CENTRAL ASIA: Kyrgyzstan’s development (part 3): industrialization and FEZ *

BISHKEK (TCA) — Kyrgyzstan needs to diversify and upgrade its production if the Eurasian Economic Union (EEU) with its large market and new opportunities should not be missed. Presently Kyrgyzstan is on the losing side since it has little or nothing to export while imports are becoming more expensive every day. There is an urgent need to reverse the past economic policy, with reform and a new approach matched by a new breed of entrepreneurs.

Kyrgyz need to learn new skills and technology to sustain competition and develop suitable production using local labor, material and modern equipment. This requires a combined public and private effort from the financial system and the State through special credit lines, tax exemptions, and training for several years.

Sustainable growth should not be the topic of another conference on investment attraction that ends up with populist speeches and little result. Such conferences, speeches and promises fail to bring in new investment, and all this has been going on for the last fifteen years.

Policymakers certainly know that Kyrgyzstan has little to offer to potential investors — there is no stability, a bad past record, no long-term strategy and a credible policy. The only way to proceed is a radical change in the incentive program using fiscal levers. It does not require reducing existing taxes, what is needed is to offer tax exemption for a certain period to those genuine investors that have interest in setting up production facilities. Taxes without investments would bring in nothing, and it would make sense to grant a ten-year tax exemption to anyone that is willing to venture in a new business and risk his time and money where nobody else seems to be interested.

Incentives should be based on several parameters, such as location, the number of employees, amount of investment, exported production, and so on. Incentives should also provide for basic infrastructure such as water, electricity, gas, and sewage. All this should be done by joint efforts of the State and Municipalities and several multilateral banks, to make investors, local and foreign, interested and welcome. Authorities should exempt new companies from taxes and offer them a one-stop procedure for the finalization of proposed plans, reducing obstacles and eliminating or greatly reducing bureaucratic barriers. This is what China, Vietnam, Malaysia, Africa, and Europe are doing. It is a win-win solution for both sides, granted that the state budget does not get any income from potential taxes but local people are employed, goods are exported, utilities such as electricity, water, telephone, and internet are paid for, and a long list of services are used creating a tangible external support to the local economy. Any investment in productive activities brings in a series of benefits to the economy and each dollar invested will bring three dollars of indirect benefits. This alone should justify the tax exemption. In many countries, in the west and in Asia, incentives are not limited to tax exemption but extend to cash participation in the proposed and audited investment. Investment attraction is supported by the possibility to start operation in equipped industrial zones with ready buildings to rent or free land for future construction, export and import concessions, and so on. In Kyrgyzstan, the State does not provide any incentive. On the contrary, anyone that has the intention to venture into a new operation would face a series of barriers whose scope only discourages potential investors.

Kyrgyzstan needs to move from empty words to concrete action driven not by the private interest of the often-corrupt bureaucracy but a new pragmatic approach dictated by the country’s needs and good common sense. The genuine desire to change the present situation should allow Kyrgyz to invest in manufacturing activities of any type — from export-oriented production to import substitution.

Tax exemption would be meaningless if the State does not act as a real partner. Public and private sectors should work together to achieve results that will benefit all sides. Investors should not be seen as benefactors since they are profit-oriented and the State should be more than happy to facilitate achieving such target. To do it the State needs to change the present system, providing the appropriate investment climate without populist promises. The much-talked reforms in the present taxation and bureaucratic system must be implemented to facilitate the country’s transition to manufacturing in all regions of the country and not only in the capital Bishkek. Underdeveloped oblasts such as Naryn, Talas, and Jalal-Abad should lead the way with bigger incentives to compensate for their chronic lack of infrastructure, and activate a comprehensive training program to develop skills and knowledge that are presently missing. The country needs many small and medium sized factories with productive employment capable to generate added value and allow entrepreneurs to make money.

The State should also be serious in implementing reform showing its pro-active attitude and making it credible in the eyes of potential investors. All these issues can be solved locally with appropriate political will and without investing public money. Investors and multilateral banks will certainly support the process. Such public-private partnership can create industrial zones with new factories. We are not talking about huge areas of state land but about a few hectares with adequate infrastructure that can be part of a grant or long-term loan provided by the EBRD or ADB or other multilateral banks. Building factories should be the task of individual entrepreneurs, with a special tax regime a one-stop permissive system in place.

Another possibility to develop small and medium manufacturing facilities would be the assigning of the management of the Bishkek Free Economic Zone, as well as other inefficient free economic zones in different parts of the country, to external parties. The Government can hold a tender open to local and foreign parties, indicating the rules and the terms. The Chinese could be very efficient managers of such zones, given their experience of operation of hundreds of industrial zones, small and large, and the new free economic zone at the border between China and Kazakhstan. The matter can expand considerably by creating outside the Bishkek FEZ of a residential area and facilities needed to support the new investors and an additional employment that such operation will generate.

These are simple proposals that require the Government’s commitment to provide a better tomorrow for the country and an answer to the opportunities offered by the membership of the Eurasian Economic Union. The Kyrgyz are not inborn industrialists but they are practical people and with proper incentives, they would invest less money in buying apartments but instead take their chance in the small industry that certainly has a big future and can bring good profit.

* This article was written by our publisher, a long-time resident of Kyrgyzstan, and is the 3rd part of a series of four articles proposing solutions to the problems that face Kyrgyzstan’s development

The next article:

KYRGYZSTAN DEVELOPMENT * PART 4 * / AGRICULTURE AND AGRO PROCESSING

The previous articles:

Kyrgyzstan’s development: a local problem that requires local reforms

Kyrgyzstan’s development (part 2): the housing problem and solution

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