The Sino-Egyptian Suez Zone of Trade and Economic Cooperation as a promising model of economic development in Africa

Li Jinyang Postgraduate student, Peoples' Friendship University of Russia 117198, Russia, Moskovskaya oblast', g. Moscow, ul. Miklukho-Maklaya, 6 ljy950517.@gmail.com

Special economic zones (SEZs) are a relatively broad concept. In a broad sense, they cover various types of parks, such as free trade zones, export processing zones, high-tech industrial development zones, economic and technological development zones, etc. As a special "policy tool", SEZs, if used correctly, can become an effective means of promoting industrialization and economic restructuring of the country.

The African continent is rich in natural resources, accounting for about 20% of the total land area in the world, about 17% of the population. At the same time, it is the poorest continent in the world. According to the UN, 33 of the 46 least developed countries in the world are located in Africa. There are many reasons for the poverty of the African population, but the low degree of industrialization and the unfavorable situation in foreign trade are the main ones.

The construction of special economic zones in Africa began even earlier than in China. In the 1970s, Mauritius, Senegal and Egypt planned and established export processing zones. ^[1] However, due to the inadequate infrastructure of these African countries, their attractiveness for foreign investment was very limited. In addition, in African countries, one can often encounter an imperfect legal system and poor governance. Export processing zones in some countries have turned into places for smuggling, tax evasion and resale of foreign currency. Export processing zones did not contribute to an increase in the level of domestic production, and even had a negative impact on the domestic market. ^[2]

Unlike these countries, China has maintained rapid economic growth for more than 40 years. The use of opportunities and the rational use of the policy instruments of the "special economic zones" have become an important reason for the emergence of the "Chinese miracle". A large number of researchers believe that China is one of the most successful countries using special economic zones to promote economic development and industrialization. For example, D. Zeng, a senior economist at the World Bank, stated in his research report that the numerous special economic zones that have emerged since the beginning of reform and openness are undoubtedly one of the engines of China's amazing development.^[3] Some researchers believe that thanks to its success, Shenzhen has already become a model for special economic zones in other parts of the world.^[4] The first four special economic zones created in China soon gave a powerful boost to the local economy, and the GDP growth rates in the areas where the special zones are located increased significantly. (see Table 1)

Table 1. Average annual GDP growth rates in China's Special Economic Zones from 1980 to 1984

Sources: Yeung Yue-man, J.Lee, G.Kee. 2009. China’s Special Economic Zones at 30. Eurasian Geography and Economics. Volume 50. Issue 2. p. 228.

At the same time, special economic zones as a testing ground for new policies have provided a wealth of trial and error experience and ample opportunities for nationwide economic and political reforms in China. "How to apply the successful experience of establishing China's special economic zones in their countries?" is a question that should be considered by all African countries that want to contribute to the rapid economic development of their countries with the help of SEZs. Special economic zones created as a result of cooperation between China and African countries have become one of the important topics of academic research. Russian scientists have also studied China's special economic zones in Zambia and Mauritius.^[5] Some scientists believe that special economic zones in Africa are one of the promising areas for the development of Russian business.^[6]

THE HISTORY OF THE CREATION OF THE SINO-EGYPTIAN SPECIAL ECONOMIC ZONE

Sino-African cooperation on the creation of special economic zones has a long history. Back at the Beijing Summit of the Sino-African Cooperation Forum in 2006, the parties made concrete decisions on "the creation of 3-5 foreign zones of economic and trade cooperation in African countries."

The history of the creation of the "Sino-Egyptian Suez Zone of Trade and Economic Cooperation" begins in 1994: Egyptian President Hosni Mubarak was invited to visit China and study the situation in the economic and technical development zone of Tianjin and Pudong district in Shanghai. H. Mubarak showed great interest in the experience of building such zones and the development of cooperation between the two countries in this area. Then, in October 1994 and May 1995. During the visits of Chinese Vice Premier Zhu Rongji and Chinese President Jiang Zemin to Egypt, the Egyptian government proposed to plan a plot of land in the Suez Canal area for China's use and the creation of a special economic zone. ^[7] The Chinese government reacted enthusiastically to this idea. In April 1997, Egyptian Prime Minister Kamal al-Ganzouri visited China and signed a memorandum between the two governments on China's assistance to Egypt in the construction of the Suez Free Zone with Chinese Prime Minister Li Peng. China agreed to share its experience in the construction of special economic zones and stated that it would encourage the participation of Chinese enterprises in the construction of special economic zones in Egypt. ^[8]

The desire of the two sides to jointly build special economic zones arose even earlier, but since Egypt adjusted the location of the zone several times, the launch time of the cooperation zone was postponed. In a memorandum signed by Li Peng and Kamal al-Ganzouri in 1997, both sides defined the cooperation zone as a free zone. In September 1999, the Prime Minister of Egypt issued Order No. 3757, in which the Suez Special Zone was defined as a new industrial zone. In 2003, Egyptian President Mubarak Hosni issued Presidential Decree No. 35, which stipulated that the Suez Special Zone, built jointly by China and Egypt, would fully participate in commercial activities on the international market, and its products would not be sold inside Egypt. ^[9] The cooperation zone officially started working only in 2008. In 2008, TEDA Investment Holding Co., Ltd., Tianjin Economic and Technical Development Zone SUEZ International Cooper Co., Ltd. and the Joint Egyptian-Chinese Co., Ltd established the investment company Egypt TEDA. These three companies own 75%, 5% and 20% of the shares of the new company, respectively. [7. p. 29] The construction of the cooperation zone is divided into two stages. The land plot with an area of 1.34 square kilometers at the first stage was mainly developed in 2017, and the second stage with an area of 6 square kilometers is under construction.

THE MAIN FEATURES OF THE SINO-EGYPTIAN SUEZ ZONE OF TRADE AND ECONOMIC COOPERATION

According to the Chinese model of the construction of a special economic zone, in order for the Sino-Egyptian Suez Zone of Trade and Economic Cooperation to play a proper role in promoting the modernization of the regional industrial structure and stimulating industrialization, the following conditions were necessary:

1. The Special Zone should be located in a place that will give it a unique advantage. From the very first special economic zones of China: Shenzhen, Zhuhai, Shantou and Xiamen, to the later 14 coastal cities such as Dalian, Qinhuangdao and Yantai – all these zones have one thing in common - they are all located in the eastern coastal zone of China, adjacent to large cities with developed territory, which makes it possible their connection to the international market. For example, the Shenzhen ECO is located on the border with Hong Kong and in close proximity to the Pearl River Delta, located in the large southern province of Guangdong. During its development, Hong Kong provided technology and capital, and the Zhujiang River Delta region provided a large amount of labor, land and natural resources. It is thanks to this combination of favorable factors that allows Shenzhen to realize its initial goal of attracting foreign investment, and Shenzhen has become one of the most important production bases in the world, which further contributed to the rapid economic development of the entire Pearl River Delta. ^[10]

2. Creation of appropriate incentives for investment promotion, as well as independent and flexible SEZ management systems. One of the important goals of creating a SEZ is to attract investment, especially foreign direct investment. To achieve this goal, China's SEZs, as a result of long-term experiments, developed a flexible corporate income tax policy for foreign direct investment in 1991: the rate is only 15% for foreign direct investment, and the tax rate for Chinese corporations is 30%. ^[11] Only in 2007, the State Tax Administration of China made adjustments to these rates in order to stimulate innovation and development of domestic enterprises while attracting foreign direct investment. For enterprises using the 15% corporate income tax rate before 2007, the tax rate became 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. ^[12] This practice of annual corporate income tax changes fully proves that the Chinese government is constantly adjusting its management policy taking into account the special zone and the economic development of the country. When adjusting the policy, the Chinese government also fully took into account its flexibility, giving businesses enough time to adapt to the new tax rate.

ECO enterprises were also the first in China to obtain the right to conclude employment contracts with employees independently: the recruited personnel first signed an experienced contract with the enterprise for six months, and then, with the consent of both parties, an official contract defining the mutual responsibilities of the enterprise, workers and employees. Later, contract hiring of workers became widely used throughout China.^[13] The provision of such flexible and autonomous management rights to enterprises has influenced and contributed to the development of innovative capabilities of enterprises throughout the ECO.

3. Establishment of economic ties between the SEZ and other parts of the country. The SEZ function cannot be limited to achieving economic prosperity within the zone. To maximize the role of the SEZ, it is necessary to use the zone as a leader and establish organic links with enterprises in other regions of the country through the supply chain of raw materials and other production chains. This connection not only helps to achieve economies of scale of the industrial cluster, but also effectively contributes to the improvement of the innovative potential in the industry and increases the competitiveness of domestic industries. The Zhujiang River Delta in China is the best example of establishing such economic ties.

4. Improving the educational level of the district's population and attracting foreign specialists. The composition and characteristics of the population have a huge impact on the innovative and entrepreneurial opportunities of the region. According to the latest data on the population of Shenzhen for 2021, among more than 17.5 million permanent residents of Shenzhen, 5.06 million people have a higher education or higher, i.e. 28 thousand people have a higher education for every hundred thousand people, which is much higher than the average level in China. ^[14] This is one of the important factors that makes Shenzhen rich in innovation and creativity.

In addition, in order to increase the level of education and the number of highly qualified specialists in the region, Shenzhen has invested more in higher education than many other cities in China. For example, at Shenzhen University, revenues from budget allocations for 2019 reached 3.98 billion yuan. ^[15] Active investments in education have also attracted a large number of students who stayed in Shenzhen after graduation, providing a constant influx of new forces for economic development, innovation and entrepreneurship of the Shenzhen ECO. If the China-Egypt Suez Trade and Economic Cooperation Zone hopes to achieve sustainable development, it will undoubtedly need to follow the practice of Shenzhen: attract foreign talent and increase investment in education in the region to reserve talent for economic development.

Compared to the several necessary conditions listed above for the success of special economic zones in China, the Sino-Egyptian Suez Zone of Trade and Economic Cooperation is located in the "golden zone" of three continents - Asia, Africa and Europe. This is the intersection of the "Belt and Road" and the "Economic Belt of the Suez Canal Corridor". The zone is located just 2 km from the port of Sukhan - the third largest and most modern port in Egypt. It can accommodate cargo ships with a displacement of 15 thousand tons, from it you can get to 170 ports around the world. This gives an additional advantage during transportation for companies in the cooperation area, allowing them to effectively distribute their products in Western Asia, Africa and even in Europe and the USA. At the same time, the cooperation zone is located in a densely populated area of Egypt, just 40 kilometers from the city of Suez and 120 km from the Egyptian capital Cairo, and has a rich workforce.

As an important project of Sino-Egyptian and all Sino-African cooperation, the Sino-Egyptian Suez Zone of Trade and Economic Cooperation not only has investment benefits and preferential policies from the Egyptian government. China, in turn, has established a $40 billion Silk Road Fund to provide financial support to companies operating under the "One Belt, One Road" initiative. Enterprises located in the cooperation zone can apply to the Fund for support. In addition, the State Development Bank of China and the administration of the cooperation Zone jointly determine the activities of enterprises and provide a special national loan of $1 billion to small and medium-sized African enterprises to support and assist healthy development in this zone.

As for the management mechanism, the zone has created a single service center to provide services for the establishment, registration and related state processing of documents for investment enterprises, so that investment enterprises can use relatively convenient and efficient services. Companies, enterprises and their branches in the cooperation zone do not need registration and licensing for import and export, they can directly engage in various import and export businesses independently. In order to attract and retain specialists, apartments for employees have been specially equipped in the cooperation zone, playgrounds, a water park and other entertainment facilities have been built on an area of 20 thousand square meters. As of June 2020, the China-Egypt Suez Trade and Economic Cooperation Zone has attracted 96 enterprises with investments of more than $1.2 billion, total sales of $2.3 billion and taxes paid of almost $170 million for the Egyptian government. Enterprises in the zone provided jobs for more than 4 thousand local residents, and related industries helped solve the employment problem for almost 30 thousand more people. ^[16]

Various types of professional training are also regularly organized in the cooperation zone, which makes it possible to train a large number of technical personnel and managerial personnel. Currently, five industrial clusters have been formed in the cooperation zone in the following areas: the production of textiles and clothing, oil equipment, new construction materials, energy equipment and mechanical engineering, which contribute to the development of industrial production in Egypt.

COOPERATION ZONE DEVELOPMENT PROBLEMS AND SOLUTIONS FROM CHINA

Judging by the current state of development of the cooperation zone, we can say that it has already achieved good results. However, the task of special economic zones in stimulating regional and national industrialization, adjusting the national industrial structure and, ultimately, in promoting rapid economic development throughout the country is obviously not fully realized. Compared to the development process of China's SEZ, which stimulates the industrialization and urbanization of the country, Egypt still has a lot to learn.

Firstly, in the practice of the cooperation zone, the effect of the secondary extension of the SEZ on the Egyptian economy is clearly insufficient. Although five large industrial clusters have been formed in the cooperation zone, the number of international orders for enterprises in the zone is insufficient, and the driving influence of the cooperation zone on the Egyptian economy has not been fully realized. According to the data, Egypt's GDP in 2021 will be about $396.3 billion,^[17] and the production volume of the Sino-Egyptian Suez Zone of trade and Economic Cooperation is only $600 million,^[18] which is about 0.15% of Egypt's GDP.

In addition, with regard to the transfer of advanced technologies, there is a lack of clear political leadership and support in the cooperation zone, there is currently no systematic organization and scale. For a country that has lagged behind in the development of high and new technologies, the development of advanced foreign technologies is an indispensable step towards the development of independent innovation potential. For Egypt, therefore, to now establish a preferential policy to encourage the transfer of advanced technologies in order to attract advanced foreign technologies and enhance independent innovation capacity in the future. In China, the Shenzhen SEZ even passed a law in 2013 promoting technology transfer. In accordance with it, the administrative process of approving the transfer of advanced technologies was simplified; state support was strengthened, it was established that the municipal government should annually allocate a certain percentage of its research and development funds in the field of science and technology for technology transfer; it was obliged to support international technology exchange and cooperation with foreign regions, as well as encourage the creation of international transfer institutions technologies. ^[19]

Secondly, the cooperation zone itself still faces some obstacles to development at the level of infrastructure and policy. Currently, the infrastructure of the zone mainly meets the needs of domestic enterprises. However, with the beginning of the second stage of construction, the demand for basic production materials, such as water, electricity, oil and gas, will definitely grow. It is not yet known whether the Egyptian government will be able to guarantee a large demand for production materials of enterprises entering the zone in the future.

The inconsistency of the government's course in Egypt has also become a serious obstacle to attracting businesses. In 2015, a new Suez Canal was opened, the Chinese "One Belt, One Road" strategy was actively promoted in Egypt, the SEZ thus received great new opportunities for development, but the Egyptian government revised Law No. 83 on the special economic zone. As a result, the preferential tax rate for operating companies in the SEZ was abolished. At that time, almost ten enterprises signed intentions to cooperate with the SEZ, each project could attract investments of $ 100 million. The adopted amendment not only led to a significant increase in operating expenses of enterprises, but also caused investors' concerns about the continuity and stability of Egyptian legislation, as a result, many of them suspended negotiations on entering the zone. ^[20]

Thirdly, the administrative efficiency of the Egyptian management agency is low, the exchange rate of the Egyptian pound is unstable, and the political environment also experiences periods of instability from time to time. The economic development of all African countries is actually facing these problems. In the early days of the creation of the Shekou Industrial Zone in Shenzhen, its leaders put forward the slogan "Time is money, and efficiency is life." At that time, this slogan was considered one of the ten brightest slogans in China.^[21] However, the desire for efficiency is still rare in the Sino-Egyptian Suez Zone of Trade and Economic Cooperation. For example, service agencies have been established in the cooperation zone for procedures related to foreigners, such as investment registration and legal advice. In practice, companies entering the zone often have to undergo burdensome inspections from Egypt, which delays the time for their entry into the zone.

In addition, since the cooperation zone was put into operation in 2008, there have been several serious upheavals in the Egyptian political arena. For example, the Egyptian revolution of 2011 had a long and large-scale impact on the political and economic situation, which undoubtedly hindered the attraction of foreign investment.

Fourth, there are still large functional differences between the Sino-Egyptian Suez Zone of Trade and Economic Cooperation and the SEZ of China. The SEZs of China served as a place for an experiment in the introduction of a market economy and openness. From a national point of view, the SEZ is an experimental area with a bright innovative character. The Sino-Egyptian Suez Zone of Trade and Economic Cooperation currently performs the sole function of promoting economic development and cooperation, there is no experimental part for a new policy and the formation of new systems. At the beginning of its creation, the intention was declared to experiment with nationwide reforms, but so far it has implemented only the function of using external resources for regional development, increasing the economic power of the region and strengthening foreign economic and trade cooperation. In China, after experimenting with the market economy and new political systems, the first SEZs became an example for the whole country. By 1992, the concept of openness had spread to coastal areas and the capitals of the country's interior provinces, and various special economic zones began to appear throughout the country. We can say that when the SEZ ceases to be special nationwide, the time will come when its historical mission will be basically completed.

Currently, there are 11 different zones of economic and trade cooperation, industrial parks built as a result of cooperation between China and Africa in African countries (see Table 2). This proves that African countries are very enthusiastic about learning lessons from the experience of building SEZs in China. China is also ready to cooperate with African countries in the creation of SEZs. The practice of creating the Sino-Egyptian Suez Zone of Trade and Economic Cooperation in Africa as a SEZ of the Chinese model has an important impact on the future economic development of Egypt and Africa as a whole.

Table 2. China's Foreign Trade and Economic Cooperation Zones in Africa

Sources: http://www.cocz.org/news/channel-571---1.aspx (accessed 10.11.2021)

The concept of SEZs and their impact on economic growth is becoming increasingly recognized in the world. At the same time, it should be understood that SEZs are not a panacea, they must be implemented properly and adapted to the specific conditions of each country. If African countries want to achieve economic take-off by creating SEZs based on the Chinese model, they should use the successful experience of China and create a clear framework that corresponds to their national conditions for managing the operation of SEZs. This framework may include the following elements: determining the comparative advantages of a country through detailed strategic planning and feasibility studies; choosing a location with location advantages for SEZs; integrating special economic zones into broader national economic, industrial and urbanization policies to prevent the transformation of special economic zones into "economic enclaves"; ensuring high-level political support of the government and long-term commitments regarding preferential policy; persistent experimentation of political and administrative reforms and rapid dissemination of successful experience gained in the SEZ throughout the country; support for the continuous development of infrastructure construction covering the SEZ and nearby cities as a catalyst for sustainable development of the SEZ; taking into account the ability of the government to implement projects SEZs, as well as political and economic factors that may affect the development of special economic zones, for example, widespread political instability in African countries.

Moreover, as more and more special economic zones for China-Africa cooperation appear on the African continent, other countries such as Turkey, Mauritius and Russia are gradually also trying to use this method to expand their influence in Africa. For example, a memorandum on the establishment of a Russian industrial zone (RPZ) in Egypt was signed in 2007. At the highest level – between the presidents of the two countries – this issue began to be discussed in 2014, and in May 2018 an intergovernmental agreement was signed on the creation and provision of conditions for the operation of the Russian industrial zone in the economic zone of the Suez Canal. ^[22] But these countries do not have sufficient resources to cover the continent with such a deep network of national economic zones and use trial and error, so the only correct solution is a deep analysis of the Chinese experience.^[23]

As a result, thanks to the gradual promotion of national strategies such as China's "One Belt, One Road" and Russia's "Return to Africa", as well as the adjustment of African strategies by the United States, France, India and Japan, Africa has opened the way to a peak period of foreign investment. Against the background of the global wave of international industrial transfer, Africa has unprecedented opportunities. Taking advantage of this period of historical opportunity, and correctly using the experience of building SEZs according to the Chinese model to open the door to the economic development of the country, perhaps the "Flying Geese Paradigm" that created the miracle of East Asia will reappear in Africa.