Special Economic Zone: A Boon For Indian Economy

It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, ( Special Economic Zones/Export Processing Zones) are being established as industrial enclaves for expediting the process of industrialization.

One of the earliest and most famous Special Economic Zone was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s.

Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country. As of 2007, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of Special Economic Zones.

Tracing Indian economic reforms In India several attempts have been made to liberalize the system of economic management. In 1980s, the Indian Government focused on reorganizing low-efficient state-run enterprises and partial disinvestment, relaxing the control on private enterprises and foreign capital, introducing competitive mechanisms, reducing protection for domestic industries, promoting and importing advanced technological equipment from abroad etc.

In 1991, the reformed trade and industrial policy eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. Special Economic Zones came in pursuance of this export led growth strategy.

Special Economic Zones were announced by the Government of India in April 2000 as a part of the Export-Import policy of India. The government realized the need to enhance foreign investment, promote exports from the country and at the same time provide a level playing to the domestic enterprises, while ensuring manufacturers to be competitive globally.

The Special Economic Zones as announced by the Government of India in 2000 were deemed to be foreign territory for the purposes of trade operations, duties and tariffs. These zones were to provide an internationally competitive and hassle free environment for exports. Units were allowed be set up in Special Economic Zone for manufacture of goods and rendering of services. All import/export operations of the Special Economic Zone units were on self-certification basis. Anything could be imported duty free but sales in the Domestic Tariff Area by Special Economic Zone units were subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units were being allowed to be set up in the Special Economic Zones. The policy provided for setting up of Special Economic Zones in the public, private, joint sector or by State Governments.

On 31st August 2004 the Department of Commerce announced the Foreign Trade Policy 2004-2009 to create an appropriate institutional framework and policy environment for facilitation and growth of external trade. The basic objective of this policy was to double India's share of global merchandise trade by 2009 and make exports an effective instrument of economic growth and employment generation. The Special Economic Zone Act, 2005 and the Special Economic Zone Rules, 2006 were introduced under this policy, to regulate and promote the development of these industrial enclaves.

The Act designated the Special Economic Zones a duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. Under the Act, no license is required for import and no routine examination is to be conducted by the custom authorities of the export/import cargo. To aid backward and forward integration of the economy, the Act provides exemptions to Special Economic Zone units and Special Economic Zone developers from all indirect taxes, including basic customs duty, countervailing duty, education cess, and direct taxes while at the same time domestic sales are subject to full customs duty and import policy in force. The Act provided the freedom to subcontract. It also permitted manufacturing, trading and service activities in the Special Economic Zones.

India and China : Whether on a Level Platform Success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any in-depth scrutiny one finds that the reform package under the broad heading of "liberalization" is very different from country to country. There is no standard recipe of a "reform package". A lot of factors influence the performance of Special Economic Zones in a country e.g. economic history, location, industries, state policy etc. Since India has adopted the idea of the special economic zones from China it becomes pertinent to study the history of economic development in India and China.

China's success can be ascribed largely because of its effective population control. In the pre-reform days, both in China and India top priority was given to equity, removing poverty and increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the economies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living becomes difficult unless efficiency in the use of resources is increased. Its attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political i nstitutions. This is defined in China as an experiment in a socialistic market economy.

In India, heavy import substitution lead to increased inefficiency in production and generation of surplus for maintaining the tempo of equity measures as a result social development became impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, this new economic policy in India was initiated.

China's success in attracting foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its Special Economic Zone policy. Size, location, flexible labour laws and stable policies were the factors primarily responsible for making Chinese Special Economic Zones attractive to foreign investors. In India, the fiscal concessions being offered to developers and units are the primary driving force.

Chinese government started building Special Economic Zones way back in 1979. The idea behind the Special Economic Zones was to experiment with liberal policies in certain ear-marked regions while insulating the rest of the economy from their influence. The government identified huge tracts of land, near the coastal region, and started building mega cities with all required infrastructure. Stringent labour laws applicable in China were relaxed in these regions and foreign investment was encouraged by offering concessions and promising of stability.

In 1980 four Special Economic Zones namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis--vis open market interactions.

Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to five mega Special Economic Zones built by the Chinese government (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. As a result, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zone s.

In China, the government chose the location for Special Economic Zone s with a lot of thought with all five located near the coastal region. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is absent in the Indian Special Economic Zones. This is one of the prices India has to pay for the advantages of a federal democratic government. India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops. Tax holidays for Special Economic Zones in India are longer and steeper than those given by China. This had given rise to some dissent from the finance ministry which had complained that the fiscal loss would be immense. In fact the scheme has generated a difference of opinion between the Finance and Commerce Ministries. While the former is voicing its concerns about possible revenue loss from the tax privileges for the Special Economic Zones, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting eventual gains in terms of employment and revenues

Reserve Bank of India has also expressed its concerns about the revenue losses and the uneven pattern of development. Reserve Bank of India insisted on factoring the revenue implications of the taxation benefits. The revenue loss for the Government in providing incentives may be justified only if the Special Economic Zone units ensure forward and backward linkages with the domestic economy. Also, as resources are being diverted from the less developed, growth will not be uniform.

One of the most basic difference between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector . In China , the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

Current Controversy The Economic Survey of 2006-07 highlighted the fact that Special Economic Zone s are testing grounds for the implementation of liberal market economy principles. At the same the survey emphasized on some apprehensions against the Special Economic Zones: Generation of little new activity as there may be relocation of industries to take advantage of tax concessions, Revenue loss, Large-scale land acquisition by the developers, may lead to displacement of farmers with meager compensation, Acquisition of prime agricultural land, having serious implications for food security, Misuse of land by the developers for real estate and Uneven growth aggravating regional inequalities.

The Survey also mentioned that many of these apprehensions, however, could be addressed through appropriate policies and safeguards. A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The "SEZ No More" campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land. If perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zone, the same should not exceed 10 % of the total land required for the Special Economic Zone

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

The benefits expressed in monetary terms have been linked to the Consumer Price Index, and the same shall also be revised suitably at appropriate intervals. Special provision has been made for providing life-time monthly pension to the vulnerable persons, such as the disabled, destitute, orphans, widows, unmarried girls, abandoned women, or persons above 50 years of age (who are not provided or cannot immediately be provided with alternative livelihood).

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc. Provision has also been made for post-implementation social audits of the rehabilitation and resettlement schemes and plans.

For effective monitoring of the progress of implementation of R&R plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

Conclusion A study conducted by Aradhna Aggarwal on the Impact of Special Economic Zones on Employment, Poverty and Human Development indicated, that Employment generation, both direct and indirect, has thus far been the most important channel, through which Special Economic Zones have impacted on human development and poverty reduction in India. However, the role of Special Economic Zone s in human capital formation and as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation appears to be relatively limited. With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects.

For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy. Such a regulated and monitored approach is the only means of attaining the actual potential of these Special Economic Zones.

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Special & Differential Treatment in World Trade Organization

The provisions include, things like, longer time periods for implementing Agreements, commitments or measures to increase trading opportunities for developing countries.[1] Such provisions are referred to as special and differential treatment provisions.

The special provisions of the WTO include: Relaxation of time periods for implementing Agreements and commitments, Specific measures to increase and promote the trade of developing countries, provisions making it mandatory for all the WTO members to safeguard the trade interests of developing countries, possible support to help the developing countries in building the infrastructure for WTO work, handling disputes, and implementing technical standards, and provisions related to Least-Developed country (LDC) Members.[2]

While there are 6 billion people in this world today, the wealthy part of the world, the developed world, contains no more than 15% of the worlds population. The rest of the world which falls under brackets such as less developed countries or least developed countries or alternatively, developing countries or under-developed countries, and comprises of 85% of the worlds population, existing in a state of near minimum subsistence. The world therefore faces a divide known as the developmental gap which refers to the discrepancy between the living standards of these wealthy and developed countries on one hand, and less developed countries with relatively poorer economies on the other hand. Interestingly, it has been observed in the recent past that the standards of living in the developed world keep getting better while the poorest of countries struggle to make any progress; further widening this development gap.)[3] This results in an even more unequal world with unequal means of livelihood.

However, while there are developed economies which include some of the wealthiest countries of the world and other economies which have struggled to grow, most countries fall in the category of the developing world with economies in constant growth, at however differential rates, yet full of promise to grow further. It has been observed by economists that the reason behind the success of under-developed economies robust growth has been their success in implementing outward-oriented reforms that have enabled them to integrate rapidly into the global economic and financial system.[4]

It is an acceptable fact that today no developing country can play a significant role in the global trading system without the presence of trans-national countries within its borders. It has also been observed that the model that promises maximum returns to these developing economies is not one of extreme protectionism but a model that balances protection and liberalization. This does not mean that protectionism as a policy has failed miserably, but in turn highlights the importance of liberalization with planned discrimination and safeguards to ensure the development of local industries. The basic intention is to help the developing country in question to integrate with the global economy and let it benefit from whatever it is that is a distinctive characteristic of that country vis--vis its competitors. Once the country has a firm footing in the international market, the country is able to make use of such stability and guide itself to a future of growth and let its econom y flourish.

Approximately two-thirds of the 150 member states that constitute the World Trade Organization (WTO) are developing countries. The number of developing countries in the WTO is ever increasing and so is their participation. Considering the vast majority, it comes as no surprise that the interests of these developing countries lie at the core of the organizations policies. [5]

Now the question arises, what exactly are developing countries, and who makes the distinction between a developed and a developing country? Moreover, what purpose does this distinction serve? While there is no universally accepted definition of a developing country, the World Bank, the International Monetary Fund and the United Nations use different yardsticks to determine the development status of a country. There is, however, no official list of developing countries. The practice has been that such status is self determined.[6] The member countries of the WTO announce their own status at the WTO as either developing or developed. However, this status can be challenged by other member countries as there are several benefits and rights that are reserved at the WTO for developing countries. These benefits may include longer transitional periods before a developing country may be expected to comply with global norms, or the provision of technical assistance to developing count ries which may not be provided to developed nations. [7]

Such are the needs of a developing country; leniency and planned protection in order to ensure that the developing economy can compete internationally with other countries, some of them developed economies, and establish a firm foundation in this global economy and as a result tread the path of growth and economic success.

Without special provisions for such economies the developed world, which already dominates international trade, can easily exploit a poorer nation owing to a better bargaining position and better sustainability of economy. Keeping this mind, the researcher thus concludes that special provisions have to be made for the developing countries and the least developed countries to enable them to a platform which gives them better access to international markets while protecting their own interests. This also safeguards them from harsh policies and treaties with better off nations which might favor the rich countries who dominate world trade and its governing organizations and are able to heavily influence policy decisions at international forums. Such policies or treaties might otherwise have the tendency to significantly deter economic growth of developing countries due to the sensitive nature of their economies. Moreover, incentives and benefits provided to these countries can i n fact boost this economic growth further.

The standard development arguments for special and differential treatment are two fold. First , it is argued, it is developmentally undesirable for some countries to follow policies that are sensible for others. The agreement on agriculture for example, has a core objective the removal of the substantial OECD distortions that have led to higher agricultural output that can be justified economically.[8]

The other argument is that parts of the new trade agenda are developmentally desirable, but the opportunity cost of implementation at this stage is too high.[9]This is because it is expensive in terms of finance, human resources, or governmental/judicial attention. At the same time, the cost to the world trade system of non implementation is trivial (because the countrys share of relevant trade is so miniscule.[10]

To grasp the need for special and differential treatment , the researcher has taken into consideration the need for such treatment with respect to international trade. International trade plays a significant role in the development of a countrys economy and engines its economic growth. It is this international trade that has led to major economic advancement over the past five decades or so, and the process of globalization and the increased accessibility of markets have only aided this process. We live in a world of specialization and inter-dependence. Every country seeks to maximize their profits by playing to their strengths and marketing their products and services in which they hold an edge over their competitors. International trade has therefore become an/ indisputable fact and the dilemma today is not whether to trade or not, but instead how to trade. [11]

As a consequence of a liberal outlook and ready access to global markets, nations are able to compete and market their products globally by increasing their economic efficiency to meet their aim of accumulation of wealth. It cannot be denied that there exists an underlying link between trade and development. It is widely believed that while trade may cause increased inequalities, in the long run trade forms an important source of income and is useful in reducing poverty. [12] Therefore, it has been globally understood that trade is an essential part of a wider process of a countrys development.

It has been recognized worldwide that trade is an essential contributor to a countrys national income and has a major role to play in its development. This is the reason why developing countries are offered better trading opportunities to help them integrate with the international trade.

While discussing the special and differential treatment of third world countries , it becomes quintessential to mention the india-ec case. In april 2004, the wto appellate body issued a report which allowed a developed country to apply different tariffs to products originating in different generalized system of preferences (GSP) beneficiaries, it was subject to the said requirement that identical tariff is applied to the products of all similarly situated developing country members with the development, financial and trade needs to which the differential tariff treatment is intended to respond. India brought forward this case against the European Communities challenging their discriminatory tariff preferences.[13]

Research Questions. What are the various provisions for special and differential treatment in the WTO? 2. What are the reasons for special and differential treatment in the WTO? 3. What does the India-EC case deal with?

Various Provisions for Special & Differential Treatment in the WTO. The WTO Secretariat has made several compilations of the special and differential provisions and their use.

The ambit of special and differential treatment consists of 145 specific provisions spread across the different Multilateral Agreements on Trade in Goods; the General Agreement on Trade in Services; The Agreement on Trade-Related Aspects of Intellectual Property; the Understanding on Rules and Procedures Governing the Settlement of Disputes; and various Ministerial Decisions. Of the 145 provisions, 107 were adopted at the conclusion of the Uruguay Round, and 22 apply to leastdeveloped country Members only. [14] The said provisions referred to : actions developing countries might undertake via exemptions from disciplines otherwise applying to the membership generally; exemptions from commitments otherwise applying to Members in general; a comparatively low level of commitment for the developing countries as compared to the developed countries and membership in general.

The phases of development of the special treatment of the third world countries can be studied in the form of four phases. The first phase starts from the forming of the GATT in 1948 till the beginning of the Tokyo Round in 1973. The second phase refers to the Tokyo Round itself, from 1973 to 1979. The third phase dates from the end of the Tokyo Round to the end of the Uruguay Round, that is from 1979 to 1995. The fourth phase starts from the end of the Uruguay Round until the present.[15] The analysis that follows distinguishes five arguments that have been advanced for Special &Differential treatment. The five categories are stated as follows: 1. Special and differential treatment is an acquired political right. 2. Developing countries ought to enjoy privileged access to the markets of their trading partners, particularly the developed countries. 3. Developing countries ought to have the right to restrict imports to a greater degree than developed countries 4. Developing countries ought to be allowed additional freedom in order to subsidize exports. 5. Developing countries ought to be allowed flexibility in lieu of the application of certain WTO rules, or in order to postpone the application of rules as stated by WTO.[16]

Chapter-2Reasons For Special And Differential Treatment In The WTO The concept of this differential treatment stems from the understanding that many policies that may be implemented with the focus on a developed economy could possibly have ill effects on a poorer economy. Policies which might make sense for one nation might not have the same consequences in another economy. Or in other words, different economies may have different characteristics and needs. For example, a policy which might be initiated to counter the excessive subsidies in rich countries, say in the agriculture sector, can easily restrict the support that could be provided to a poor country for its agriculture and thereby have unwanted results. To elaborate the example, the Agreement on Agriculture has provisions for the removal of certain subsidies which had led to higher agricultural output that that could be justified economically and therefore the agreement focused, as one of its core objectives, on the removal of these subsidies. But the case with developing and least developed countries is such that they suffer from neglect and have been unable to benefit as much from these subsidies. These poor economies still have lower agricultural production than it should be[17] If instruments to remove the subsidies were to be introduced, their economies would further suffer.

Therefore, such policies must bear in mind the sensitive nature of the economies that the policy is likely to affect. This can be done by categorizing the countries, as done under the WTO, into developed and developing economies and implementing these policies according to the needs of the country and the expected consequences of the policy.

But the concept of such special and differential treatment has faced certain criticism as well. This is predominantly based on the root of this concept. Such leniency is justified on the basis that certain laws applicable to all nations may have an element of exploitation and anti-development. By relaxing such laws when the country under question is a developing country, unfair treatment is doled out to other countries which do not have the privileged tag of being developing. There also exists a lapse in the system vis--vis the criteria that a country must meet in order to be eligible for privileges. As per the current system, a country may decide its own status as either developing or developed. This may lead to paradoxical situations where a country which may not require certain privileges may be put at a discriminatory advantage over other countries by the grant of these privileges. Moreover, if there are laws which have the tendency of being exploitive or harsh, they sho uld be removed as a whole. Furthermore, there needs to be a clear understanding of the distinction between laws which may be negotiable and those which must be binding on all the countries[18]

While the weaknesses in the capacities of developing countries forms the basic reason for the continuous of such differential treatment, such benefits should only be made available to the countries which are low income countries and those which may need help to become integrated into the international trade system, or in other words, which are in dire need for trade opportunities. [19]

This results in a paradoxical situation. What about those nations which may fall under the tag of developing countries, but in effect be high-income nations? Unless some differentiation is made between these countries, it is not possible to frame an efficient and fair system of special and differential treatment.

Although the introduction of special provisions for developing countries in the WTO policies would benefit the developing countries without affecting the developed countries too much, the counter argument to this lenient treatment is that the opportunity cost that the implementation of these provisions pose to other nations. Many countries are of the opinion that while developmentally these might be desirable, but the opportunity cost to the trade system is massive as compared to the insignificant contribution some of these least developed and developing countries would make to the international trading system. If one was to subscribe to this view, then it would be of more desirable outcome to introduce these provisions at a later stage when the country is in a position to contribute to the international trade system more significantly in return and in the meantime find better avenues which promise greater returns with regard to the attention, finance and human resources tha t are required for implementation of the special benefits. [20]

Chapter-3India EC Case Since the inception of the WTO in 1995, India has been involved in 33 disputes at the WTO. It has initiated cased against other countries 16 times and has faced complaints against itself 17 times. India is amongst the most frequent users of the WTO dispute resolution system from among the developing country members. Amongst the more recent disputes, India was involved in a dispute with the EU where it contested the tariff concessions granted by the members of the European Communities (EC) to twelve developing countries under its Generalized System of Preferences (GSP). The ground for this dispute was Indias belief that under the WTO structure, discrimination could only be made in favor of least developed and developing countries. Contrary to this, in December 2001, the EC had launched its GSP scheme which had provisions for five different preferential tariff preferences. The effect of this arrangement was that twelve countries received greater tariff reductions as compared t o countries like India which created undue difficulties for Indias exports to the EC and took away the benefits given to India under the most favored nation policy. [21]

Conclusion Special and Differential Treatment at the WTO: It is the privileged treatment offered to developing nations at the WTO based on the understanding that needs of these countries are substantially different from those of developed nations. This principle allows a certain degree of discrimination in favor of developing countries.

The India-EU Dispute: In India contested the European Communities Generalized System of Preferences wherein distinction was made between beneficiary countries and twelve countries were granted greater tariff concessions owing to the five different preferential tariff preferences.

The researcher concludes the draft with the mentioning of the relevance of the special and differential treatment for developing and least developed countries. It is essential for these countries to receive such benefits as their resources and services are not comparable to developed countries and such treatment provides an impetus to such countries to produce and prosper.

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Special Economic Zone: A Boon For Indian Economy

It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, ( Special Economic Zones/Export Processing Zones) are being established as industrial enclaves for expediting the process of industrialization.

One of the earliest and most famous Special Economic Zone was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s.

Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country. As of 2007, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of Special Economic Zones.

Tracing Indian economic reforms In India several attempts have been made to liberalize the system of economic management. In 1980s, the Indian Government focused on reorganizing low-efficient state-run enterprises and partial disinvestment, relaxing the control on private enterprises and foreign capital, introducing competitive mechanisms, reducing protection for domestic industries, promoting and importing advanced technological equipment from abroad etc.

In 1991, the reformed trade and industrial policy eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. Special Economic Zones came in pursuance of this export led growth strategy.

Special Economic Zones were announced by the Government of India in April 2000 as a part of the Export-Import policy of India. The government realized the need to enhance foreign investment, promote exports from the country and at the same time provide a level playing to the domestic enterprises, while ensuring manufacturers to be competitive globally.

The Special Economic Zones as announced by the Government of India in 2000 were deemed to be foreign territory for the purposes of trade operations, duties and tariffs. These zones were to provide an internationally competitive and hassle free environment for exports. Units were allowed be set up in Special Economic Zone for manufacture of goods and rendering of services. All import/export operations of the Special Economic Zone units were on self-certification basis. Anything could be imported duty free but sales in the Domestic Tariff Area by Special Economic Zone units were subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units were being allowed to be set up in the Special Economic Zones. The policy provided for setting up of Special Economic Zones in the public, private, joint sector or by State Governments.

On 31st August 2004 the Department of Commerce announced the Foreign Trade Policy 2004-2009 to create an appropriate institutional framework and policy environment for facilitation and growth of external trade. The basic objective of this policy was to double India's share of global merchandise trade by 2009 and make exports an effective instrument of economic growth and employment generation. The Special Economic Zone Act, 2005 and the Special Economic Zone Rules, 2006 were introduced under this policy, to regulate and promote the development of these industrial enclaves.

The Act designated the Special Economic Zones a duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. Under the Act, no license is required for import and no routine examination is to be conducted by the custom authorities of the export/import cargo. To aid backward and forward integration of the economy, the Act provides exemptions to Special Economic Zone units and Special Economic Zone developers from all indirect taxes, including basic customs duty, countervailing duty, education cess, and direct taxes while at the same time domestic sales are subject to full customs duty and import policy in force. The Act provided the freedom to subcontract. It also permitted manufacturing, trading and service activities in the Special Economic Zones.

India and China : Whether on a Level Platform Success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any in-depth scrutiny one finds that the reform package under the broad heading of "liberalization" is very different from country to country. There is no standard recipe of a "reform package". A lot of factors influence the performance of Special Economic Zones in a country e.g. economic history, location, industries, state policy etc. Since India has adopted the idea of the special economic zones from China it becomes pertinent to study the history of economic development in India and China.

China's success can be ascribed largely because of its effective population control. In the pre-reform days, both in China and India top priority was given to equity, removing poverty and increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the economies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living becomes difficult unless efficiency in the use of resources is increased. Its attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political i nstitutions. This is defined in China as an experiment in a socialistic market economy.

In India, heavy import substitution lead to increased inefficiency in production and generation of surplus for maintaining the tempo of equity measures as a result social development became impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, this new economic policy in India was initiated.

China's success in attracting foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its Special Economic Zone policy. Size, location, flexible labour laws and stable policies were the factors primarily responsible for making Chinese Special Economic Zones attractive to foreign investors. In India, the fiscal concessions being offered to developers and units are the primary driving force.

Chinese government started building Special Economic Zones way back in 1979. The idea behind the Special Economic Zones was to experiment with liberal policies in certain ear-marked regions while insulating the rest of the economy from their influence. The government identified huge tracts of land, near the coastal region, and started building mega cities with all required infrastructure. Stringent labour laws applicable in China were relaxed in these regions and foreign investment was encouraged by offering concessions and promising of stability.

In 1980 four Special Economic Zones namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis--vis open market interactions.

Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to five mega Special Economic Zones built by the Chinese government (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. As a result, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zone s.

In China, the government chose the location for Special Economic Zone s with a lot of thought with all five located near the coastal region. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is absent in the Indian Special Economic Zones. This is one of the prices India has to pay for the advantages of a federal democratic government. India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops. Tax holidays for Special Economic Zones in India are longer and steeper than those given by China. This had given rise to some dissent from the finance ministry which had complained that the fiscal loss would be immense. In fact the scheme has generated a difference of opinion between the Finance and Commerce Ministries. While the former is voicing its concerns about possible revenue loss from the tax privileges for the Special Economic Zones, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting eventual gains in terms of employment and revenues

Reserve Bank of India has also expressed its concerns about the revenue losses and the uneven pattern of development. Reserve Bank of India insisted on factoring the revenue implications of the taxation benefits. The revenue loss for the Government in providing incentives may be justified only if the Special Economic Zone units ensure forward and backward linkages with the domestic economy. Also, as resources are being diverted from the less developed, growth will not be uniform.

One of the most basic difference between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector . In China , the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

Current Controversy The Economic Survey of 2006-07 highlighted the fact that Special Economic Zone s are testing grounds for the implementation of liberal market economy principles. At the same the survey emphasized on some apprehensions against the Special Economic Zones: Generation of little new activity as there may be relocation of industries to take advantage of tax concessions, Revenue loss, Large-scale land acquisition by the developers, may lead to displacement of farmers with meager compensation, Acquisition of prime agricultural land, having serious implications for food security, Misuse of land by the developers for real estate and Uneven growth aggravating regional inequalities.

The Survey also mentioned that many of these apprehensions, however, could be addressed through appropriate policies and safeguards. A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The "SEZ No More" campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land. If perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zone, the same should not exceed 10 % of the total land required for the Special Economic Zone

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

The benefits expressed in monetary terms have been linked to the Consumer Price Index, and the same shall also be revised suitably at appropriate intervals. Special provision has been made for providing life-time monthly pension to the vulnerable persons, such as the disabled, destitute, orphans, widows, unmarried girls, abandoned women, or persons above 50 years of age (who are not provided or cannot immediately be provided with alternative livelihood).

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc. Provision has also been made for post-implementation social audits of the rehabilitation and resettlement schemes and plans.

For effective monitoring of the progress of implementation of R&R plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

Conclusion A study conducted by Aradhna Aggarwal on the Impact of Special Economic Zones on Employment, Poverty and Human Development indicated, that Employment generation, both direct and indirect, has thus far been the most important channel, through which Special Economic Zones have impacted on human development and poverty reduction in India. However, the role of Special Economic Zone s in human capital formation and as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation appears to be relatively limited. With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects.

For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy. Such a regulated and monitored approach is the only means of attaining the actual potential of these Special Economic Zones.

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Special & Differential Treatment in World Trade Organization

The provisions include, things like, longer time periods for implementing Agreements, commitments or measures to increase trading opportunities for developing countries.[1] Such provisions are referred to as special and differential treatment provisions.

The special provisions of the WTO include: Relaxation of time periods for implementing Agreements and commitments, Specific measures to increase and promote the trade of developing countries, provisions making it mandatory for all the WTO members to safeguard the trade interests of developing countries, possible support to help the developing countries in building the infrastructure for WTO work, handling disputes, and implementing technical standards, and provisions related to Least-Developed country (LDC) Members.[2]

While there are 6 billion people in this world today, the wealthy part of the world, the developed world, contains no more than 15% of the worlds population. The rest of the world which falls under brackets such as less developed countries or least developed countries or alternatively, developing countries or under-developed countries, and comprises of 85% of the worlds population, existing in a state of near minimum subsistence. The world therefore faces a divide known as the developmental gap which refers to the discrepancy between the living standards of these wealthy and developed countries on one hand, and less developed countries with relatively poorer economies on the other hand. Interestingly, it has been observed in the recent past that the standards of living in the developed world keep getting better while the poorest of countries struggle to make any progress; further widening this development gap.)[3] This results in an even more unequal world with unequal means of livelihood.

However, while there are developed economies which include some of the wealthiest countries of the world and other economies which have struggled to grow, most countries fall in the category of the developing world with economies in constant growth, at however differential rates, yet full of promise to grow further. It has been observed by economists that the reason behind the success of under-developed economies robust growth has been their success in implementing outward-oriented reforms that have enabled them to integrate rapidly into the global economic and financial system.[4]

It is an acceptable fact that today no developing country can play a significant role in the global trading system without the presence of trans-national countries within its borders. It has also been observed that the model that promises maximum returns to these developing economies is not one of extreme protectionism but a model that balances protection and liberalization. This does not mean that protectionism as a policy has failed miserably, but in turn highlights the importance of liberalization with planned discrimination and safeguards to ensure the development of local industries. The basic intention is to help the developing country in question to integrate with the global economy and let it benefit from whatever it is that is a distinctive characteristic of that country vis--vis its competitors. Once the country has a firm footing in the international market, the country is able to make use of such stability and guide itself to a future of growth and let its econom y flourish.

Approximately two-thirds of the 150 member states that constitute the World Trade Organization (WTO) are developing countries. The number of developing countries in the WTO is ever increasing and so is their participation. Considering the vast majority, it comes as no surprise that the interests of these developing countries lie at the core of the organizations policies. [5]

Now the question arises, what exactly are developing countries, and who makes the distinction between a developed and a developing country? Moreover, what purpose does this distinction serve? While there is no universally accepted definition of a developing country, the World Bank, the International Monetary Fund and the United Nations use different yardsticks to determine the development status of a country. There is, however, no official list of developing countries. The practice has been that such status is self determined.[6] The member countries of the WTO announce their own status at the WTO as either developing or developed. However, this status can be challenged by other member countries as there are several benefits and rights that are reserved at the WTO for developing countries. These benefits may include longer transitional periods before a developing country may be expected to comply with global norms, or the provision of technical assistance to developing count ries which may not be provided to developed nations. [7]

Such are the needs of a developing country; leniency and planned protection in order to ensure that the developing economy can compete internationally with other countries, some of them developed economies, and establish a firm foundation in this global economy and as a result tread the path of growth and economic success.

Without special provisions for such economies the developed world, which already dominates international trade, can easily exploit a poorer nation owing to a better bargaining position and better sustainability of economy. Keeping this mind, the researcher thus concludes that special provisions have to be made for the developing countries and the least developed countries to enable them to a platform which gives them better access to international markets while protecting their own interests. This also safeguards them from harsh policies and treaties with better off nations which might favor the rich countries who dominate world trade and its governing organizations and are able to heavily influence policy decisions at international forums. Such policies or treaties might otherwise have the tendency to significantly deter economic growth of developing countries due to the sensitive nature of their economies. Moreover, incentives and benefits provided to these countries can i n fact boost this economic growth further.

The standard development arguments for special and differential treatment are two fold. First , it is argued, it is developmentally undesirable for some countries to follow policies that are sensible for others. The agreement on agriculture for example, has a core objective the removal of the substantial OECD distortions that have led to higher agricultural output that can be justified economically.[8]

The other argument is that parts of the new trade agenda are developmentally desirable, but the opportunity cost of implementation at this stage is too high.[9]This is because it is expensive in terms of finance, human resources, or governmental/judicial attention. At the same time, the cost to the world trade system of non implementation is trivial (because the countrys share of relevant trade is so miniscule.[10]

To grasp the need for special and differential treatment , the researcher has taken into consideration the need for such treatment with respect to international trade. International trade plays a significant role in the development of a countrys economy and engines its economic growth. It is this international trade that has led to major economic advancement over the past five decades or so, and the process of globalization and the increased accessibility of markets have only aided this process. We live in a world of specialization and inter-dependence. Every country seeks to maximize their profits by playing to their strengths and marketing their products and services in which they hold an edge over their competitors. International trade has therefore become an/ indisputable fact and the dilemma today is not whether to trade or not, but instead how to trade. [11]

As a consequence of a liberal outlook and ready access to global markets, nations are able to compete and market their products globally by increasing their economic efficiency to meet their aim of accumulation of wealth. It cannot be denied that there exists an underlying link between trade and development. It is widely believed that while trade may cause increased inequalities, in the long run trade forms an important source of income and is useful in reducing poverty. [12] Therefore, it has been globally understood that trade is an essential part of a wider process of a countrys development.

It has been recognized worldwide that trade is an essential contributor to a countrys national income and has a major role to play in its development. This is the reason why developing countries are offered better trading opportunities to help them integrate with the international trade.

While discussing the special and differential treatment of third world countries , it becomes quintessential to mention the india-ec case. In april 2004, the wto appellate body issued a report which allowed a developed country to apply different tariffs to products originating in different generalized system of preferences (GSP) beneficiaries, it was subject to the said requirement that identical tariff is applied to the products of all similarly situated developing country members with the development, financial and trade needs to which the differential tariff treatment is intended to respond. India brought forward this case against the European Communities challenging their discriminatory tariff preferences.[13]

Research Questions. What are the various provisions for special and differential treatment in the WTO? 2. What are the reasons for special and differential treatment in the WTO? 3. What does the India-EC case deal with?

Various Provisions for Special & Differential Treatment in the WTO. The WTO Secretariat has made several compilations of the special and differential provisions and their use.

The ambit of special and differential treatment consists of 145 specific provisions spread across the different Multilateral Agreements on Trade in Goods; the General Agreement on Trade in Services; The Agreement on Trade-Related Aspects of Intellectual Property; the Understanding on Rules and Procedures Governing the Settlement of Disputes; and various Ministerial Decisions. Of the 145 provisions, 107 were adopted at the conclusion of the Uruguay Round, and 22 apply to leastdeveloped country Members only. [14] The said provisions referred to : actions developing countries might undertake via exemptions from disciplines otherwise applying to the membership generally; exemptions from commitments otherwise applying to Members in general; a comparatively low level of commitment for the developing countries as compared to the developed countries and membership in general.

The phases of development of the special treatment of the third world countries can be studied in the form of four phases. The first phase starts from the forming of the GATT in 1948 till the beginning of the Tokyo Round in 1973. The second phase refers to the Tokyo Round itself, from 1973 to 1979. The third phase dates from the end of the Tokyo Round to the end of the Uruguay Round, that is from 1979 to 1995. The fourth phase starts from the end of the Uruguay Round until the present.[15] The analysis that follows distinguishes five arguments that have been advanced for Special &Differential treatment. The five categories are stated as follows: 1. Special and differential treatment is an acquired political right. 2. Developing countries ought to enjoy privileged access to the markets of their trading partners, particularly the developed countries. 3. Developing countries ought to have the right to restrict imports to a greater degree than developed countries 4. Developing countries ought to be allowed additional freedom in order to subsidize exports. 5. Developing countries ought to be allowed flexibility in lieu of the application of certain WTO rules, or in order to postpone the application of rules as stated by WTO.[16]

Chapter-2Reasons For Special And Differential Treatment In The WTO The concept of this differential treatment stems from the understanding that many policies that may be implemented with the focus on a developed economy could possibly have ill effects on a poorer economy. Policies which might make sense for one nation might not have the same consequences in another economy. Or in other words, different economies may have different characteristics and needs. For example, a policy which might be initiated to counter the excessive subsidies in rich countries, say in the agriculture sector, can easily restrict the support that could be provided to a poor country for its agriculture and thereby have unwanted results. To elaborate the example, the Agreement on Agriculture has provisions for the removal of certain subsidies which had led to higher agricultural output that that could be justified economically and therefore the agreement focused, as one of its core objectives, on the removal of these subsidies. But the case with developing and least developed countries is such that they suffer from neglect and have been unable to benefit as much from these subsidies. These poor economies still have lower agricultural production than it should be[17] If instruments to remove the subsidies were to be introduced, their economies would further suffer.

Therefore, such policies must bear in mind the sensitive nature of the economies that the policy is likely to affect. This can be done by categorizing the countries, as done under the WTO, into developed and developing economies and implementing these policies according to the needs of the country and the expected consequences of the policy.

But the concept of such special and differential treatment has faced certain criticism as well. This is predominantly based on the root of this concept. Such leniency is justified on the basis that certain laws applicable to all nations may have an element of exploitation and anti-development. By relaxing such laws when the country under question is a developing country, unfair treatment is doled out to other countries which do not have the privileged tag of being developing. There also exists a lapse in the system vis--vis the criteria that a country must meet in order to be eligible for privileges. As per the current system, a country may decide its own status as either developing or developed. This may lead to paradoxical situations where a country which may not require certain privileges may be put at a discriminatory advantage over other countries by the grant of these privileges. Moreover, if there are laws which have the tendency of being exploitive or harsh, they sho uld be removed as a whole. Furthermore, there needs to be a clear understanding of the distinction between laws which may be negotiable and those which must be binding on all the countries[18]

While the weaknesses in the capacities of developing countries forms the basic reason for the continuous of such differential treatment, such benefits should only be made available to the countries which are low income countries and those which may need help to become integrated into the international trade system, or in other words, which are in dire need for trade opportunities. [19]

This results in a paradoxical situation. What about those nations which may fall under the tag of developing countries, but in effect be high-income nations? Unless some differentiation is made between these countries, it is not possible to frame an efficient and fair system of special and differential treatment.

Although the introduction of special provisions for developing countries in the WTO policies would benefit the developing countries without affecting the developed countries too much, the counter argument to this lenient treatment is that the opportunity cost that the implementation of these provisions pose to other nations. Many countries are of the opinion that while developmentally these might be desirable, but the opportunity cost to the trade system is massive as compared to the insignificant contribution some of these least developed and developing countries would make to the international trading system. If one was to subscribe to this view, then it would be of more desirable outcome to introduce these provisions at a later stage when the country is in a position to contribute to the international trade system more significantly in return and in the meantime find better avenues which promise greater returns with regard to the attention, finance and human resources tha t are required for implementation of the special benefits. [20]

Chapter-3India EC Case Since the inception of the WTO in 1995, India has been involved in 33 disputes at the WTO. It has initiated cased against other countries 16 times and has faced complaints against itself 17 times. India is amongst the most frequent users of the WTO dispute resolution system from among the developing country members. Amongst the more recent disputes, India was involved in a dispute with the EU where it contested the tariff concessions granted by the members of the European Communities (EC) to twelve developing countries under its Generalized System of Preferences (GSP). The ground for this dispute was Indias belief that under the WTO structure, discrimination could only be made in favor of least developed and developing countries. Contrary to this, in December 2001, the EC had launched its GSP scheme which had provisions for five different preferential tariff preferences. The effect of this arrangement was that twelve countries received greater tariff reductions as compared t o countries like India which created undue difficulties for Indias exports to the EC and took away the benefits given to India under the most favored nation policy. [21]

Conclusion Special and Differential Treatment at the WTO: It is the privileged treatment offered to developing nations at the WTO based on the understanding that needs of these countries are substantially different from those of developed nations. This principle allows a certain degree of discrimination in favor of developing countries.

The India-EU Dispute: In India contested the European Communities Generalized System of Preferences wherein distinction was made between beneficiary countries and twelve countries were granted greater tariff concessions owing to the five different preferential tariff preferences.

The researcher concludes the draft with the mentioning of the relevance of the special and differential treatment for developing and least developed countries. It is essential for these countries to receive such benefits as their resources and services are not comparable to developed countries and such treatment provides an impetus to such countries to produce and prosper.

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Special Economic Zone: A Boon For Indian Economy

It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, ( Special Economic Zones/Export Processing Zones) are being established as industrial enclaves for expediting the process of industrialization.

One of the earliest and most famous Special Economic Zone was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s.

Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country. As of 2007, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of Special Economic Zones.

Tracing Indian economic reforms In India several attempts have been made to liberalize the system of economic management. In 1980s, the Indian Government focused on reorganizing low-efficient state-run enterprises and partial disinvestment, relaxing the control on private enterprises and foreign capital, introducing competitive mechanisms, reducing protection for domestic industries, promoting and importing advanced technological equipment from abroad etc.

In 1991, the reformed trade and industrial policy eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. Special Economic Zones came in pursuance of this export led growth strategy.

Special Economic Zones were announced by the Government of India in April 2000 as a part of the Export-Import policy of India. The government realized the need to enhance foreign investment, promote exports from the country and at the same time provide a level playing to the domestic enterprises, while ensuring manufacturers to be competitive globally.

The Special Economic Zones as announced by the Government of India in 2000 were deemed to be foreign territory for the purposes of trade operations, duties and tariffs. These zones were to provide an internationally competitive and hassle free environment for exports. Units were allowed be set up in Special Economic Zone for manufacture of goods and rendering of services. All import/export operations of the Special Economic Zone units were on self-certification basis. Anything could be imported duty free but sales in the Domestic Tariff Area by Special Economic Zone units were subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units were being allowed to be set up in the Special Economic Zones. The policy provided for setting up of Special Economic Zones in the public, private, joint sector or by State Governments.

On 31st August 2004 the Department of Commerce announced the Foreign Trade Policy 2004-2009 to create an appropriate institutional framework and policy environment for facilitation and growth of external trade. The basic objective of this policy was to double India's share of global merchandise trade by 2009 and make exports an effective instrument of economic growth and employment generation. The Special Economic Zone Act, 2005 and the Special Economic Zone Rules, 2006 were introduced under this policy, to regulate and promote the development of these industrial enclaves.

The Act designated the Special Economic Zones a duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. Under the Act, no license is required for import and no routine examination is to be conducted by the custom authorities of the export/import cargo. To aid backward and forward integration of the economy, the Act provides exemptions to Special Economic Zone units and Special Economic Zone developers from all indirect taxes, including basic customs duty, countervailing duty, education cess, and direct taxes while at the same time domestic sales are subject to full customs duty and import policy in force. The Act provided the freedom to subcontract. It also permitted manufacturing, trading and service activities in the Special Economic Zones.

India and China : Whether on a Level Platform Success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any in-depth scrutiny one finds that the reform package under the broad heading of "liberalization" is very different from country to country. There is no standard recipe of a "reform package". A lot of factors influence the performance of Special Economic Zones in a country e.g. economic history, location, industries, state policy etc. Since India has adopted the idea of the special economic zones from China it becomes pertinent to study the history of economic development in India and China.

China's success can be ascribed largely because of its effective population control. In the pre-reform days, both in China and India top priority was given to equity, removing poverty and increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the economies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living becomes difficult unless efficiency in the use of resources is increased. Its attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political i nstitutions. This is defined in China as an experiment in a socialistic market economy.

In India, heavy import substitution lead to increased inefficiency in production and generation of surplus for maintaining the tempo of equity measures as a result social development became impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, this new economic policy in India was initiated.

China's success in attracting foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its Special Economic Zone policy. Size, location, flexible labour laws and stable policies were the factors primarily responsible for making Chinese Special Economic Zones attractive to foreign investors. In India, the fiscal concessions being offered to developers and units are the primary driving force.

Chinese government started building Special Economic Zones way back in 1979. The idea behind the Special Economic Zones was to experiment with liberal policies in certain ear-marked regions while insulating the rest of the economy from their influence. The government identified huge tracts of land, near the coastal region, and started building mega cities with all required infrastructure. Stringent labour laws applicable in China were relaxed in these regions and foreign investment was encouraged by offering concessions and promising of stability.

In 1980 four Special Economic Zones namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis--vis open market interactions.

Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to five mega Special Economic Zones built by the Chinese government (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. As a result, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zone s.

In China, the government chose the location for Special Economic Zone s with a lot of thought with all five located near the coastal region. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is absent in the Indian Special Economic Zones. This is one of the prices India has to pay for the advantages of a federal democratic government. India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops. Tax holidays for Special Economic Zones in India are longer and steeper than those given by China. This had given rise to some dissent from the finance ministry which had complained that the fiscal loss would be immense. In fact the scheme has generated a difference of opinion between the Finance and Commerce Ministries. While the former is voicing its concerns about possible revenue loss from the tax privileges for the Special Economic Zones, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting eventual gains in terms of employment and revenues

Reserve Bank of India has also expressed its concerns about the revenue losses and the uneven pattern of development. Reserve Bank of India insisted on factoring the revenue implications of the taxation benefits. The revenue loss for the Government in providing incentives may be justified only if the Special Economic Zone units ensure forward and backward linkages with the domestic economy. Also, as resources are being diverted from the less developed, growth will not be uniform.

One of the most basic difference between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector . In China , the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

Current Controversy The Economic Survey of 2006-07 highlighted the fact that Special Economic Zone s are testing grounds for the implementation of liberal market economy principles. At the same the survey emphasized on some apprehensions against the Special Economic Zones: Generation of little new activity as there may be relocation of industries to take advantage of tax concessions, Revenue loss, Large-scale land acquisition by the developers, may lead to displacement of farmers with meager compensation, Acquisition of prime agricultural land, having serious implications for food security, Misuse of land by the developers for real estate and Uneven growth aggravating regional inequalities.

The Survey also mentioned that many of these apprehensions, however, could be addressed through appropriate policies and safeguards. A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The "SEZ No More" campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land. If perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zone, the same should not exceed 10 % of the total land required for the Special Economic Zone

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

The benefits expressed in monetary terms have been linked to the Consumer Price Index, and the same shall also be revised suitably at appropriate intervals. Special provision has been made for providing life-time monthly pension to the vulnerable persons, such as the disabled, destitute, orphans, widows, unmarried girls, abandoned women, or persons above 50 years of age (who are not provided or cannot immediately be provided with alternative livelihood).

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc. Provision has also been made for post-implementation social audits of the rehabilitation and resettlement schemes and plans.

For effective monitoring of the progress of implementation of R&R plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

Conclusion A study conducted by Aradhna Aggarwal on the Impact of Special Economic Zones on Employment, Poverty and Human Development indicated, that Employment generation, both direct and indirect, has thus far been the most important channel, through which Special Economic Zones have impacted on human development and poverty reduction in India. However, the role of Special Economic Zone s in human capital formation and as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation appears to be relatively limited. With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects.

For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy. Such a regulated and monitored approach is the only means of attaining the actual potential of these Special Economic Zones.

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The Blessings of the Black Economy

Some call it the "unofficial" or "informal" economy, others call it the "grey economy" but the old name fits it best: the "black economy". In the USA "black" means "profitable, healthy" and this is what the black economy is. Macedonia should count its blessings for having had a black economy so strong and thriving to see it through the transition. If Macedonia had to rely only on its official economy it would have gone bankrupt long ago.

The black economy is made up of two constituent activities:

1.. Legal activities that are not reported to the tax authorities and the income from which goes untaxed and unreported. For instance: it is not illegal to clean someone's house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison.

2.. Illegal activities which, needless to say, are also not reported to the state (and, therefore, not taxed).

These two types of activities together are thought to comprise between 15% (USA, Germany) to 60% (Russia) of the economic activity (as measured by the GDP), depending on the country. It would probably be an underestimate to say that 40% of the GDP in Macedonia is "black". This equals 1.2 billion USD per annum. The money generated by these activities is largely held in foreign exchange outside the banking system or smuggled abroad (even through the local banking system). Experience in other countries shows that circa 15% of the money "floats" in the recipient country and is used to finance consumption. This should translate to 1 billion free floating dollars in the hands of the 2 million citizens of Macedonia. Billions are transferred to the outside world (mostly to finance additional transactions, some of it to be saved in foreign banks away from the long hand of the state). A trickle of money comes back and is "laundered" through the opening of small legal businesses.

These are excellent news for Macedonia. It means that when the macro-economic, geopolitical and (especially) the micro-economic climates will change - billions of USD will flow back to Macedonia. People will bring their money back to open businesses, to support family members and just to consume it. It all depends on the mood and on the atmosphere and on how much these people feel that they can rely on the political stability and rational management. Such enormous flows of capital happened before: in Argentina after the Generals and their corrupt regime were ousted by civilians, in Israel when the peace process started and in Mexico following the signature of NAFTA, to mention but three cases. These reserves can be lured back and transform the economy.

But the black economy has many more important functions.

The black economy is a cash economy. It is liquid and fast. It increases the velocity of money. It injects much needed foreign exchange to the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of "we know better" institutions such as the IMF. It fosters economic activity and employs people. It encourages labour mobility and international trade. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does - and, usually, more efficiently.

So, what is morally wrong with the black economy? The answer, in brief: it is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes. The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defence, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. These encourages them, in theory to use these resources less efficiently.

And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word "market". Unfortunately, we all live in societies which are regulated by bureaucracies which are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner. Even economic theory admits that any dollar left in the hands of the private sector is much more efficiently used than the same dollar in the hands of the most honest and well meaning and well planning civil servant. Governments all over the world distort economic decisions and misallocate scarce economic resources.

Thus, if the goals are to encourage employment and economic growth - the black economy should be welcomed. This is precisely what it does and, by definition, it does so more efficiently than the government. The less tax dollars a government has - the less damage it does. This is an opinion shares by most economists in the world today. Lower tax rates are an admission of this fact and a legalization of parts of the black economy.

The black economy is especially important in times of economic hardships. Countries in transition are a private case of emerging economies which are a private case of developing countries which used to be called (in less politically correct times) "Third World Countries". They suffer from all manner of acute economic illnesses. They lost their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.

Read this list again: isn't the black economy a perfect solution until the dust settles?

It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practised by them), it adds to the wealth of the nation (black marketeers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market. Mercifully, the black economy is out of the reach of zealous missionaries such as the IMF. It goes its own way, unnoticed, unreported, unbeknownst, untamed. It doesn't pay attention to money supply targets (it is much bigger than the official money supply figure), or to macroeconomic stability goals. It plods on: doing business and helping the country to survive the double scourges of transition and Western piousness and patronizing. As long as it is there, Macedonia has a real safety net. The government is advised to turn a blind eye to it for it is a blessing in disguise.

There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. Without the black economy, the population of Macedonia would not have survived. This lesson must be remembered as the government prepares to crack down on the only sector of the economy which is still alive and kicking.

Operational Recommendations

The implementation of these recommendations and reforms should be obliged to be GRADUAL. The informal economy is an important pressure valve for the release of social pressures, it ameliorates the social costs inherent to the period of transition and it constitutes an important part of the private sector.

As we said in the body of our report, these are the reasons for the existence of an informal economy and they should be obliged to all be tackled:

a.. High taxation level (in Macedonia, high payroll taxes);

b.. Onerous labour market regulations;

c.. Red tape and bureaucracy (which often leads to corruption);

d.. Complexity and unpredictability of the tax system.

Reporting Requirements and Transparency

a.. All banks should be obliged to report foreign exchange transactions of more than 10,000 DM (whether in one transaction or cumulatively by the same legal entity). The daily report should be submitted to the Central Bank. In extreme cases, the transactions should be investigated.

a.. All the ZPP account numbers of all the firms in Macedonia should be publicly available through the Internet and in printed form.

a.. Firms should be obliged by law to make a list of all their bank accounts available to the ZPP, to the courts and to plaintiffs in lawsuits.

a.. All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.

a.. All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.).

a.. All retail outlets and places of business should be required to install - over a period of 3 years - cash registers with "fiscal brains". These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources (see: "Databases and Information Gathering"). This can be done only after the full implementation of the recommendations in the section titled "Databases and Information Gathering". I do not regard it as an effective measure. While it increases business costs - it is not likely to prevent cash or otherwise unreported transactions.

a.. All taxis should be equipped with taximeters, which include a printer. This should be a licencing condition.

a.. Industrial norms (for instance, the amount of sugar needed to manufacture a weight unit of chocolate, or juice) should be revamped. Norms should NOT be determined according to statements provided by the factory - but by a panel of experts. Each norm should be signed by three people, of which at least one is an expert engineer or another expert in the relevant field. Thought should be dedicated to the possibility of employing independent laboratories to determine norms and supervise them.

a.. Payments in wholesale markets should be done through a ZPP counter or branch in the wholesale market itself. Release of the goods and exiting the physical location of the wholesale market should be allowed only against presentation of a ZPP payment slip.

Reduction of Cash Transactions

a.. Cash transactions are the lifeblood of the informal economy. Their reduction and minimization is absolutely essential in the effort to contain it. One way of doing it is by issuing ZPP payment (debit) cards to businesses, firm and professionals. Use of the payment cards should be mandatory in certain business-to-business transactions.

a.. All exchange offices should be obliged to issue receipt for every cash transaction above 100 DM and to report to the Central Bank all transactions above 1000 DM. Suspicious transactions (for instance, transactions which exceed the financial wherewithal of the client involved) should be duly investigated.

a.. The government can reduce payroll taxes if the salary is not paid in cash (for instance, by a transfer to the bank account of the employee). The difference between payroll taxes collected on cash salaries and lower payroll taxes collected on noncash salaries - should be recovered by imposing a levy on all cash withdrawals from banks. The banks can withhold the tax and transfer it to the state monthly.

a.. Currently, checks issued to account-holders by banks are virtually guaranteed by the issuing banks. This transforms checks into a kind of cash and checks are used as cash in the economy. To prevent this situation, it is recommended that all checks will be payable to the beneficiary only. The account-holder will be obliged to furnish the bank with a monthly list of checks he or she issued and their details (to whom, date, etc.). Checks should be valid for 5 working days only.

a.. An obligation can be imposed to oblige businesses to effect payments only through their accounts (from account to account) or using their debit cards. Cash withdrawals should be subject to a withholding tax deducted by the bank. The same withholding tax should be applied to credits given against cash balances or to savings houses (stedilnicas). Alternatively, stedilnicas should also be obliged to deduct, collect and transfer the cash withdrawal withholding tax.

a.. In the extreme and if all other measures fail after a reasonable period of time, all foreign trade related payments should be conducted through the Central Bank. But this is really a highly irregular, emergency measure, which I do not recommend at this stage.

a.. The interest paid on cash balances and savings accounts in the banks should be increased (starting with bank reserves and deposits in the central bank).

a.. The issuance of checkbook should be made easy and convenient. Every branch should issue checkbooks. All the banks and the post office should respect and accept each other's checks.

a.. A Real Time Gross Settlement System should be established to minimize float and facilitate interbank transfers.

Government Tenders

a.. Firms competing for government tenders should be obliged to acquire a certificate from the tax authorities that they owe no back-taxes. Otherwise, they should be barred from bidding in government tenders and RFPs (Requests for Proposals).

Databases and Information Gathering

a.. Estimating the informal economy should be a priority objective of the Bureau of Statistics, which should devote considerable resources to this effort. In doing so, the Bureau of Statistics should coordinate closely with a wide variety of relevant ministries and committees that oversee various sectors of the economy.

a.. All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licences, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?).

a.. The PRO should have complete access to the computers of the ZPP and to all its computerized and non-computerized records.

a.. The computer system should constantly compare VAT records and records and statements related to other taxes in order to find discrepancies between them.

a.. Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).

a.. A system of informants and informant rewards should be established, including anonymous phone calls. Up to 10% of the intake or seizure value related to the information provided by the informant should go to the informant.

Law Enforcement

a.. Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors - regardless of their original place of employment - should be equalized (of course, taking into consideration tenure, education, rank, etc.).

a.. Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea (see recommendation below). Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions.

a.. It is recommended to assign tax inspectors to the public prosecutors' office to work as teams on complex or big cases.

a.. To establish an independent Financial and Tax Police with representatives from all relevant ministries but under the exclusive jurisdiction of the PRO. The remit of this Police should include all matters financial (including foreign exchange transactions, property and real estate transactions, payroll issues, etc.).

a.. Hiring and firing procedures in all the branches of the tax administration should be simplified. The number of administrative posts should be reduced and the number of tax inspectors and field agents increased.

a.. Tax arrears and especially the interest accruing thereof should be the first priority of the ZPP, before all other payments.

a.. All manufacturers and sellers of food products (including soft drinks, sweetmeats and candy, meat products, snacks) should purchase a licence from the state and be subjected to periodic and rigorous inspections.

a.. All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties. Many "firms" doing business in Macedonia are not even legally registered.

Reforms and Amnesty

a.. A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.

a.. Bureaucracy should be pared down drastically. The more permits, licences, tolls, fees and documents needed - the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.

a.. A general amnesty should be declared. Citizens declaring their illegal wealth should be pardoned BY LAW and either not taxed or taxed at a low rate once and forever on the hitherto undeclared wealth.

The Tax Code

a.. To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the production process throughout a chain of value added suppliers and manufacturers.

a.. The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To restore progressivity, the government should directly compensate the poor for the excess relative burden.

a.. After revising the tax code in a major way, the government should declare a moratorium on any further changes for at least four years.

a.. The self-employed and people whose main employment is directorship in companies should be given the choice between paying a fixed % of the market value of their assets (including financial assets) or income tax.

a.. All property rental contracts should be registered with the courts. Lack of registration in the courts and payment of a stamp tax should render the contract invalid. The courts should be allowed to evidence and stamp a contract only after it carries the stamp of the Public Revenue Office (PRO). The PRO should register the contract and issue an immediate tax assessment. Contracts, which are for less than 75% of the market prices, should be subject to tax assessment at market prices. Market prices should be determined as the moving average of the last 100 rental contracts from the same region registered by the PRO.

a.. Filing of tax returns - including for the self-employed - should be only with the PRO and not with any other body (such as the ZPP).

Legal Issues

a.. The burden of proof in tax court cases should shift from the tax authorities to the person or firm assessed.

a.. Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled - except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).

a.. The law should allow for greater fines, prison terms and for the speedier and longer closure of delinquent businesses.

a.. Seizure and sale procedures should be specified in all the tax laws and not merely by way of reference to the Income Tax Law. Enforcement provisions should be incorporated in all the tax laws.

a.. To amend the Law on Tax Administration, the Law on Personal Income Tax and the Law on Profits Tax as per the recommendations of the IRS experts (1997-9).

Customs and Duties

a.. Ideally, the customs service should be put under foreign contract managers. If this is politically too sensitive, the customs personnel should be entitled to receive a percentage of customs and duties revenues, on a departmental incentive basis. In any case, the customs should be subjected to outside inspection by expert inspectors who should be rewarded with a percentage of the corruption and lost revenues that they expose.

a.. In the case of imports or payments abroad, invoices, which include a price of more than 5% above the list price of a product, should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.

a.. In the case of exports or payments from abroad, invoices which include a discount of more than 25% on the list price of a product should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.

a.. The numbers of tax inspectors should be substantially increased and their pay considerably enhanced. A departmental incentive system should be instituted involving a percentage of the intake (monetary fines levied, goods confiscated, etc.).

a.. The computerized database system (see "Databases and Information Gathering") should be used to compare imports of raw materials for the purposes of re-export and actual exports (using invoices and customs declarations). Where there are disparities and discrepancies, severe and immediate penal actions should be taken. Anti-dumping levies and measures, fines and criminal charges should be adopted against exporters colluding with importers in hiding imported goods or reducing their value.

a.. Often final products are imported and declared to the customs as raw materials (to minimize customs duties paid). Later these raw materials are either sold outright in the domestic or international markets or bartered for finished products (for example: paints and lacquers against furniture or sugar against chocolate). This should be a major focus of the fight against the informal economy. I follow with an analysis of two products, which are often abused in this manner.

a.. I study two examples (white sugar and cooking oil) though virtually all raw materials and foods are subject to the aforementioned abuse.

a.. White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import licence required) list, to limit the effective period of each licence issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder's as well as an importer's guarantee and to require a certificate of origin. The same goes for Cooking Oil (which - when it is imported packaged - is often declared as some other goods).

a.. All payments to the customs should be made only through the ZPP. Customs and tax inspectors should inspect these receipts periodically.

a.. All goods should be kept in the customs terminal until full payment of the customs duties, as evidenced by a ZPP receipt, is effected.

Public Campaign

a.. The government should embark on a massive Public Relations and Information campaign. The citizens should be made to understand what is a budget, how the taxes are collected, how they are used. They should begin to view tax evaders as criminals. "He who does not pay his taxes - is stealing from you and from your children", "Why should YOU pay for HIM?" "If we all did not pay taxes- there would be no roads, bridges, schools, or hospitals" (using video to show disappearing roads, bridges, suffering patients and students without classes), "Our country is a partnership - and the tax-evader is stealing from the till (kasa)" and so on.

a.. The phrase "Gray Economy" should be replaced by the more accurate phrases "Black Economy" or "Criminal Economy".

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