The Political Economy of China's Economic Zones

George T. Crane

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781315492438
• Topic: Business
• Subtopic: Business General
• Index: Business

In 1979 China launched a new international economic policy with the establishment of four Special Economic Zones (SEZs): Shenzhen, Zhuhai, and Shantou in Guangdong Province and Xiamen in Fujian Province. Modelled loosely on export processing zones and free trade zones found in other less developed countries, the SEZs offer a variety of financial inducements to foreign investors in order to harness international business for national economic advantage. Designed to be a cornerstone of China's economic reforms, by 1985 the SEZs (in the mid-80s zone-like policies were extended to fourteen coastal cities) were scandal-ridden and fraught with serious problems. This work, the first book-length analysis in English of China's SEZs, examines the problems and promise of this innovative approach to "structural economic reform" and the comparative significance of the SEZs.

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Explaining China’s Special Economic Zones

In 1979 the People’s Republic of China initiated a new international economic policy under which it established four Special Economic Zones (SEZs)—three in Guangdong province (Shenzhen, Zhuhai, and Shantou) and one in Fujian province (Xiamen). Modeled loosely on Export Processing Zones and Free Trade Zones found in other less developed countries, the SEZs offer a variety of financial inducements to foreign investors in the belief that international business can be harnessed for national economic advantage. The zones are designed to provide foreign enterprises with lower taxes, reduced tariffs, more modern infrastructure, flexible labor and wage policies, and less bureaucracy. Additionally, to take maximum advantage of this “opening to the outside,” the SEZs have been laboratories for innovative domestic economic reforms.

From the outset, SEZs were presented by their supporters as a logical extension of the post-Mao reform ethos. Optimistic analysts contended that the zones would boost exports, earn foreign exchange, promote technology transfer, introduce new management techniques, and hasten local development (Sun 1980; Xu 1981a). They would contribute positively to China’s modernization in myriad ways. Indeed, early assessments of SEZ success were confirmed by none other than Deng Xiaoping as he gave his imprimatur to the Shenzhen, Zhuhai, and Xiamen SEZs in 1984. Shortly afterward, zone-like policies were extended to fourteen coastal cities. The future looked bright for SEZs. By March 1985, however, the zones were being castigated as havens for “carpetbaggers” who “made money from the rest of the country” (FBIS 85061:W2). Reports of trade deficits, foreign exchange losses, financial mismanagement, and corruption led to a retrenchment of zone policy. The costs of the scandal-ridden SEZs seemed to have overwhelmed their benefits. What happened?

This book sets forth to explain the development and performance of China’s SEZs. The analytic framework for this endeavor is derived from a growing literature that investigates how domestic political structures shape, and are constrained by, economic outcomes. This perspective grows out of the strengths and weaknesses of arguments relevant to China’s zone experience. Studies dealing explicitly with the SEZs provide a rich base upon which to build an explanation of zone development. Examinations of similar policies (Export Processing Zones) in other less developed countries offer some insights into the workings of the SEZs. Finally, at a higher level of abstraction, more general discussions of political and economic development are useful in fashioning an account of China’s SEZs. A brief consideration of each of these areas of inquiry will provide the proper analytic context for the task at hand. What kinds of questions have the SEZs inspired? What is their significance?

SEZ Studies

The SEZs have spawned a cottage industry of sorts within China itself. Bibliographic indices, such as the Quanguo baokan suoyin, include page after page of material on the zones. Books, yearbooks, and edited volumes on the SEZs are plentiful. Additionally, Hong Kong researchers have produced a wealth of information and analysis. These Chinese sources are the foundation of the following chapters of this book and, therefore, are not plumbed here. A portion, though by no means all, of the Chinese material has been incorporated into English-language studies on the zones. This smaller corpus brings to light several of the central issues raised by the SEZs.

Two major themes are discernible in the English-language work on China’s SEZs.¹ First, the evolution of zone policy has attracted a fair amount of analytic attention. These studies generally present the zones as attempts to solve the stagnation of late Maoism and the failure of Hua Guofeng’s international economic policy (Oborne 1986:11–16; Chu 1985a:25–35). Several authors demonstrate how some Chinese saw Asia’s Export Processing Zones (EPZs) as models that, with some alterations, might be worthy of emulation (Pepper 1986:2; Oborne 1986:75–81; Wong and Chu 1985b:2–8). The literature goes into detail regarding specific innovations in both international and domestic economic policies in the zones, including tax and tariff reductions, customs privileges, wage and price reforms, administrative decentralization, and new forms of enterprise management.² The expansion of SEZ-like policies to fourteen other coastal cities in 1984 and three delta areas in 1985 is also chronicled (Pepper 1986:5–6; Harding 1987:167–68). Finally, the retrenchment of some reform measures since 1985 has been discussed (Fewsmith 1986).

These descriptions of the evolution of the SEZs are most useful for their empirical content. The substance of, and changes in, reform efforts in the zones are very carefully documented. Ambiguities in policy are brought to light (Fenwick 1984). The picture that emerges is one of inconsistent policy, never very clear and changing unexpectedly. Although these conclusions may be accurate, the studies that give rise to them do not fully explicate the causes of the policy problems. Why have zone proponents chosen a particular course? Why is implementation a continuing problem? These sorts of questions take on added significance when considered in light of the second major theme of English-language analyses of the SEZs: economic performance.

Examinations of actual economic accomplishments of the SEZs reveal, on balance, a suboptimal performance. Early reports convey a certain optimism.³ It seemed as if the Shenzhen zone in particular was attracting foreign investment into a capital-starved economy at an impressive rate. Much of this activity appeared to be export-oriented, suggesting rising foreign exchange receipts. Moreover, the most obvious achievement was the economic transformation of a sleepy border town. The influx of Hong Kong capital and construction coincided with a significant increase in local economic growth. Shenzhen looked as though it would contribute positively to China’s reintegration into the world economy.

Later studies, however, paint a bleaker picture. Drawing on dramatic Chinese revelations of zone failures in 1985, many Western analysts now agree that local growth in Shenzhen has been fueled largely by domestic rather than foreign investment. This means that significant costs, especially infrastructural development, have been borne by the national Chinese economy. Moreover, it is also evident that Shenzhen, the flagship of the SEZs, has functioned more as an entrepôt for foreign goods moving into China than as an engine of export-led growth. Consequently, foreign exchange deficits have soared. Additionally, these losses cannot be justified in terms of technology transfer, which has been modest at best. When local dislocations such as inflation and corruption are factored in, it is clear that the SEZs have run into serious trouble. In sum, a consensus has emerged, albeit not shared by all Chinese analysts, that SEZ policy has created more problems than it has solved (Far Eastern Economic Review [FEER], October 1, 1987:102–105). Indeed, it was Chinese recognition of these difficulties that led to the retrenchment in reform initiatives in 1985, throwing the entire zone policy into doubt.

Although the SEZs have survived in spite of policy gyrations and poor performance, their checkered history leaves a pressing question: why the shortcomings? One answer is to blame poor economic performance on incoherent policy. In a headlong rush to reform, zone administrators lost their sense of direction and coordination. Signals emanating from Beijing have been ambiguous, and local leaders have had to experiment haphazardly. In this context, economic performance has suffered as imports have leaked into the Chinese hinterland and construction projects have not been carefully monitored. This line of reasoning suggests that the zones’ problems may be solvable; an improved management style and heightened experience will pave the way to success. Although it certainly possesses a measure of validity, this argument begs a more fundamental question: what has brought about “bad” policy from the start? It may be that SEZ difficulties run deeper than deficiencies of public administration.

A more satisfying explanation of SEZ problems focuses on politics. Some analysts point out that serious differences of opinion exist within the Chinese leadership over zone policy. Generally, the debate is presented as a “two-line struggle” of sorts, with zone supporters drawn from the ranks of reformist leaders managing the startling changes of post-Mao China versus SEZ detractors found among the more conservative skeptics of the reform enterprise. Thus, zone advocates, trying to build up their political base and stave off a potential conservative counterattack, are under some pressure to produce tangible national benefits in the SEZs. This situation has led reformers to adopt uncritically a zone strategy based on the EPZ experiences of other less developed countries (LDCs), but possibly unsuitable for China’s circumstances (Pepper 1986:3). Additionally, political pressure has confounded policy implementation as the desire for quick results has pushed zone administrators into dubious deals with both foreign and domestic economic agents. In short, it is politics that has undermined economic performance in the SEZs.

This argument is more comprehensive in that it links China’s SEZ experience to national political forces, providing a better explanation of policy inconsistencies. It is also more pessimistic as it suggests that zone difficulties may be close to intractable, hinging on the solution of basic political issues. Extant political analyses of the SEZs are not free of problems themselves, however. Is it best to assume that zone politics are simply a matter of a “two-line struggle”? Recent studies of related aspects of China’s political economy point to a more complex reality (Solinger 1982; Hamrin 1984; Bachman 1986). Moreover, if the conservative leadership disappeared tomorrow, would the SEZs’ problems be solved, or is the political dynamic structural in nature? In sum, while politics may hold a key to understanding China’s zones, more work needs to be done in specifying the political forces at work in and around the SEZs.

C. Y. Chang (1986) makes a noteworthy contribution in this regard. He suggests that zone problems are rooted in the structure of the Chinese state. For Chang, two aspects of China’s “politicized bureaucracy” are the source of bad policy and poor economic performance. SEZ bureaucracy is politicized because it is dominated by the party. Therefore, political loyalty supplants the technical expertise required for zone success. Bureaucracy is further politicized in that the state, regardless of structural reform, continues to control most aspects of SEZ economy. Under these circumstances, Chang argues, economic issues, such as banking and land use, are hampered by political inefficiencies. This is a helpful insight as far as it goes. It only provides, however, a rudimentary understanding of the structural dynamics of the SEZs. Although Chang’s work is promising, its full potential as an explanation of zone development has yet to be demonstrated. A more detailed analysis of the structures of state power and social forces in the SEZs is needed.

To summarize, the English-language literature on China’s SEZs has settled on a leading research question: why has zone policy been so inconsistent and zone performance so poor? Thus far, the most appealing answers to this query have focused on domestic politics. The relationship between political structures and zone problems, however, has not been fully specified. Indeed, a more detailed political analysis of the SEZs would not only provide a more comprehensive explanation of zone policy, but might also link China’s experience to more general discussions of comparative political economy. Only modest efforts at such analytic integration have occurred to date. Chang places the zones in the context of comparative communism. Other analysts suggest that EPZs in other LDCs may provide some insights for understanding China’s SEZs (Sit 1988; Stoltenberg 1984).

Export Processing Zones: Descriptions and Explanations

Export Processing Zones are industrial estates offering customs privileges and financial incentives to attract foreign investment in export-oriented manufacturing enterprises.⁴ The first EPZ was established in Shannon, Ireland, in 1959 (Kelleher 1976:2). In 1965 Taiwan seized upon the EPZ model as an incremental step in the gradual liberalization of its international economic policy and became the first less developed territory to establish a zone. Other LDCs recognized the development potential of EPZs and quickly moved to begin their own programs. Encouraged by the United Nations Industrial Development Organization (UNIDO) and the United Nations Conference on Trade and Development (UNCTAD), Mexico, Brazil, the Philippines, and India all had EPZs of one sort or another operating by the late 1960s. Since then, EPZs have become a popular policy alternative for quite a few LDCs. In 1984, some eighty-four zones were operating in thirty-seven LDCs with about forty-four more EPZs in the planning and construction stages (Diamond and Diamond 1984; Currie 1983).

In the early 1970s UNIDO and UNCTAD had high hopes for the role that EPZs might play in economic development. An often-cited 1972 UNIDO report outlined a host of benefits that LDCs could expect to gain from EPZs: increases in capital stock; creation of employment opportunities; promotion of technology transfer; growth of exports and foreign exchange earnings; and a general stimulation of national economic activity (UNIDO 1972). A 1973 UNCTAD paper, although somewhat more circumspect, echoed most of the UNIDO points (UNCTAD 1973). The claim that EPZs benefited LDC hosts was bolstered by other studies on Mexico and India (Baerresen 1971; Vittal 1977).

By the late 1970s, however, the argument that EPZs were having a negative, or at best insubstantial, impact on LDCs systematically challenged each point of the more optimistic assessments (AMPO 1977; Frobel et al. 1980; Frank 1980; ICFTU 1983). The critics hold that the structure of industry in EPZs tends to be “noncomplex,” consisting mostly of simple processing and assembly firms with low capital investment per enterprise. These sorts of operations are not effective vehicles for technology transfer. Moreover, employment gains are seen as minimal because many EPZ companies hire mostly young women at very low wages under exploitative working conditions. The impact of zone exports on the host country’s balance of payments has generally been less than expected. EPZ exports have a high import content, reducing foreign exchange potential. Furthermore, foreign exchange receipts are reduced by the repatriation of profits that is found in virtually every zone. Finally, EPZs have retained their enclave nature as isolated islands of foreign investment and have had little impact on the domestic economies of host LDCs.

It would appear that much of this criticism is well taken insofar as UNIDO and UNCTAD have incorporated many of these points into later reports (UNIDO 1980; UNCTAD 1983). Although they still support the idea of zone development strategies, both organizations now conclude that EPZs are of limited utility in the industrialization efforts of LDCs.

Studies done by International Labor Organization–Asia Regional Team for Employment Promotion (ILO-ARTEP) reach similar conclusions regarding the beneficial, though circumscribed, contributions EPZs can make to development in some countries. The ILO reports contend that zone employment can have a positive impact on a regional or sectoral basis within the host country, as in Malaysia and Singapore. EPZs can also create significant levels of new manufacturing jobs.⁵ Although zone working conditions and wages are a continuing problem, in some cases they are no worse than prevailing national standards.⁶ Beyond the ILO studies, other evidence suggests that EPZs have played an important, dynamic part in industrial development in some countries, such as Taiwan and South Korea (UNIDO 1980:26; Currie 1979: 12–15). In sum, EPZs are neither savior nor villain of LDC industrialization. Their role in development, while generally modest, has at times been positive while at others less so.

How has actual EPZ performance around the world been explained? The debate on this question reflects the broader contention of liberal and Marxist theories on development. Liberals, working within the paradigm of neoclassical economics, see EPZs as a novel and efficient expression of the basic principle of comparative advantage (Kelleher 1976; UNIDO 1972). LDCs have the surplus of inexpensive labor necessary to exploit shifting patterns of manufacturing investment worldwide. Thus, if properly designed, EPZs should positively contribute to national development objectives as forecast by UNIDO. Shortcomings of EPZ policy are blamed on undue political interference in the market. Although liberals recognize that zone performance is critically shaped by changing international conditions (i.e., recession in advanced industrial countries), they suggest that the world market will clear and these sorts of pressures will not fundamentally subvert EPZ policy. Rather, problems are more likely the result of excessive state regulation of domestic and international market forces. In short, if the market is allowed to follow its “natural” course, liberals argue, then there is every reason to believe that EPZs will succeed.

Marxists, on the other hand, view zone success as virtually impossible. Drawing on various strands of dependency theory, Marxist analyses posit a “new international division of labor” characterized by the redeployment of manufacturing enterprises from the core to the periphery of the world economy (Frobel et al. 1980: chap. 2). In essence, this account of the international conditions surrounding EPZs is similar to liberal arguments. Marxists, however, view the results of international restructuring differently. They hold that foreign investment in EPZs cannot fundamentally change the unequal nature of the world-system. Instead, zones merely replicate mechanisms of underdevelopment on a smaller scale. EPZs are based upon heightened exploitation of local workers who are denied the protection of unions and proper working conditions. Zones are marked by “unequal exchange” as they contribute to the overall outflow of capital to...

Table of contents

• Cover
• Half Title
• Title Page
• Dedication
• Copyright Page
• Table of Contents
• Acknowledgments
• Abbreviations
• 1 Explaining China’s Special Economic Zones
• 2 The Politics of SEZ Creation
• 3 SEZ Management and Performance, 1979–1982
• 4 Accelerated SEZ Development, 1983–1985
• 5 Retrenchment and Revision, 1985–1987
• 6 The Political Economy of China’s SEZs
• Notes
• References
• Index