Free Economical Zone Transformation in Georgia

There are a lot of free economical zones in the world. What priorities will it have to form free industrial zone in Georgia, and what will make it successive?

We may consider geographical location of the country, also closeness with Azerbaijan, Armenia, Russia, Turkey, Ukraine, and markets of Middle Asia to be prior for forming free industrial zone. It must also be foreseen, that direct neighbor of Georgia on the Black Sea is Euro Union.

It must be mentioned, that Sea port of Poti is the larges in the Black Sea. It is the largest port servicing dry Caucasian cargo, it is situated on the TRASECA corridor and it the most important part of Caucasian transit transporting web. The port is connected by direct sea directions with Europe and Asian largest ports, has direct ferry connection with Ukraine, Russia, Bulgaria. The port is connected with the railway web of the country, it is connected with every Georgian city with the automobile road, has relations with Poti airport and international airport of Batumi. The seaport serves all kinds of cargo. It has received ISO-9001-2000.

Poti port can widen conductivity and serving more then 25 million tones of cargo annually.Together with geographical location, closeness with international transit arteries and cheap working force also are considered to be prior.

They are going to open free industrial zone on 400 hectares, it borders to the seaport from the north and followed the sea beach line.

Exactly advantage location of free economical zone and extremely liberal legislation system must provoke attracting foreign investments, as investment environment in Georgia is not very attractive from the various points of view. First defining factor of the investment environment is the size of a market. Larger is the market size, the more attractive it is. Georgian market doesn't differ with large scales.

Second factor is legislation. Georgian legislation is liberal. Heritage Foundation considers us to be attractive country in this direction. According to the index of economical independence, Georgia occupies 32nd place. This means, that there are quite liberal barrier for displaying providing business and industrial initiatives in Georgia.

An interrupting factor is political instability. It is known, that inventors pay large attention to the political stability and investment guarantees. A problem of territorial integrity of our country, what puts Georgia under the permanent danger of war is also added to all, mentioned above.

There are some problems from the point of executing law. Fixed facts suppressing private property influenced negatively upon investment surrounding. It is important to provide profitable activities and creation of the mechanisms of legislative protection.

Qualification of working forces is also a serious problem. it is very low in Georgia. Intellectual resource is also reduced.

Main reason of creating free industrial zone is attracting investments, growth of business activity in the region and achieving employment. For this the country must form advantage financial conditions to the investors, for making their choice for the benefit of Georgia among many others. We'll see in the future how much successful the functioning of free industrial zone is, and if inflow of investments take place.

They call free industrial zones off-shore ones. These are the territories, which are under the doubtful sight of everyone, because of being uncontrolled. Its creation in Georgia has been followed by opposition and critical dependence. Most of Georgian experts have negative dependence upon free industrial zones, because it is considered to be the sphere of unreduced actions of private interests of definite persons, for whitening "black money", selling capital in the way of avoiding rules and taxation, perspective of which in Georgia is very doubtful. To their mind, it is incomprehensible, why is there any need of founding free economical zone in such country in which there have been made important steps towards liberalization of economical and industrial surrounding. Complete liberalization of foreign trade took place in the 90s. This meant that export was released from taxation. Tariff-free reductions, as quoting and licensing were abolished. Since 1998, currency operations have complete independence. In 2006 they reduced high custom tariffs. Today custom tariff on agricultural production is 12%, on building materials - 5%, others are zeroed. They simplified licensing and rights on beginning industrial activities and their realization. A professor, economical expert Vladimir Papava exclaims: "creating free economical zone under the conditions of free economy is the most ineffective step. Exactly for this I consider creation of free economical zone in Georgia to be nonsense".

He finds following explanation to his point of view. There are countries of two kinds in the worlds - those, which have surplus investments and which suffer lack of them. Countries having surplus investments strengthen inner investor in its free economical zone. I.e. the country forms such conditions, that the investor invests money in the free zone at the territory of his/her country and doesn't take it out of it. Creation of free economical zones in the country being in hunger of investments hardens the situation, as the investor doesn't come in the country itself, but in the zone. Local investor will try to do same. Georgian economy is not firm and creation of free economical zone will ruin economy of whole country.

The expert Temur Giorkhelidze writes: "the fact, that something will be done in one town and whole country will be raised is illusion. One zone will not stand international capacity. Development of insufficient industrial surrounding at whole territory of the country will cause chaos in this zone!"

Authors of the project and supporters of founding of FIZ estimate its foundation to be positive and consider that Georgia will be better developed and will overcome poverty easier if the economy is more open and liberal.

The author of the bill Kakha Benduqidze considers such zone to be necessary for increasing business-activity in Georgian regions. This will be industrial zone with high technologies and processing industry, in which industrial persons will work in the zeroed regime, which will make additional stimuli for providing their business.

Deputy Minister of economics Vakhtang Lezhava writes: "there is quite liberal regime of business regulation in Georgia. Main goal of making free industrial zone is to create more liberal industrial surrounding in the definite territory of the country to be oriented towards real employment". Lezhava exclaims, that "Georgia will not turn into the off-shore zone, there is no preconditions for this". According to the governmental statement, free economical zone will bring economical raise to the country.

Thus, creation of free industrial zone has been followed by various points of view. There is a permanent question - "What will foundations of free industrial zone bring to Georgia?" in such situation they often say, that "a stick has two ends" or there are as positive, so negative sided of it. They must provide analyzing, which side surpluses another and make advantage decision, is it positive or not to found FIZ in Georgia.

Let's discuss expected dangers and problems of founding free economical zone:

• foundation of FIZ is followed by expenses, at the first stage because of tax payments, and this reduces budgetary incomes.
• Attractive legislative regime of free industrial zone will give rise to the inflecting investments to one concrete region of the country at the expense of other ones. This will ruin less interesting regions from the point pf investments. This may give rise to the opposition among various regions, as people living in this or that region may say that they are oppressed and have no opportunity for being developed.

It is defined by the law, that free economical zone may be founded at any territory of the country, i.e. it is possible to open it in every region. This is exactly where the experts see the danger, as foundation of FIZ is possible on those border territories, in which there is ethnical variety, as free industrial zone comes out of economical domain of our country and it becomes possible to be completely integrated for the territories of neighbor country from the economical point of view.

• it is negative as there will be another uncontrolled territory in the country, in which trade may also not be controlled, as on the sections of Roki - Down Zaramaga and Adler -  Gantiadi. It will be very difficult to realize custom control
• it is necessary to foresee special measures of security, for not letting production provided on the territory of the zone to get to the inner market by the illegal ways. They must reduce entering and outgoing ways maximally and their strict controlling. There is a danger of contraband in the free economical zone. They see danger in the existence of fictive firms, which will pull amounts. Though the authors of the project exclaim that there are levers in the law for avoiding this danger.
• Free industrial zone will give rise to the danger of "whitening" money. There are a lot of methods of "whitening" money. Operations related with cash money, illegal usage of banking and other financial institutions, operations related with expensive movable and unmovable property, gambling games are considered to be classical mechanisms. The simplest way of "whitening" money is in the process of privatization and in the free zones. A free zone is the best way for entering commodity in the contraband way.
• It's well-known axiom, that, in those countries, in which liberalization of economy, opening borders, transit development, entering foreign investments, increasing movement of physical persons are in progress, in the countries, where quite large part of the population is abroad and which is surrounded by ill-disposed countries, possibility of "whitening" "black" money is very high.

Georgia "satisfies" almost every condition named above and it may be considered one of the zones for "whitening" money. The fact that so-called off-shore companies, which represent symbols of "whitening" money provide activities in Georgia, strengthens this danger.

To my mind, danger of "whitening" money is higher in FIZ, than at whole territory of Georgia, foreseeing the fact, that registration of such enterprises, as banks is prohibited in FIZ. To my mind, this process is in progress in Georgia today anyway, because foreign investors, placing their sources in Georgia do not belong to the number of transparent capital owners. In fact, there is no civilized capital flowing in Georgia. Invested capital is entered by the firms registered in off-shore zones (for example, from Marshal and Virginia isles), and this, of course, means, that they are doubtful.

• Free industrial zone, to my mind, will support growth of inflation. Foreign investments will enter FIZ. This will give rise to the growth of masses of foreign currency in the country, which devaluates it in relation with Lari, and this is bad for export.
• There is no political stability in Georgia, rights of the owners are abolished, and working force is not qualified. Permanent changing of legislative system is still continuing. According to this, there is a danger, that foreseeing disadvantage business environment, short termed foreign capital of doubtful appear will enter FIZ, which will run out of the country as soon as the conjuncture worsens a little and thus provoke finance-economical destabilization.

There is danger in selecting an operator. FIZ wouldn't b successive, if it operator were not recognized worldwide and a successful investor in this business. For being successive, it is also necessary to make Georgian FIZ a part of industrial infrastructure of the world and integrated chain.

Creation of free industrial zone has its positive sides. There are large possibilities for business development and growing business activity. It is possible to develop backward region, and zeroed taxation regime will be additional stimuli for providing business.

A positive side of free industrial zone also is the fact, that leading technologies and Know-How will enter the country.

It will increase inflow of foreign currency, because, the capital is objective in its nature it moves towards the place, where there is low payment. Inflow of investments gives the possibilities for economical and social development. Investments will give rise to the creation of working places, relatively - employment.

Creation of free industrial zone in Georgia, as a they say, is not calculated for fiscal effect, it is necessary to provide investments and create attractive surrounding for new business and new working places.

With free industrial zone export potential may be increases. The largest part of manufactured production will be for export that will definitely be successive for Georgia, as firming Lari in the country gave rise to the rise the price of export and worsening taxation balance. For example, data of covering import with export was 32% in 1995; in 2000 it grew up to 46%, for today it is reduced till 23%. From 1995, till 2007 the volume of export has been increased 8 times, and 11 times - of import. Nominal WIP at the same period has been increased from 3.9 Billion Laris to 17 billions i.e. 4.36 times, while real WIP has been increased only per 2.1. Exchange rate of the currency gave rise to the worsening of taxation balance. Only 10% of the production manufactured in FIZ will be permitted in Georgia, others will be exported to other countries. This will provoke improvement of taxation balance.

Free industrial zone - from the point of territorial integrity. FIZ is directed towards territorial expansion. Its territory duels in 5-10 years. if FIZ of Guria-Samegrelo works successfully, Guria-Sukhumi-Ochamchire will join it. Separatists will not be able to block all good of FIZ. For example, Turkish separatists of North Cyprus requested themselves to join economically successful Cyprus.

To the experts' mind, economical integration is necessary. They must make joint investment projects with Abkhazians and Alanians. Founding such zones will give rise to the centralized lob in the conflict regions, which will play positive role in the affair of regulating conflicts. Though, this is only a dream today, as it is known, that they need very good control and stability. If realization of good administration is possible in the conflict regions and the investors have feeling of stability, it will be really possible to create FIZ there. In the modern reality it is utopia, though we can not exclude anything in the future.

Creation of free industrial zone is already decided and it will be activated very soon. FIZ is expected to be an impulse for economical development of Georgia, though opening of free industrial zone is not a miracle, there mustn't be surplus expectation, it is a permanent process, which will bring first results in 5-10 years.

Modern century is of globalization. A process of economical globalization in the world will not be avoided by Georgia and it will be progressively integrated into the world economical system. The process, to our mind, has already begun. Foundation of free industrial zone speaks for this.

Georgian government passed the law "about global competition abilities of financial sector", which foresees foundation of financial center. Main goal of the law is integration of Georgia to the world financial system. Articles involved in the processed "revolution legislative" package touches upon founding off-shore zone in Georgia. We mean foreign banks and assets per ten million dollars.  According to the articles put in the law, the banks' profit up to 100 million dollars will not be taxed. They also touch upon providing the rule of taxing banking-financial operations, capital movement and so on.

How much does it matter to found financial center in Georgia on the background, when financial centers of London, Milan and Hong-Kong are on the highest level of development and need no representatives in Poti. In case, if we offer them taxation oasis and really advantage conditions, they may stop their choice on Georgia. Though it will not be enough, as foreign investors pay large attention to the countries distinguished with economical-political stability, to the category of which Georgia doesn't belong. There is no institutional, technical-economical infrastructure and a mechanism of protecting property is very weak in Georgia.

Notwithstanding everything, integration of Georgia in the world economical domain is inevitable and this is only matter of time, because under the conditions of total globalization no national state may exist without total financial economical space.