Fri, 11 Aug 2006

Lessons from China's success in developing special economic zones

Yuliana Bahar, Quangzhou, China

The Special Economic Zones (SEZs) have served as one of China's important economic engines for more than two decades.

Recently, businesspeople in India called upon their government to "carbon copy" China's SEZs, and currently Indonesia also is preparing Batam, Bintan and Karimun islands as SEZs.

There are five areas designated as China's SEZs. They are Shenzhen, Shantou, Zhuhai, Hainan and Xiamen, and all of them are located on the Southern coast of China.

From the beginning, China's SEZs have been specifically designed to attract foreign capital, technology and management skills, especially from Hong Kong, Taiwan, Macao and overseas Chinese compatriots. Their objectives are to boost foreign trade, enhance the capacity of human resources and create massive job opportunities, increase the competitiveness of China's products in the international market and develop China's new modern industrial community, which later on can be used as a model for application in the rest of China.

More than 25 years after the SEZs' establishment, they are now facing some challenges arising from developments inside and outside China.

Should our government adopt the concept of China's SEZs? There are some lessons to learn from China's success story and the challenges of the SEZs' implementation.

First, location matters. It was not without any thought that Shenzhen, Zhuhai, Shantou, Xiamen and Hainan were selected to be China's SEZs. Before their designation as SEZs, those areas were backward small villages with a lack of basic infrastructure and industrial resources and lower populations compared to other developed areas in North China. However, those areas have the geographical advantages of location and open access to one of the busiest international trade sea lanes.

Shenzhen is on China's border with Hong Kong, then already the region's logistics, financial, trade and service center. Zhuhai shares a land border with Macao whose economic capacity, though not as huge as Hong Kong's, was higher than the Mainland's. Shantou and Xiamen are adjacent to Taiwan, one of China's largest trading partners and investors. Equally important is that China's five SEZs have a direct sea route to international trade lanes through the South China Sea.

Second, foreign investment-led trade is the pillar. China's SEZs have been purposely set up to support the growth of its foreign trade through the use of foreign capital. Therefore, China's SEZs have been designed to develop not only the industrial sectors that are export-oriented, but are also able to optimize the use of foreign capital, management, advance technology and equipment.

However, the expanded foreign trade and the inflow of foreign investment have become factors that may hamper the sustainability of economic growth in China's SEZs. Foreign trade and investment have become the dominant contributors to the economic growth, leaving behind disproportionate equilibrium among the pillars of growth.

Third, the government's unwavering commitment and consistent policies are the key. The Chinese government has succeeded in maintaining a conducive investment climate and foreign trade- and environment-friendly policies.

When the Tiananmen Square protests took place and the conservatives tried to hinder the economic reform already taking place in China's SEZs, Deng Xiaoping made his famous "Southern Inspection Trip" just to reiterate the Chinese central government's solid commitment to the SEZs. A trip which then produced more market-friendly policies and incentives for foreign investors in the SEZs.

Nevertheless, the still dominant role of state-owned enterprises (SOEs) in the industrial sector and foreign trade and the SOEs' lukewarm response to reform have made it difficult for the establishment of the effective political and institutional infrastructure needed to support a market economy.

Fourth, reliable market research is imperative. Prior to the establishment of SEZs, and then during their establishment, the Chinese government has been continuously conducting and improving market analysis to determine which industrial sectors will be most competitive in the international market.

The major industrial sectors in China's SEZs are concentrated mainly in high-tech industries and particularly in the electronics, automotive and biotech manufacturers and the development of their research and development (R&D) facilities. The output of these sectors are among the leading commodities in international trade.

Fifth, a comparative advantage is quite important. China's SEZs are special areas that have been exempt from national rulings on economic activities, especially when it comes to foreign investment and trade. This exemption has helped to significantly reduce operational and production costs.

Nonetheless, the comparative advantage offered by the SEZs seems to be less appealing than it was in the first few years of the SEZs' operations due to the improving living standards (higher living costs) in the SEZs, China's accession to the World Trade Organization and Beijing's current policy to focus more on developing the less-developed provinces in West China.

The improving living standards in the SEZs have resulted in stronger demand for higher wages, while low wages have been the key factor of the low-cost production in the SEZs. Then, in joining the WTO, China must now comply with the organization's basic principles of free flow of goods, capital, people and services.

Hence, national treatment shall apply equally to all areas within China's territory. Furthermore, more and more favorable policies and incentives, previously privileges given to the SEZs, have been applied in the backward western regions to attract foreign capital.

Last but not least is the optimization of the overseas Chinese compatriots' capital and networking. China has used cultural affiliations to serve its interests in attracting investment, not only from Chinese people living overseas in rich neighboring areas such as Hong Kong, Macao and Taiwan, but also from those in Southeast Asia.

All the five locations for the SEZs are in the provinces of Guangdong and Fujian, both have been origins for the Chinese nationals who now live in Hong Kong, Macao, Taiwan and Southeast Asia. This strategy of cultural affiliation proved to be handsomely rewarded as Hong Kong, Taiwan and Macao have been the major source of investment and trade partners for the SEZs for more than two decades.

The writer is vice consult at Indonesia's Consulate General in Guangzhou, China. This is a personal opinion. She can be reached at