During my Economic Development of China class, Professor Xu talked about the philosophy of China’s reform: crossing the river by touching the stone.
The idea of building up Special Economic Zones was put forward by the Guangdong governor Xi Zhongxun. He suggested local experiments be done to investigate the effects of foreign investments. Shenzhen, at that time, was a small fishing village of 30,000 population encompassing 3 km2 of dilapidated buildings, lacking even a traffic light (Yeung et al, 2009). But its proximity to Hong Kong and Macau made it an ideal choice of experimenting area.
China’s SEZs can be interpreted by two ways: as a small-scale experiment and as regional competition. The idea of SEZ was highly debatable in the central government, and some deemed it “selling the nation”. The final decision of doing experiment in remote counties is a compromise between the two views. If the experiment fails, the remaining part of the economy stay intact. Moreover, Shenzhen was such an unimportant fishing village that not many people would even notice an experiment was carried out. On the other hand, if the experiment succeeded, the other regions could follow suit and boost economic growth. The rationale of the wide applicability of SEZ was facilitated by China’s M-form economy and what is called Regional Decentralized Authoritative scheme.
Regional competition has been a powerful tool to encourage local officials to work hard for better economic performance. They are more likely to get promoted and get wider recognition in the party system if their region perform extraordinary in the regional competition. Since all the provincial leaders are designated by the Party, local officials open up a door for better future by getting the best economic results. For example, Xi Zhongxun was promoted to the central government in October 1980.
The favorable policies in the SEZs include the following:
-To city government:
Increase autonomy in trade and foreign investment related activities, including the FDI project approving authority (decentralize);
Relaxing foreign exchange control and increasing foreign loans for these cities.
-To foreign investors:
Encourage entry in industries, joint ventures allowed;
Lower income-tax rates than domestic firms;
Reduced custom duty for production materials.
The four initial SEZs are Shenzhen, Zhuhai, Shantou, and Xiamen. Shenzhen is the most successful among the four, but they followed different paths. The following graph shows the economic performance of the five SEZs (Hainan was established in 1988), measuring the per capita GDP in current dollars.
Xu, Chenggang. 2010. “The Fundamental Institutions of China’s Reform and Development,” Journal of Economic Literature, forthcoming.