SEZ lessons from China: Opening 'windows' to the world

SEZ lessons from China: Opening 'windows' to the world

Venkatesan Vembu
Saturday, September 30, 2006 22:19 IST

HONG KONG: A ride on the magnetic levitation train that teleports
visitors from Shanghai’s Pudong International Airport to a suburb of
China’s most modern city is a metaphor for the changes that have swept
through the country.

As the ‘mag-lev’ hurtles in at a top speed of 430 kmph, all that
passengers see is a blurred rush of life. The morphing of landscapes is
so seamless and sudden it’s easy to believe skyscrapers have sprouted in
the blink of an eye, right out of agricultural fields. That’s entirely
in character with what’s happened across China since the 1980s, when the
country began its economic experiments in the laboratory of special
economic zones (SEZs).

China’s success over the past 25 years in using SEZs to usher in
revolutionary economic changes is now part of developmental folklore.
When they were first conceptualised in 1978, the SEZs were intended as
“windows” to the world, through which the gentle winds of economic
change may be permitted to blow into a country where the stale air of
Maoism was choking countless lungs.

What they did instead was let in gale-force winds that blew away every
remnant of China’s socialist economy.

Many other countries have, of course, made big gains from employing the
SEZ model, but what China did with it has no match in terms of scale or
scope. At the start, the SEZ objectives were merely to attract foreign
investment, generate foreign exchange, provide employment in large
numbers, and facilitate the transfer of technology and managerial
know-how to China.

It’s possible to argue that not all these objectives have been fully
met. But a far more defining achievement of the SEZs was that by
stimulating spectacular growth and by serving as beacons of the economy,
they have helped changed mindsets — of the proletariat as well as
Politburo members — and prepared the country for an orderly transition
to the market. To the extent that the whole of China is today an SEZ.

Says Wei Ge, associate professor of economics at Bucknell University and
author of Special Economic Zones and the Economic Transition of China:
“SEZs in China were elevated to the overall developmental strategy —
that is, to promote outward-looking structural readjustment. In most
other countries they had a much narrower concentration, and were not
elevated to a strategic level.”

What were the critical factors that contributed to China’s SEZ success?
At the take-off stage, economic geography and cultural affinity with
overseas Chinese investors played a crucial role. The first SEZs — set
up back in 1979 in Shenzhen, Zhuhai and Shantou in the southern
Guangdong Province, and Xiamen in the southeastern Fujian Province —
were sited in port cities and served as buffer zones with far more open
economic entities: Hong Kong, Taiwan and Macau.

Can China’s SEZ model be replicated with as much success in India today?
“The SEZ model is probably more useful for India today than ever
before,” says Ge. But whether it will be equally successful, he notes,
would depend on the type of industries being promoted and the policies
that are put in place to stimulate the economy.

“There isn’t one fixed model for SEZs,” he adds. “It can take on
variations, and different regions can concentrate on what they do best.”
Ge’s point is that India can, rather than follow a rigid pattern,
synchronise its SEZ plans with its developmental objectives.

Clarity of policy issues is critical for the success of the Indian SEZs,
says Hong Kong-based businessman M Arunachalam, who leases factories in
the Shenzhen SEZ to service his leather garment exports.

“Fiscal incentives aren’t critical beyond a point,” he says. “What’s far
more important is a good overall investment environment without labour
market rigidities and infrastructure bottlenecks.”

Viewpoint:

Businesses outside SEZs should not be handicapped by the excessive tax
rebates enjoyed by similar businesses inside these enclaves. This may be
detrimental. - Rahul Bajaj chairman, Bajaj Auto
The idea of acquiring agricultural land at government rates is not good.
Ideally, these transactions should be between the industrialists and the
farmers. Sharad Pawar, Union agriculture minister
Indiscriminate approvals for SEZs will affect agriculture, food
security, the interests of farmers and our economic sovereignty. Prakash
Karat, CPI-M general secretary
SEZs are ... a throwback to the feudal state. Even as they provide sops
to the business community, they severely debilitate our public
institutions. Ramesh Ramanathan, Janaagraha (a Bangalore-based NGO)
The SEZ Act is the biggest real estate scam in India. The aim is to rob
farmers of their fertile land for the benefit of the corporate land
mafia. -Sharad Yadav, Janata Dal (U) president