Special Economic Zones (SEZS)

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Special Economic Zones (SEZs)

Special Economic Zones (SEZs) are districts within a country in which businesses are exempt from various government policies that apply in the rest of the country. Their usual purpose is to stimulate foreign investment and trade and/or to attract technology transfers without having to alter policies throughout the country. Special policies within zones may include lower tax rates, exemption from foreign-exchange and/or price controls, suspension of labor standards or licensing requirements, and so on. The best known of these zones are in China, though they in turn were based on examples in other countries, such as Malaysia. More recently, similar zones have been set up in India, Kazakhstan, Poland, the Philippines, Iran, and elsewhere.

In some cases, SEZs have been created as experiments or test cases before, or rather than, changing laws throughout an entire country. In other cases they have resulted from political compromise or from fear of the social consequences of very rapid change. Some governments may feel that the foreign exchange and/or new technologies acquired through pursuing these polices in a particular zone is sufficient, and that there is no need to sacrifice other priorities by changing rules throughout the country.

The first four Chinese SEZs were created in 1979, early in the process of post-Mao economic reform, and served as an opportunity to experiment with policies still far too controversial to be applied nationally. Three of them were in Guangdong Province, adjacent to Hong Kong and Macao; the fourth was in Xiamen, a port in Fujian Province with a long history of overseas trade. All four were in areas that had sent a large number of people overseas over the previous two centuries; one hope (which did indeed materialize) was that the SEZs would draw in investment from Chinese emigrants in particular.

The first group of SEZs grew rapidly and was generally judged to be successful; this was especially true of Shenzhen. Essentially a district of farming and fishing villages with an estimated population of about 150,000 (20,000 in the town itself) in 1979, Shenzhen today has a population of almost 5 million and the highest population density in all of China. Its population has China's highest income per capita, expected to reach U.S.$7,600 in 2005 based on quoted exchange rates, and much higher based on purchasing power parity (PPP) calculations Even the lower figure is more than thirty times what it had been before Shenzhen became an SEZ. The population is composed overwhelmingly of migrants, mostly less than 35 years old. Shenzhen's industries have changed dramatically since the district became a SEZ. Initially it drew Hong Kong enterprises looking for cheaper land, labor, and electricity. The first industry targeted when the SEZ was created was breaking up old ships for scrap metal, and many other early industries were basic assembly processes, but current industries include high-value-added sectors such as telecommunications and banking. Today the service sector accounts for almost half of employment in the zone.

The other SEZs in the 1979 group have not been as spectacularly successful, but they also have made major gains. Five years after the SEZ experiment was begun, fourteen other coastal cities—including the huge metropolises of Shanghai, Guangzhou, and Tianjin—were given permission to open free-trade zones with provisions similar to SEZs, though they did not necessarily have all of the same exemptions from domestic relations Other free-trade areas were opened later. Unlike Shenzhen, where the SEZ was built on an almost blank slate, these cities had huge populations that could not suddenly have a completely different social and economic system imposed on them. Nonetheless, they also saw dramatic changes as a result of greater opening to the outside world. And at the broadest level, the SEZs were the cutting edge of a series of reforms that have spread gradually across China. Prior to reform, for instance, many commodities had administratively set prices that were very far from their world prices, and it was understood that too wrenching a removal of these price controls would create great social and economic dislocation. In the SEZs, however, prices of imported commodities gradually found their global level (plus transport costs); this, in turn, became a step towards decontrolling prices over a wider area. As the SEZs grew, the share of China's GDP that was bought and sold at something like world prices grew with them.

SEZs have had their critics, however. Particularly in the early years, the zones fell short in attracting investments that transferred advanced technologies. And although the SEZs do produce significant exports, many have targeted the Chinese market also, and some critics blame them for exacerbating the crisis faced by state-sector industrial firms, and, in turn, for contributing to the chronic weakness of China's banking sector (which has many loans to troubled state enterprises). Critics also point out that SEZ firms have attracted an overwhelmingly young labor force; this, combined with the absence of mandated firm-financed benefits and services for workers elsewhere in the country, gives SEZ firms a competitive advantage beyond what they might enjoy simply from technological or organizational advantages. Others have charged that SEZs have brought unwelcome social developments such as the growth in prostitution, HIV infection, and pornography. Although it is not clear that the SEZs are much different from other urban areas in these respects, they made irresistible targets for the campaigns against "spiritual pollution" in the 1980s. It was only with Deng Xiaoping's "southern tour" in 1992, in which the Communist Party's patriarch gave his full support to a program of accelerated openings, that the SEZs were completely safe politically. Today, as more areas in China offer investors at least some similar economic incentives, SEZs are less important for China as unique windows on foreign ways of doing things, but they remain very influential as models—mostly positive, but sometimes also negative—for policy elsewhere in China.

They have also influenced policy beyond China, as suggested by the rapid growth of SEZs in other countries in the last decade. For the most part, these other SEZs have not shown results as impressive as those in China, although many of the non-Chinese zones are still young, and should appropriately be compared with China's SEZs in their early years. In the Philippines, which began creating SEZs in 1995, these zones have come to dominate the country's exports, but overall exports have not grown particularly rapidly. In India, where SEZs are also fairly recent, their contribution to the country's recent high growth rates appears to be fairly modest. And complaints about the environmental and social costs of waiving many regulations in effect elsewhere continue to raise anxieties about a "race to the bottom." Nonetheless, the spectacular growth of some SEZs, especially in China, and their ability to generate both jobs and exports ensure continued broad interest in creating such enclaves.

SEE ALSO China; Counterfeit Goods;Deng Xiaoping; Free Trade, Theory and Practice; Industrialization.