China’s special economic zones are facing a critical period of transition. As consequential as they have been to the country’s rapid growth over the three decades since Deng Xiaoping launched economic reform in 1978, they now face a number of challenges. These include:
- moving up the global value chain;
- questions over the sustainability of export-led growth;
- environmental and resource constraints;
- institutional changes;
- lagging social development.
These are largely the challenges facing the broader economy, too. History suggests that it is the special economic zones that will first try to address these issues. As World Bank staff economist Douglas Zhihua Zeng writes in a new working research paper,
The SEZs have made crucial contributions to China’s success. Most of all, they— especially the first ones—successfully tested the market economy and new institutions and established role models for the rest of the country to follow.
Zeng’s paper is well worth reading. As well as Shenzhen (the first SEZ, started in 1980) and its six fellow SEZs, it looks at economic and technological development zones, free trade zones, export-processing zones, high-tech industrial development zones and, though Zeng, rightly, considers them a different economic animal, industrial clusters. Zeng estimates that by 2007, the latest year for which he can get numbers, the total GDP of the major state-level zones accounted for 22% percent of national GDP, 46% of foreign direct investment and 10% of employment, mostly skilled jobs as they have been hotbeds of China’s new and high-technology firms, accounting for more than a third of the country’s R&D spending.
As the paper notes, the zones vary widely in their performance and speed of growth, but mostly they have all more or less succeeded. That is not always the case with economic development zones in developing economies. Zeng identifies several characteristics of China’s success with SEZs:
- strong commitment from the top leadership, and high-level pragmatism, flexibility, and autonomy;
- a gradualist approach toward reform;
- proper role of government (active, pull-up strategy);
- foreign direct investment, including from the Overseas Chinese diaspora;
- public-private partnership approach
- technology innovation, adaptation, and learning;
- clear goals and vigorous benchmarking, monitoring, and competition.
Zeng also notes one other characteristic of the most successful SEZs, “the capacity…to identify its comparative advantages and bottlenecks accurately and implement the right strategy to remove problems as well as to build a conducive business environment.” What that means for the SEZs’ future, Zeng says, is that they will have to:
- put more emphasis on producing for domestic markets and consumption;
- move towards a more knowledge- and technology-based development model;
- promote technology innovation and learning;
- adopt stricter environmental and social standards.
The zones will attempt to do that by, in Deng Xiaoping’s phrase, “crossing the river by touching the stones”. There will be splashes along the way, but getting that right will have impact far beyond the zones themselves.