Relevance of New Solutions:
The Example of Free Zones in Serbia and Montenegro By Zdenka Djuric, Ph.D., Faculty of Entrepreneurial Management, Braća Karić University, Novi Sad, Serbia and Montenegro |
Abstract On the example of free zones in Serbia and Montenegro, the author addresses two theses. The first, by which even the best solutions do not last forever and have a limited period of relevance. The second, by which the utility of a new solutions is highly dependent on the quality of the environment and the subjects using it. Key words: free zones, Serbia and Montenegro Introduction The transfer of the global economy into the phase of New Economics more than ever gives significance to the issues of the relevance of new solutions being limited by time and the issues of the knowledge and skills of particular subjects required to deal with change successfully. The problem of changing patterns of successful functioning of the global economy and its subjects does not lie only in the strength of arguments and positions of the participants in the debate. The problem also lies in the knowledge and skills to adopt new solutions in a qualitative manner within the relevant period. In order to elaborate the above positions, this paper considers an unused possibility in Serbia and Montenegro. Knowledge, skills and coincidence have caused the institution of free zones not to yield expected results and effects during the period of high relevance. Free zones as a new, advanced institution in a socialist country The former Yugoslavia was a socialist country. Unlike other socialist countries, it had far more of the elements of a market economy. In the conditions at that time, it maintained a rich practice of foreign economic relations. A little less than one-half of total exports were placed in developed markets. Domestic practices included joint ventures and long-term cooperation with foreign partners. In such an environment, in the mid-1970s, legislation introduced the institution of free zones. Introduction of free zones was accompanied with strong media campaigns about their significance for further access of the domestic economy to the developed world, attracting international capital and transfer of international technology, for further growing exports and creating new employment in the country. A climate was being created in which the institute of free zones was represented as a condition for energizing further economic development. Nowadays, regretfully, we find that the institution of free zones in Serbia and Montenegro, and as far as we know, even wider, in the area of former Yugoslavia and its environment (Romania and Bulgaria) did not accomplish its mission. One exception is Hungary, which initially opted for and very successfully used the trading zones. Transitional changes in the country and liberalization of international trade and business sooner or later will raise the issue of relevance and further maintenance of free zones. Aim and basis of consideration The question asked in compiling this paper is: Why did an institution, which at the time of its introduction represented a modernization and liberalization of links between national and international economies, did not accomplish its mission? When answering this question, besides a decade of professional work on their development, I also wanted to rely on empirical data. Having asked the Association of Free Zones of Serbia within the Chamber of Economy of Serbia, I received the answer that there are no data and that the data are confidential. Free zones in the Republic of Serbia According to the data from the Internet [1] , free zones in the Republic of Serbia are located in Belgrade, Novi Sad, Smederevo, Kovin, Šabac, Subotica, Sremska Mitrovica, Prahovo, Sombor, Lapovo, Vladičin Han, Bačka Palanka and Pirot. Most of these free zones have obtained establishing and working licenses, but factually, they are doing very little or no business at all. We must point out that in the 1980s and the 1990s there was a lot of interest from numerous local governments and companies, mostly in underdeveloped communities, to establish free zones. It was a climate in which it was in to have one's own free zone. Definition of a free zone Under the Law, (Official Gazette of FRY, issues 81/94 and 28/96), a free zone is:
Enterprises managing free zones Free zones on the national territory are incorporated companies owned by local governments, banks, freight forwarding or transporting companies and other corporate entities. In the practice of domestic free zones, new shares were issued and new share capital was added in a very small number of cases. Otherwise, the assets of the free zones did not include the value of land in the free zone area. Free zones are administered by free zone managing enterprises. The range of activities of these enterprises includes:
Privileges for investment and business in free zones At the time of passing the first Free Zones Act, when there were numerous customs barriers to the import of goods on national level and when goods could be held under customs surveillance up to 60 days, free zones provided the possibility of keeping goods under customs surveillance for unlimited time. Otherwise, any transfer of goods from free zone area into the national market is subject to complete import procedure. One of the advantages in this procedure is that the free zone area included Customs offices. At the time of passing the first Free Zones Act, the Direct Foreign Investments Act did not provide, as it does today, the possibility for goods used for setting up a new enterprise or a jointly owned facility to be imported exempt from import duties. The Free Zones Act provides such a possibility. In the first Free Zones Act, the beneficiary of the free zone could have a foreign currency bank account and full freedom of its use. By the changes in legislation regarding foreign currencies, this privilege in doing business in free zones has lost significance. Changes and liberalization of legislation regarding foreign trade and foreign currency transactions of domestic subjects caused the dissipation of minor legislative privileges for investments and business transactions in domestic free zones. Services in free zones Inside the free zone areas, the Law does not allow retailing or rendering services to users who are outside the free zone area. It only allows wholesale between subjects located inside the zone and subjects outside the zone. In compliance with contracts with free zone managing companies, a body corporate may organize and render services inside the free zone area. As far as I know, such a possibility is not used in domestic free zones. On a daily basis, the free zone area includes a small volume of individual specialized services, so that anyone who is potentially interested faces the problem of their cost effectiveness. In a number of free zones, managing enterprises organize and render services of handling and storage of goods, as well as catering, for their users. Programs and contents of free zones In the 1970s and 1980s, domestic free zones were promoted as export-oriented production zones, although legislation did not define it anywhere. Namely, legislation allows organizing all industries and activities in the free zone area, with the exception of activities endangering national security and environment. Experience has shown that domestic free zones acquired a profile of free trading zones. Some stages of production were organized in a very small number of free zones, mostly assembly stages, employing no more than 10 workers per individual program. Strengthening trading and transporting operations in the free zone area has lead to direct competition between free zones and Customs zones and public storage facilities in the direct environment. Users of free zones The 1980s and 1990s were the time of frequent talks about the entry of multinational companies into the free zone areas. The practice, however, failed to live up to the expectations. An average free zone user may be defined as:
Foreign trade balance of free zones The legislature provided that free zones must have exports worth 50% of the value produced and services rendered in the free zone area over the period one year. Under the Law, if a free zone does not comply with this requirement over three consecutive years, this entitles the competent authorities to hand down a decision for withdrawing the permit to operate a free zone. Justification of organizing export-oriented production in free zone space is highly subject to dispute. Legally-provided privileges for transactions in free zones do not stimulate export-oriented production. The legislature gave a high quality solution to the problem of temporary import for finalization or for export, or the issue of temporary import into the territory of the country. According to my information, the value of import in the 1990s exceeded the value of export, but the issue of implementation of the law was not raised due to the situation the entire country was in. Although I do not have the latest accurate information, I tend to conclude that the recent years have not seen significant changes in terms of the volume and size of foreign trade of the free zones. I believe that the share of exchange conducted in the free zones is below 1% of the country’s total foreign trade. Constructing and equipping of free zones By definition, free zones cover areas regulated in terms of urban development, infrastructure and equipment, on high-quality locations. It is true that in several cases free zones also have unregulated grounds in terms of development and equipment. The problems of development and equipment, as well as lack of interest in construction, have lead to the fact that only a part of the ground has been fenced and put to use. So far, local authorities do not comply with the legal provision under which land allotted for construction must be used for construction within a given period of time. The average area of larger free zones is several dozen hectares of land. Smaller free zones cover a few hectares. In the largest number of free zones, built business premises in the free zone regime include facilities that represent the initial investment capital of the free zone. Depending on the free zone, the areas of the built premises of standard dimensions range from 2,300 to 15,000 square meters. These premises, owned by the managing companies are either rented or used by the owners themselves as storage space. The largest number of free zone management enterprises has not invested in further expansion of business premises. Only in the case of two free zones is there a recorded entry of foreign capital and construction of premises for their own needs. Rights of foreign investors The Free Zones Act allows for foreign investors to be shareholders of free zones. Most of foreign equity participation is limited to 49% of the value of the free zone's capital. This provision is one of the reasons for the lack of foreign interest in capital extension of free zones. In case of building within the free zone area, the investor is the owner of the facility and the tenant of the grounds upon which the facility is built. The maximum period of tenancy is 60 years. Factors contributing to failure of free zones to accomplish their mission A large number of factors have contributed to the fact that free zones in our country, once represented as advanced and high-quality institutions, never accomplished their mission. Numerous factors contributing to this fate of free zones can be systematized in several basic groups:
Conclusion A large number of factors have contributed to the fact that free zones in Serbia & Montenegro have not accomplished their mission in the period of their high relevance. Nowadays, the institute of free zones both in the global environment and Serbia & Montenegro is losing its relevance. The problem is not in the volatile character of the relevance of this institution. The problem is in the unwillingness of managements and those gathered around free zones in this country to accept these changes, and with more or less delay, to carry out changes in the programs and contents, relying less on the privileges granted by law and more on the structure and quality of their own offers. Translation from Serbian: Women’s Center for Democracy and Human Rights, Serbia and Montenegro Sources Đurić, Z. (1993). Jugoslovenske slobodne zone [Yugoslav free zones]. Poslovna politika, Issue 10, Belgrade. Đurić, Z. (1994). Kineske ekonomske zon, [Chinese economic zones]. Poslovna politika Issue 7, Belgrade. Đurić, Z. (1995). Slobodne zone u Rumunij, [Free zones in Romania]. Poslovna politika, Issue 4, Belgrade. Đurić, Z. (1996). Maqaldori gube status slobodnih zon, [Magaldori loses free zone status]. Poslovna politika, Issue 3, Belgrade. Đurić, Z. (1998). The Danubian Basin Free Zone, Collection of papers WEBZA, Istanbul. Đurić, Z. (2001). Prilagođavanje promenama – Uslov uspešnosti preduzeć, [Adapting to changes – precondition for successful enterprises]. Belgrade: Institute of economic sciences. - www.szns.co.yu/10- ponuda.htm - www.carinskatarifa.com/propisi/ostali/1225-htm - www.carinskatarifa.com/linkovi/slobodne -zone.htm About the author:
Zdenka Djuric, Serbia and Montenegro, Ph.D., Professor of Faculty of Entrepreneurial Management, Braća Karić University, Novi Sad. She has a broad experience working at research, developmental and leadership positions in companies in Vojvodina. She has published over 120 research and scientific papers.She is the author of one monography and three university textbooks, and co-author of one university textbook. She is affiliate of the Economics Institute in Belgrade and member of the Scientific Association of Economists.
[1] Source: www.carinskatarifa.com/linkovi/slobodne_zone.htm
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