Whatever one’s attitude toward the idea of economic freedom, it is an undeniable fact that there already are areas where this freedom exists to a certain extent. Today, this country has eleven special (free) economic zones (FEZs), nine priority development areas (PDAs) with special investment treatment, and eight technoparks. Those who gathered at the Yaroslav the Wise Law Academy (mainly, public administration executives and experts, and, surprisingly, just a few businessmen) tried to decide what to do next. The question was to be or not to be.
As Vice Premier Volodymyr Semynozhenko said, the first goal has been achieved. The government made its choice in macroeconomic policy, opting for investment attractive, rather than industrial method of development. There are some positive changes: Ukraine is now receiving foreign capital, with investments being made by such universally-known companies as Carroll, Volkswagen Grope, Phillips, et al. This is a sign of trust.
In 1999, the activities of FEZs and PDAs made it possible to attract almost $700 million in investment and to sign contracts worth $2 billion. The rate of investment growth in these zones is almost three times as high as Ukraine’s average, with domestic investors accounting for 42%. The labor market situation is far better in FEZs and PDAs than elsewhere. Another example is that Kharkiv Oblast Administration Chairman Yevhen Kushnariov noted that Kharkiv had seen qualitative changes in the nature of investment over the two and a half years of special investment treatment.
While formerly businessmen focused primarily on trade and services, now they are making 42% of all investment in mechanical engineering, the city’s top priority industry. Incidentally, this business forum’s program included a session of the special investment coordination council which approved projects to produce Horyzont grain harvesters, update the manufacture of diesel engines at the Malyshev Plant, and set up a modern GMP-standard pharmaceutical production facility. The latest information shows that the city had had $32.2 million invested, 3,100 jobs created, and over 1000 jobs saved by May 1. Nationally, this amounts to almost 92,000 jobs.
However, things do not go smoothly in all areas. The state-sponsored instruments of regional development support have not been utilized at many territories, while some FEZs and PDAs have not even begun to function in practice. For example, the Yavoriv special economic zones in Zhytomyr oblast have not even drawn up an environmental protection program, the latter being the reason why those zones were established. But the most striking fact is that FEZ and PDA economic facilities paid about UAH 600 million in taxes and UAH 260 million in government targeted fund fees from 1999 through 2001, a mere 860 million. Over the same period, the state granted UAH 990 million in tax exemptions. This is a powerful argument against FEZs.
Moreover, the FEZ ideology in a way contradicts that of the tax reform: taxes, although cut, are paid by everybody. At first glance, all those involved in economic activities are supposed to look forward to the approval of the Taxt Code which has gone through its second reading in Verkhovna Rada. In reality, those working in the free economic zones and priority development areas sound the alarm. Article 15056 stalls the further development of FEZs and PDAs, for it specifies that privileges will be awarded only to those economic entities that had already begun to implement investment projects by the time the code was passed, i.e., for another 5-6 years. But the investors were lured by a long-term tax exemption.
The last thing the Kharkiv business forum resembled was a fair where merchants strike deals. No joint venture contracts were signed there. On the contrary, the forum gathered mainly those who organize economic freedom rather than those who make use of it. They set the goal of disseminating the experience of work in FEZs and PDAs and work out the common problem- solving methods, i.e., tried to draw up an algorithm of common behavior. Some roundtable discussions resembled brainstorming. For example, Serhiy Kunitsyn, Chairman of the Council of Ministers of the Autonomous Republic of the Crimea and president of the Ukrainian Association of Special (Free) Zones, wrote a problem on the blackboard. The debaters suggest the ways of solution. The suggestions are immediately recorded and discussed. Then the best option is chosen.
These brainstorms resulted in recommendations to the Cabinet of Ministers and a message to Verkhovna Rada, quite specific documents. The only question is when they will be approved. For Verkhovna Rada itself still works in its own special mode.
