huge potential for the development of all types of tourism. Our country has an amazing natural, historical and cultural resources. The tourism potential of Azerbaijan is to welcome up to 5 million tourists a year. Anyway, there are still no functional mechanisms in the republic, such as the creation of tourist and recreational special economic zones and the regulatory framework controlling this process.

On July 7, 2021, according to the decree of the President of Azerbaijan "On the new division of economic regions in the Republic of Azerbaijan", the Republic of Azerbaijan is divided into 14 economic regions [13]. And in all regions of Azerbaijan, based on the available natural resources, climatic conditions, transport and geographical location of the territories, the possibility of organizing free economic zones is obvious, which would serve as a stimulus for increasing the tourism business in the country, since all regions of our republic have a great tourist resource potential.

However, unfortunately, in many tourist and resort regions of Azerbaijan, there is no complementary tourist infrastructure: transport system, accommodation and catering facilities, leisure and entertainment industry, etc. Also, the lack of preferential lending, the existence of regional management barriers, and the lack of prepared investment sites serve as a barrier both to attracting investment and to the interest of businessmen. That is why it would be advisable to utilise tourist special economic zones to attract foreign capital for the development of Azerbaijan's tourism business. It should be noted that the functioning of these zones in particular regions seems to be a complex process in which all economic entities directly involved in the tourism sector take part. That is, the primary feature of the work of the tourism industry as a branch of the world economy is the scale of collaboration of many types of economic activities.

An optimal strategy for the territorial organization of special tourist zones in Azerbaijan should be based on providing the socio-economic development of our republic. And here the role of the state is essential, its policy is aimed at enhancing the tourism sector of the Republic of Azerbaijan based on the introduction of the legislative framework for the creation of tourist SEZ. Specifically, the development of tourist zones based on the use of the mechanism of public-private partnership (PPP) by stimulating investment in particularly important objects of tourist infrastructure should be made [14, p. 161].

PPP is an important mechanism for attracting extra-budgetary investments in the development of different types of infrastructure. Such mechanisms are most attractive for the tourist SEZ since the partnership between the state and business is most dynamically developing in the field of enhancing tourism infrastructure. This is when the state finances the development of engineering and communication infrastructure, and the private sector invests in the construction of hotels, repairs of necessary equipment, etc. At the same time, it would be useful to form a PPP model on the territory of each region of Azerbaijan, in order to develop tourist zones, taking into account the regional peculiarity and investment attractiveness of this territory [14, p. 167]. It also becomes crucial to provide tax and other benefits to entrepreneurs, change administrative procedures, provide benefits for communications, etc. As world experience illustrates, the success of tourism directly depends on how this industry is considered at the state level and to what extent it gets state support.

Looking at, for example, the Turkish experience in the creation and operation of FEZs and, taking into account the success of this country in the field of tourism, it is clear that with the adoption of the relevant law in 1987, the first tourist and recreational zones were created in the country in the cities of Mersin and Antalya in the same year. Already in 1990, the Aegean FEZ in Izmir and the Istanbul Free Trade Zone joined the ranks of the FEZ. In 1992, the FEZ was created in Trabzon and in 1993 - in Adana. In the following years, the number of them in the country increased, in total there are more than 20 FEZs in Turkey now. In addition, in 1982 the country adopted the "Law on Investments in the field of Tourism", which provides the state with the opportunity to use land capital for 49 years. Also, Turkish legislators have adopted laws in the tax and customs Code, because of which 40% of the total investment costs in the tourism sector are not subject to value-added tax and privileges are provided for duties on the import of appropriate equipment for tourist facilities. When purchasing local equipment for the development of the tourism industry, they provide significant benefits for taxes and duties [15, p. 52].

Conclusion

Thus, what the formation of tourist recreational economic zones in Azerbaijan gives us? Firstly, it is the inflow of FDI and, as a result, the increase in financial revenues to the budget of the region. This is the modification of the proper, necessary infrastructure including transport, social, hotel, and communication infrastructure and facilities. Secondly, it is the creation of new jobs, which helps to mitigate the phenomenon of unemployment. Finally, it leads to an increase in the welfare of the local population. In other words, the creation and operation of the SEZ have a huge multiplier result. It will give additional advantages to Azerbaijan for its participation in the integration processes of the global tourism industry making the tourism sector one of the most profitable sectors of the national economy.

 

            references:

  1. http://www.tamognia.ru/doc_base/document.php?id=1571053 - International Convention dated May 18, 1973 “on the simplification and harmonization of customs procedures”.
  2. https://azertag.az/ru/xeber/UKAZ_PREZIDENTA_AZERBAIDZHANSKOI_RESPUBLIKI_O_SOZDANII_OSOBYX_EKONOMICHESKIX_ZON_V_AZERBAIDZHANSKOI_RESPUBLIKE-660653 - Decree of the President of the Republic of Azerbaijan "On the establishment of special economic zones in the Republic of Azerbaijan".
  3. https://base.spinform.ru/show_doc.fwx?rgn=28132 – Law of the Republic of Azerbaijan April 14, 2009 No. 791-III “On special economic zones”.
  4. http://interfax.az/view/781887 - Azerbaijan plans to increase the period of tax benefits for residents of industrial parks and technology parks to 10 years.
  5. https://report.az/ru/analitika/ekonomika-azerbajdzhana-v-2022-godu-kurs-na-operezhenie/ - Economy of Azerbaijan in 2022: heading ahead.
  6. https://azertag.az/ru/xeber/Ukaz_Prezidenta_Azerbaidzhanskoi_RespublikiO_sozdanii_promyshlennyh_kvartalov_i_organizacii_ih_deyatelnosti-801227 - Decree of the President of the Republic of Azerbaijan “On the formation of industrial districts and the organization of their activities”.
  7. https://moscow-baku.ru/news/economy/ilkham_aliev_podpisal_ukaz_o_sozdanii_i_organizatsii_deyatelnosti_alyatskoy_svobodnoy_ekonomicheskoy/ - Ilham Aliyev signed a Decree on the establishment and organization of the Alat Free Economic Zone.
  8. https://www.trend.az/business/3598495.html - The Economic Zones Development Agency is preparing a package of benefits for residents of industrial parks in Karabakh.
  9. Hie era of peak travel is over. [Electronic resource]. Access mode: 4/16/21216676/coronavirus-covid-19-travel-vacation-tourism-overtourism (date of access: 10.09.2021)
  10. https://tourism4sdgs.org/wp-content/uploads/2020/08/Key-Messages-for-Tourism-and-COVID-Policy-Brief_RU.pdf - Secretary General's Concept Note on Tourism and COVID-19 Key Messages, August 2020
  11. Law of the Republic of Azerbaijan "On Tourism" dated July 27, 1999
  12. A. G. Akhundova - Socio-economic basis and ways to improve the efficiency of event tourism in Azerbaijan. Journal "Economics and Entrepreneurship", No. 3, 2020, p. 323-327.
  13. https://president.az/ru/articles/view/52389 - Decree of the President of the Republic of Azerbaijan on the new division of economic regions in Azerbaijan.
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