K. Subramanian
Where there is little in common
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"Imitation may be the best form of flattery, but imitating China's SEZs,
set up in a socio-political-economic environment very different from
India's, is not necessarily the best way to go forward."
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A tectonic divide has been created in the country by the government's
policy on Special Economic Zones. It runs across political parties,
economists, civil activists and even ministries.
It was the brainchild of the late Murasoli Maran, who was impressed by
what he saw in Guangdong during his visit to China and decided, on his
return, to put it in the Exim Policy 2000.
It took five years for the SEZs Act of 2005 to take shape and a few more
months for the Rules to be framed. Then came the flood of applications
seeking approvals for SEZs across the country. States vie with one
another to set up SEZs and large industrial houses wear approvals as
badges of honour.
"Early birds" began to acquire land from hapless farmers at throwaway
prices in cahoots with local authorities. The surge in land `deals'
disturbed public opinion and created fear among economists over the
adverse impact on agriculture, in particular food security.
Chinese vision of SEZs
What is missed in the debate is the vision of SEZs the Chinese had when
they embarked on the strategy in the late 1970s, and its relevance for
India. It seems to be an attempt to cut-and-paste a stereotyped version
of China's SEZs on Indian policy. Unfortunately, China's policy was not
etched in stone.
The historic decision on economic reform and opening was taken in 1978
at the 11th Communist Party meeting and SEZs flowed from it. Four SEZs
were set up in 1980: Three in Shenzhen, Zhuai and Shantou in Guangdong
Province, and the fourth at Xiamen in Fujian Province. Significantly,
these bordered Hong Kong or were across Taiwan and Macao having close
links with Chinese communities there and commercial networks.
Advocates of the policy led by Deng Xiaoping stressed its `experimental'
nature and its role in developing state capitalism, which was viewed as
a precondition for socialist modernisation. Hardcore socialists warned
of the adverse impact of an `open door' policy, especially erosion of
socialist relations of production.
The sceptics acquiesced when a longer-term strategy was unveiled by the
Party high command.
Long-term strategy
It synthesised three elements. The first was that having regard to the
record of political upheavals and uncertainty in China, foreigners would
not invest in major cities. The second was the fear, rather a concession
to hard-core dissenters, that economic and political risks would be
higher if major economic centres, which had been sheltered for decades,
were exposed suddenly to foreign investment. Finally, the historical
mission of China to reclaim sovereignty of Hong Kong, Taiwan and Macao
and integrate them with the mainland.
When Deng commenced the experiment in the late 1970s, he declared that
he had no road map. He was tentative, hesitant and would move
cautiously, "like crossing the river by feeling the stones under the
feet." The locations of the SEZs were chosen with thought. They were on
the southern coast and linked to Chinese territories and community
networks. They had no record of industry or infrastructure and were
thinly populated. They were chosen to reduce the risk of political and
economic fallout with the intention of abandoning them if they were
unsuccessful and extending them to others if successful.
Chequered record
The SEZs had a long and chequered record in China's development. Sadly,
there are several myths attached to them. India's model is influenced by
these myths. It did lean on the market but was not driven by it. The
SEZs did not succeed in a decentralised manner but required regular
monitoring and refurbishing by the Chinese government.
In the initial years, from the early to mid-1980s, the record of SEZs
was poor. It was no doubt the transition stage. They failed to step up
exports or attract foreign direct investment and technology. Low-value
items were produced. There were bribes and real-estate scandals. Deng
was on the defensive.
In 1984, Beijing reoriented its reform policy and designated 14 coastal
cities and extended SEZ preferences to what were called `open regions.'
This led to a shift in FDI flows away from the SEZs. By the end of the
1980s and the early 1990s, Beijing extended the `open regions' to the
`three deltas' — the Pearl River Delta, the Minnan Delta and the Yangzi
River Delta, the Hainan province and the Pudong area in Shanghai.
Pudong was considered an "SEZ among SEZs." Open areas reached from south
to north all along the coast. The much-publicised Deng's visit to the
Southern provinces in 1992 was another landmark and led to radical
opening of new areas and sectors.
Opening up of China
When a very large part of China was opened up, the relative importance
of the SEZs declined. No doubt, this vindicated Deng's vision of
treating SEZs as `experimental' and extending them to other areas
gradually.
However, as later developments would show, the Chinese were moving away
from the SEZs. They were concerned about rising income disparities and
lack of regional imbalances. They are considering a new law to level the
field between the foreign and domestic firms and to increase
government's receipts.
Alongside the SEZs, the government set up smaller and more focused
economic and technological development zones (ETDZs) in other Southern
provinces and in the inland and western region. Following public demand,
there followed high-tech zones, science and technology parks, incubation
centres, industrial parks, etc.
Though there was abuse and mushrooming and overlap of these facilities,
they were funded from public sources and contributed to higher
production and exports. When the SEZs were marginalised, there were
other zones, some of them more focused and larger, which could take over
the role.
In India, it is doubtful whether the current policy would lead to
similar support structures, especially as the zones are privately
funded. China's SEZs were based on exports and after initial delays they
did perform. There were global factors, which contributed to their
stellar role.
The most important was the presence of overseas Chinese with their
financing and trading networks. They could shift production from Hong
Kong and Taiwan and also send large amounts of capital to finance exports.
The other wave flowed from the multinational corporations' strategies to
relocate labour-intensive segments of manufacturing (especially
electronics) in low-wage areas.
The last was the booming American economy and the New China Policy,
which allowed open access to the US market. These have lost their
relevance since . China's integration with Hong Kong and Macao is
complete. In fact, the SEZ strategy contributed to it greatly. The
multinational production strategy is no longer confined to any country
in Asia or to any commodity. Now the corporations are able to play one
country against another and no nation, except perhaps China, has special
advantages.
The US economy is sluggish and is no longer taken as the engine of
growth. China itself is reshaping its strategy and looking more inwards
to domestic demand to sustain its development. Thus, if India hopes to
gain any advantage through SEZs for exports, it is chimerical.
It is tale of two SEZs that have little in common. As Prof T.N.
Srinvasan of Yale University remarked, "Imitation may be the best form
of flattery, but imitating China's SEZs, that were set up in a
socio-political-economic environment very different from India's, is not
necessarily the best way to go forward." (Economic Performance and
Reforms: First Year of UPA Government, May 26, 2005.)
(The author, a former Finance Ministry official, has extensive
experience in international, financial and trade issues.)
http://www.thehindubusinessline.com/2006/11/30/stories/2006113000440800.htm
