During the 1980s, China established the first of its Special Economic Zones with the intention of attracting and accommodating foreign businesses and investments to China. Their development and expansion—and more liberal systems and regulations—played an important part in China’s global economic transition.
China’s late-twentieth-century process of economic transition began with the establishment of what are known as special economic zones (SEZs). SEZs are geographically insulated areas opened economically to the outside world. They are regulated by the government, with preferential policies in their favor, so that special and flexible economic policies and measures are adopted primarily to promote foreign investment, technology transfer, and exports. In 1979 China designated the first four SEZs—Shenzhen, Zhuhai, Shantou, and Xiamen—as part of its domestic economic reform. By limiting its experiment to those four SEZs, China sought to minimize the unnecessary economic, social, and political costs often associated with a drastic policy switch and to gain the necessary experience in carrying out the transition.
Serving both as windows to the outside world and as laboratories to test and refine various reform policies, the SEZs played a pivotal role in China’s overall economic transition during the last two decades of the twentieth century. Numerous measures aimed at reforming the existing economic system and reaching a higher degree of economic openness were developed in and spread from the SEZs. In many regards the effect of the SEZs has far exceeded their limited geographical boundaries. It is safe to say that without the successful operation of the SEZs, China’s reforms would not have gone as far, and the transitional process would not have been as smooth.
China’s Approach to SEZs
At the outset of economic reform and an open door policy, the Chinese central government realized that development could not happen in all places at once (that would have been too costly), and that certain policies needed to be tested within limited areas before being implemented nationwide. The government planned to take advantage of the global trend of industrial relocation to attract foreign investment to its capital-starved economy. Foreign investment would allow China to make full use of its large reserve of inexpensive surplus labor to produce labor-intensive goods for export and, ultimately, to create foreign-exchange earnings. The government also recognized the importance of advanced foreign technology for stimulating growth and for making possible technology transfer. It was hoped that inland enterprises could later learn from the experience of the SEZs.
Supported by growing local enthusiasm for such policies, particularly from Guangdong Province, the SEZs functioned as a laboratory where various methods aimed at overcoming the drawbacks associated with a central-planning system could be developed. Market mechanisms were foreign to the Chinese reformers, and economic efficiency was hard to achieve. Fourteen more cities were designated as coastal open cities in 1984. Here, the entire city adopted policies similar to those implemented in the SEZs, such as promoting foreign investment. In 1985 the Yangzi (Chang) River, Pearl River, and southern Fujian deltas were declared open economic zones. In April 1988 a fifth SEZ was established in Hainan, after Hainan was newly designated as a province, so that the entire province functioned as a zone. In the same year, a coastal development strategy, officially called the weixiang xing fazhan zhanlue (Outward-Oriented Development strategy), was launched in the coastal areas. This policy had a much larger scale and wider range, embracing twelve provinces and cities under the direct control of the central government. In April 1990 the Pudong New Area was formally established—with policies favorable for inducing rapid construction, large investments, and other economic development—for building a center of finance, commerce, and high technology. In the eighth five-year plan (1991–1995), the focus was placed more on the development of particular industries than of regions. Through the special economic zones, China’s reform spread from region to region by expanding the geographic areas where preferential reform policies could apply.
Economic Incentives and Political Considerations
In the Chinese SEZs, flexible and innovative packages were assembled that offered incentives for foreign investors. These included preferential tax rates; concessions; and exemptions from certain taxes, administrative fees, and the need for high-level or mid-level approval. Most exported and imported items were exempted from custom duties and the industrial and commercial consolidated tax. The SEZs also introduced reform measures dealing with labor-related issues. Employment contracts with specified term limits and dismissal of unqualified employees were permitted for the first time.
There were certain political considerations in establishing the early SEZs. The zones were not selected on the basis of whether there was a strong industrial base, an adequate urban infrastructure, or a technologically innovative capacity. The SEZs had to be easily separated from the vast inland areas because drastically different policies were to be tested in the zones, and no one could be certain that the policies would succeed. In the early stages, fences were built around them, and checkpoints were stationed to inspect traffic. Administrative procedures were also used to control population inflow to the zones. The SEZs were not built into major industrial centers at first to avoid significant losses if the experiment should fail. Moreover, the central government intended to use these zones as intermediary or buffer zones for the future reunification of Hong Kong, Macao, and Taiwan with the mainland, and so they were chosen partially for their proximity to those places. Finally, the overseas Chinese community was targeted as a potential source for productive capital. The southeast coast in Guangdong and Fujian, where the SEZs were set up, were the places of origin of many overseas Chinese.
As an integral and critical component of China’s gradualist approach toward economic reform and opening up, the SEZs have developed into self-contained mini-economies along the lines of “one country, two systems.” In these SEZs, nonsocialist measures could be adopted. The SEZs have moved China much further down the path to economic transition than would have been possible with export-processing zones because these zones may not reform the traditional socialist system but mainly processes products for export. The measures that proved to be effective and successful in the SEZs have been extended, whenever feasible, to the rest of the country. This, in turn, has helped the entire economy gradually to become more open and efficient. As the country moves further into the twenty-first century, the policy differences between the original SEZs and the rest of China are being minimized.
Judged by most social and economic indicators, the performance of the SEZs has, for the most part, been extraordinary. Despite the unfavorable initial conditions—such as a lack of industrial, infrastructure, and technological support—the pace of development of the zones has not only exceeded the national average but also narrowed the gap with some major industrial centers, such as Shanghai, that have long been considered to be the backbone of growth and trade in the Chinese economy. This happened within a short time.
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One never comes to pray in the Temple of Three Treasures if he is not in trouble.
Wú shì bù dēng sān bǎo diàn
Source: Hu, Xiaobo. (2009). Special Economic Zones. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 2074–2076. Great Barrington, MA: Berkshire Publishing.
Special Economic Zones (Jīngjì tèqū 经济特区)|Jīngjì tèqū 经济特区 (Special Economic Zones)