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Just Imagine…

You visit Hong Kong as a tourist in 2003, cross over to Shenzhen to get a glimpse of China, expecting to

see this…

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Just Imagine…

And you see this….

China’s Economic Growth and Special Economic Zones:

A good thing?

Aaron D. BrooksNS 3041

12 Mar 08

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China’s Economic Reforms

• China’s economic reforms began in 1970s

• Cause: Failures of Cultural Revolution– Weakened CCP, inefficient SOEs, lagging economy

• Method: Gradual approach to reforms• Result:

– Ten-fold increase in China’s GDP since 1978– Second-largest economy in world (PPP basis)

• Case study:– Special Economic Zones

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Special Economic Zones (SEZs)

“It doesn’t matter whether the cat is black or white,

as long as it catches mice.” -- Deng Xiaoping (1904-1997)

• Transition to “Socialist Market Economy with Chinese Characteristics”

• Goal: Encourage private ownership, foreign investment, tech transfer, while maintaining measure of control– “Window” to “Asian Tigers’” development

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Special Economic Zones (SEZs)

• Established 4 SEZs in 1979– Trade comparative advantages– China shifted authority from central gov’t to zones– Expanded to 14 Open Coastal Cities (1984)

• “Development from scratch”– Industry moved to areas of new development to take

advantage of cheap labor– Unconstrained growth with new infrastructure– Geographically “insulated” + aids reunifications

• Impact? Shift of……China’s GDP to the coast (57%)…China’s FDI to the coast (86.4%)

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Where is this Shenzhen Place?

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Shenzhen SEZ

• Land area: 126.4 square miles (largest SEZ)• From: Fishing city of 300,000 (1979)

– GDP share <1%– 80% households in fishing/agriculture

• To: Metropolis of 7,000,000 (2007)– 30% annual employment growth (1980-93)

• Shifted development inward for comparative advantage (land/labor costs)… “ripple effect”

• By 1994, more FDI than target for 2000 ($5.35B)• B/t 1980-95, real growth 35.5% (China 10%)

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State Investment in Shenzhen SEZ

QuickTime™ and a decompressor

are needed to see this picture.

“If you build it, [they] will come.” -- Field of Dreams

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Shenzhen SEZ FDI

QuickTime™ and a decompressor

are needed to see this picture.

“Show me the money!”

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Challenges in the SEZs

• Rising wages – Population movement control (hukou)

• Increased labor/societal divisions– Greater number of transitory/temporary workers– Cracking “iron rice bowl” safety net

• Negative for workers in SOEs

– Newcomers vs. original hukou residents

• Labor mistreatment– Forced overtime– Minimum wage rates ignored– Unpaid wages– Health and safety problems

• Land acquisition

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Challenges for China Proper

• Massive movement to economically successful SEZs (licit and illicit)

• With affluence comes demands for greater rights– Economic freedom political freedom?

• Socio-economic disparities (Gini Coefficient)– Increased from 0.30 (1981) to 0.40 (2005)– Divisions between employees and migrant workers

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Conclusion

• SEZs right policy, right locations, at right time• Attracted large amounts of FDI

– Input comparative advantage– Foreign access to previously-closed domestic market– Attractive government incentives

• Incorporated market-oriented reforms• Tough to ignore successes, even for most

hardline Communists• Transition SEZs from manufacturing to tech• Common capitalist challenges to address

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Conclusion

Questions?