Catalysts of Transformation: The Economic Impact of China’s Special Economic Zones
The Boston Economist — China’s Special Economic Zones (SEZs) have been key players in the country’s economic transformation since their inception in the late 20th century. These zones, characterized by favorable policies and regulatory environments, were designed to attract foreign investment, boost exports, and accelerate industrialization. By offering tax incentives, reduced tariffs, and streamlined administrative processes, SEZs like Shenzhen, Zhuhai, and Xiamen have become epicenters of innovation and economic growth, propelling China into its current status as an economic powerhouse. This article explores the origins, development, and impact of China’s SEZs on both the national and global stages, highlighting their role in the country’s rapid economic ascent.
History
Following the end of the Chinese Civil War in 1949, the Chinese Communist Party, led by Mao Zedong, took over the nation, and engaged on a series of disastrous reforms that propelled the nation rapidly into poverty. In December 1978, the CCP began the Chinese economic reform (known in China as “reform and opening up”), gradually allowing privatization of agriculture, foreign investment, and entrepreneurship. This was in response to the failure of Maoist economic policies and aimed to make China competitive against industrialized Western nations.
Officials in the Guangdong province of China, under the leadership of Xi Zhongxun, began an investment project in Shekou in 1979, and presented a proposal to the Central government of China to grant Fujian and Guangdong increased flexibility and less rigid regulation. They also asked for additional exceptions to government control in Shenzhen, Zhuhai, Shantou, and Xiamen. The proposal was approved in July 1979, and went into effect the following month. Chinese Paramount leader Deng Xiaoping coined the term “special economic zones.” Early successes in these free economic zones prompted the government of China to establish 14 additional SEZs. In 1988, China’s special economic free zones expanded to its borders along the Yangtze river, Hainan Island, and inland border zones. Since 1992, China’s central government has opened an additional 15 trade zones, 32 economic and technological development zones, and 53 industrial development zones.
Policies
Each of the SEZs vary in their specific economic policies, but all are characterized by reduced oversight from the Chinese Central Government. SEZs were allowed to develop their own laws, received lower taxes and duties, and increased negotiation power.
High Tech zones were established to encourage collaboration between universities and technology companies in close proximity.
Free Trade Zones were established in order to “test the waters” before China dove into the World Trade Organization. FTZs had three targeted functions: export processing, foreign trade and logistics, and bonded warehousing. Despite being in China, these FTZs operate essentially outside the nation’s rules, with companies eligible for tax refunds on exported goods and exemption from import duties.
Various other subdivisions of free economic zones exist in the nation, encouraging innovation, foreign investment, and overall growth.
Impact
Two years after the establishment of SEZs, the four zones accounted for 59.8 percent of total Foreign Direct Investment in China. By the end of 1985, six years after the establishment of SEZs, Foreign Direct Investment in the zones reached $1.17 Billion, or about a fifth of China’s total Foreign Direct Investment. While average annual GDP growth in China sat at roughly 10% between 1980 and 1984, Shenzhen grew an astonishing 58% on average each year and Zhuhai grew about 32% each year.
In 2006, the five original SEZs accounted for 5% of China’s total real GDP, 22% of total merchandise exports, and 9% of total FDI inflows. The 54 national ETDZs (Economic & Technological Development Zones) accounted for 5% of total GDP, 15% of exports, and 22% of total FDI inflows.
Shenzhen, the first Special Economic Zone, has been by far the most successful. Between 1980 and 1990, the city saw its population grow six-fold, and its economic output sixty-fold. In 2018, the city’s economic output surpassed that of capitalist Hong Kong’s.
Since their conception, Chinese Special Zones have accounted for 22% of China’s GDP Growth, 60% of exports, 45% of foreign investments into the nation, and created over 30 million new jobs. The American Economic Journal published a study in 2022 attributing increased economic growth in the cities to increased human capital, leading to more kids getting a proper education. Additionally, the economic zones encourage hiring of more women, giving women in the nation increased purchasing and societal power. These have come at the cost of increased pollution and reduced arable farmland within the zones.
Conclusion
China’s Special Economic Zones (SEZs) have been instrumental in the nation’s economic explosion in the past few decades. The success of cities like Shenzhen, Zhuhai, and Xiamen underscores the effectiveness of targeted economic policies and the potential of strategic deregulation. The SEZs have not only spurred economic development but have also had profound social impacts, including enhanced educational opportunities and greater gender equality. As China continues to evolve and face new economic challenges, the lessons learned from the SEZs will likely remain a vital reference point for economic strategy and development globally.
Sources
https://en.wikipedia.org/wiki/Special_economic_zones_of_China
https://www.lincolninst.edu/app/uploads/legacy-files/pubfiles/2261_1600_Zeng_WP13DZ1.pdf
https://www.aeaweb.org/articles?id=10.1257/pol.20200492&from=f
