Chinese Model of SEZs’ Development

In today's rapidly changing economic landscape, industrialization is widely used term in many government circles. And industrialization through industrial relocation using Special Economic Zones as a policy tool is on many governments’ top agenda. Pakistan is no exception. However, it is not just the establishment of SEZ to bring about industrialization but the interplay of myriad factors that determines its success, as seen in China.

China, in just over a half-century, emerged as an industrial powerhouse by implementing a robust industrial policy that included incentives laden SEZs to reform and transform the Chinese economy. The SEZs became the “greenhouses” of foreign entrepreneurs, primarily from Hong Kong and Taiwan, followed by rest of the world, and that facilitated the inflow of foreign capital, technology, and management, and China with their consistent industrial policies, SEZ’s forward and backward linkages managed positive spillover and extended the same to its domestic economy.

It all begins with the establishment of comprehensive Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen, then Hainan and Shanghai Pudong New Area followed by 14 Economic & Trade Development Zones (ETDZs) during the period 1984 through 1988. From there on, the number and scope expanded and so their contribution in the economy. It is believed that these SEZs with incentives created sufficient conditions to allure investors; however, there are more to it than meets the eye.

Proximity and cultural affinity of Shenzhen people to Hong Kong of China, Shantou to Taiwan have played a key role in attracting their investments to the respective SEZs at the onset and the ensuing years. Hong Kong of China of the 1980’s, for instance, was equipped with modern westernized management skills and had had expanded business relationship with the developed world; however, lack of space and factors of production due to its expanding economy were insufficient to sustain the growth and the Guangdong region and the Shenzhen therein provided them with the support to grow mutually.  The same cultural affinity is again on display in the widely publicized but in reality small scale relocation from China to ASEAN nations.  

Geographical proximity and cultural affinity aside, institutional autonomy in the context of industrial relocation is a force to be reckoned with and Chinese have correctly identified it. After a thorough analysis of the region's SEZs and with the advice of locals, experts in Hong Kong, and Singapore, the Communist party leadership provided much needed legal cover and autonomy by promulgating "The Regulations on Special Economic Zones in Guangdong Province" in 1980. The degree of autonomy varies across China's SEZs, but some have even formed SEZ governments. For example, Shenzhen was gradually granted autonomy, and by 1992, the central government had granted them legislative power.

Likewise, preferential policies and investment incentives aided China's colonization of designated SEZs. Back then, the Chinese with 15% corporate tax, zero custom duties on imported capital goods and materials with simplified and convenient entry and exist procedures in the context of SEZ offered the most competitive incentives in the region.

Labor availability is unquestionably critical to business ventures, particularly in the light engineering industry. Shenzhen and other pioneering SEZs benefited from China's abundant labor. According to an estimate conducted in the late 1980s, there existed 100 million surplus labor force in agriculture and it was gradually relocated to other sectors of the economy.

Even to this day the supply of skilled labor factor means a lot in the relocation decision. For instance, the Taiwanese based Foxconn company employing over 300,000 peoples just in its Zhengzhou facility while additional 150,000 in Chengdu and Chongqing moved to these cities in the inland China for the reason to lower labor cost by ensuring steady flow of skilled labor to their expanded facilities there.

Coupled with large pool of labor supply was the flexible employment option within the SEZs. Zone enterprises were allowed to hire and fire employees, and provided them with wages and insurances and others as per the terms of the employment contract. Labor rules relaxed to prefer investment over labor laws violations. 

Last but not least is the positioning of Chinese SEZs and their hard and soft integration with the local economy and beyond. All Chinese SEZs were strategically located with better transportation connectivity. At the same time, these were integrated with their national plans and growth strategies, which were then aligned with the global business context. Globalization and the free trade mantra of the 1990s and the subsequent years, played an important role in the Chinese SEZ’s phenomenal success.

The results of the Chinese government's policies and measures can be seen in the massive production capacity it has developed over time. China's share of global manufactured was around 18% in 2019.

Development and growth at this scale and speed undoubtedly hold lessons for others, with SEZs serving as the centerpiece of this marvelous journey, allowing China to compress centuries of development path into one generation. However, expecting the same path to deliver in another time and space may have consequences. China undoubtedly followed the established pattern of the industrialization trodden by British and other developed economies; however, with adaptation and application of industrial practices in the Chinese environment.

So, the takeaway is to follow the industrial development trajectory with innovative SEZs suited to the needs of the ever-changing global market conditions; and with insights from the development experience of China, plan the future and seize the day (Cape Diem).