From Follower to Leader: China’s Development of Special Economic Zones and Its Global Impact and Lessons

By Xiangming Chen

A Preamble

I published my first article “China and Latin America” in The European Financial Review in 2012 to launch this magazine’s “China & the World Series”. Since its official inauguration in 2013, the Belt and Road Initiative (BRI) has turned “China and the World” into a globally significant topic of public attention, academic research and policy debate. The topic has stayed constantly and prominently in the headlines, only magnified by the US-China trade war over the past year and a half, and generated a large and growing body of published scholarship and media commentary. Through 13 articles published in this series thus far with a variety of co-authors, including a number of undergraduate students at Trinity College in Connecticut, I have taken the reader to see China’s presence and influence in all regions of the world. More importantly, I have attempted to shed light on “China and the World” by drawing meaningful connections between local and regional development and transformation deep inside China and their echoes and extensions across varied places and boundaries around the world. The article below takes the trans-local dimension of “China and the World” further by tracing how China has evolved from a follower to a leader in building special economic zones (SEZs) within its boundaries earlier on and extending this experience and expertise to other developing countries more recently.

 

Special economic zones (SEZs) have been used as an important national development instrument around the world for the past several decades. China stands out not only in having created the largest number and variety of SEZs but also in building some SEZs in other developing countries. In this article, I first trace the evolution of SEZs into both distinctive and overlapped types over the past four decades, showing how SEZs have changed and continued in their own existence and in roles in fostering development. Second, I focus on China’s transition from a national follower to a global leader in creating the world’s largest number of SEZs, diversifying its SEZs domestically and extending them internationally. Finally, I draw critical lessons from China’s development experience with SEZs for developing countries.

 

An Age-old Story Through the 21st Century

The Economist (4 April 2015) dated the first free trade zone (FTZ) to ancient Phoenicia about 3,000 years ago. Keller Easterling (2012) traced it to the Roman port of Delos in the Aegean Sea, which flourished in the first century B.C. From the FTZ-like Hanseatic League during the 13th to 17th centuries, we could fast-forward to find the first modern zone, created at Shannon airport in Ireland in 1959. This was followed by South Korea and Taiwan using export processing zones (EPZs) in the 1960s and early 1970s to jump-start their export-oriented industrialization. China raised the SEZ approach to development to a new level in 1980 when it established four SEZs (Shenzhen, Zhuhai, Shantou, Xiamen) along its southeast coast which were much larger than the earlier EPZs and sited in or near existing cities.

From an estimated 500 in 1995, the number of SEZs has risen to 5,400 zones operating in 147 countries (UNCTAD, 2019). Given the large numbers and varied types of SEZs, their success varies widely. China is a global leader in SEZ development having operated the largest number and most varied types of SEZs with overall success. By comparison, SEZs in India and Africa have generally not done as well, for various reasons such as weak infrastructure connections, excessive bureaucracy, and resistance to land acquisition (ADB, 2015; UNDP, 2015). Timing of establishment and governance structure loom among other determining or facilitating factors that shape the differential performance of SEZs. I update my early typology of SEZs (Chen, 1995) to a dynamic view on the new SEZ landscape today.

Table 1 shows four types of SEZs over three broad stages. Free manufacturing zones (FMZs) mark industrial upgrading from the takeoff of labour-intensive and export-oriented manufacturing to knowledge-intensive innovative manufacturing. Since hosting much earlier services such as warehousing for duty-free goods in FTZs, free service zones (FSZs) have diversified over time into broader coverage of more modern and high-end services such as logistics. While overlapping somewhat with FSZs, sector-specific zones (SSZs) have a shorter history and feature more specialized economic functions and activities that increasingly herald the future. Cross-border and extra-territorial SEZs are the newest type, of the largest geographical scope, and truly border-intensive and transnational in function. This table aims to remap SEZs as subnational units of economic development with varied roles onto the development ladder of climbing or sliding national economies based on shifting comparative advantages.

China’s Experience with SEZs

China’s experience with SEZs has largely tracked the global trend over the last four decades, with Shenzhen being the most successful and well-known case. As Table 2 shows, the first two types of zones started in the 1980s, a few years apart from each other, with the economic and technological development zones (ETDZs) launched in 1984. All the early ETDZs built by the 14 established coastal industrial cities were sited some distance away from the central cities as greenfield development projects. They were similar to Shenzhen in that the new location and construction would keep the zones less connected and thus influenced by the old system. While both the SEZs and ETDZs experienced their transitions through industrial upgrading, China unleashed a wave of high- and new-technology zones (HNTZs) across much of the national economic space starting around 2000, although an earlier variation called high-tech industrial development zone started in the 1990s. The fourth type, heralding a new phase of China’s SEZ development that reflects its more open economy, appeared with the official unveiling of the Belt and Road Initiative (BRI) in 2013.

While starting out as a SEZ for low-end and labor-intensive manufacturing SEZ around 1980, Shenzhen in the early 1990s entered a new stage of development characterized increasingly by more capital- and technology-intensive manufacturing in response to rising land and labour costs and worsening environmental degradation. The focus during this stage was on Shenzhen to become a center for high- and new-tech manufacturing, finance services and logistics. In 2003, a cultural industry focus was added. In 2009, Shenzhen added a new focus on becoming an international innovation center. The successful Shenzhen model has recently been extended to China’s far western cities of Kashgar and Horgos in Xinjiang (Chen, 2018).

Focused more on industrial innovation a few years ago, Shenzhen designed a set of very generous financial incentives for attracting R&D labs of national, provincial and municipal grades ranked by a sliding scale of importance and prestige, as well as labs set up by multinational corporations. National- and provincial-level labs, especially those certified as “excellent”, would each receive financial support of up to RMB10 million ($1.5 million), while each municipal level lab would be granted 5 million RMB ($750,000). Shenzhen would also provide 5 million RMB for offsetting the cost of constructing each of these labs. In addition, Shenzhen has built new R&D lab spaces that are available to new-tech firms without rent for the first two years and at a discount of half of the rent for the next three years. These new incentives have fuelled the dense emergence and rapid expansion of high- and new-tech firms that have placed Shenzhen at the forefront of global technological innovation today (Chen and Ogan, 2017).

By 2009, China had approved 54 HNTZs occupying a total area of 962 sq kms. Although this is only 1/10,000 of China’s total territory, it produced 10.4% of China’s total industrial output that year.

Except for Shenzhen’s singular success, China’s experience with SEZs varies broadly. Despite their shorter histories than the SEZs and ETDZs, the HNTZs have since around 2000 become quite productive, in parallel with China’s overall effort to move to higher valued-added manufacturing and knowledge industries (Table 2). By 2009, China had approved 54 HNTZs occupying a total area of 962 sq kms. Although this is only 1/10,000 of China’s total territory, it produced 10.4% of China’s total industrial output that year. Of these HNTZs, 16 produced over 20% of their cities’ total output, up from eight that did so in the previous year (Yu, 2011). Productive as they are, some HNTZs have run into the land bottleneck and acquired some surrounding areas without administrative approval by the higher authorities. In some cases, the areas around the originally approved HNTZs have been developed into residential and commercial zones, which has pushed up land prices. This has restricted and diluted the original purpose and focus of building high- and new-tech industries.

This process also reflects another critical factor in China’s SEZ success – local leadership. Most of the zones of various types are led by a vice mayor or Party secretary of the cities where the zones are located. These leaders tend to do quite well early on because they can leverage and utilize the autonomy granted to the zones and their new momentum, with some institutional separation from their municipal administrative anchor. Some of the leaders were innovative and led the HNTZs to varied levels of success. However, as these zones have become more integrated with their host cities through mixed-use development and inertia, some of their leaders have become more conservative and content with the status quo. The leadership factor exposes a fundamental dilemma facing China’s SEZs. Since they are not special political zones and ultimately governed indirectly by the larger system, they carry a strong built-in limit for sustaining their vitality.

 

Partly pressured by its domestic overcapacity in cement and steel, as well as the overall saturation of the construction market, China has begun to build a variety of SEZs abroad as part of the infrastructure-led development strategy under the BRI.

Pushing SEZs Overseas

Partly pressured by its domestic overcapacity in cement and steel, as well as the overall saturation of the construction market, China has begun to build a variety of SEZs abroad as part of the infrastructure-led development strategy under the BRI. In 2014, a Chinese company started constructing Forest City, a private, gated, luxury mega-development for 700,000 people on four reclaimed islands in Malaysia’s Johor state near Singapore. But this project has been halted since the second election of Prime Minister Mahathir, who is more critical and cautious about China’s heavy investment in Malaysia. In the meantime, Alibaba has helped Malaysia launch the Duty-Digital Free Trade Zone (DFTZ), a warehousing facility close to Kuala Lumpur’s international airport. The DFTZ is designed to serve as a regional logistics hub to help small and medium-sized businesses better connect to global commerce. These cases mark the most recent phase of China’s SEZ development featuring a “go global” strategy (see the lower right corner of Table 2). It is a logical extension of China’s cumulative strength and experience in building SEZs at home and provides new opportunities for countries that are relatively late in coming to SEZs. These countries can learn useful lessons from China’s uneven success with SEZs that may or may not transfer easily and successfully to other contexts. I present two sets of cases in Laos and Ethiopia respectively below.

 

A China-Laos economic cooperation zone

China’s extension of SEZ development to Laos has taken place between the Chinese border city of Mohan in Yunnan Province and the Lao border town of Boten. In 2015, the governments of China and the Laos signed the Agreement for Joint Construction of the China–Laos (Mohan-Boten) Economic Cooperation Zone (ECZ) as the BRI gained momentum into Southeast Asia. While this bilateral plan was predated by the establishment of the Boten SEZ in 2009 directed by the Lao government, little had happened through 2015. The ECZ became China’s way to jump-start and scale up the Boten SEZ by building a new and much larger city where the Boten zone is located, on the Lao side of the border. The construction has been undertaken by Haicheng, a private real estate development company based in Kunming. The signing of another joint development master plan for the ECZ in 2016 accelerated the construction, with the vision and goal of turning the zone into a comprehensive and integrated city for 300,000 people characterized by four functions: international commerce and finance; duty-free logistics; culture, education and health care; and tourism and vacation. It recalls Shenzhen’s functional expansion into a real city from its early years of industrial dominance.

The Boten ECZ offers a set of familiar financial incentives according to the Boten SEZ and other SEZs. These include: 1) the exemption of import duties for all goods and materials used, sold and served in the zone; 2) tax reduction or exemption for 2-10 years for factories in the zone; and 3) tariff-free exports to third countries and qualification for most-favoured-nation status relative to advanced economies. The ECZ also benefits from being located at the crucial cross-border point of the China-Laos Railway and at the connecting hub for both rail and road lines linking China, Laos and Thailand that will eventually extend to Malaysia and Singapore. It also serves as the distribution and connective hub for cross-border trade and tourism. Moreover, the ECZ, in the heart of four concentric circles with travel radiuses of one to seven hours, allows easy and quick access and travel to a number of major cities and their hinterlands that span the connected adjacent border regions of China, Myanmar, Laos, Thailand and Vietnam (see Map 1).

 

The ECZ’s ultimate success is most likely to depend on the completion and operation of the China-Laos Railway that runs by the Mohan-Boten border zone. Although the idea for the China-Laos Railway project germinated in 2010, the official agreement was not signed until November 2015 and ground for construction broken in Vientiane in December 2015. The line starts in Kunming and travels southward to Jinghong and Mohan until it enters the Laos through the Lao border city of Boten. It will then move past Luang Prabang and Vang Vieng before arriving in the Lao capital of Vientiane. Designed to carry both passengers and cargo, the railway will run at an average speed of 160 kilometers per hour, which qualifies it as a high- to medium-speed train, and 60% of the line will be bridges and tunnels.1 The Lao government expects roughly 4 million Lao passengers a year to use the railway’s 420-km route through the country at first, with the figure growing to 6.1 million passengers in the midterm and 8.1 million passengers in the long run.2 This is a rather optimistic scenario.

The China-Laos case reflects the dominance of Chinese state capital and a narrower focus on cross-border transport infrastructure in the China-Laos Railway, although the new China-Laos ECZ in Boten is being built up rapidly as a hub for anchoring cross-border regional development. It is also too early to gauge the prospect of manufacturing-oriented SEZs being built and planned near some stations of the China-Laos Railway such as the China-Laos cooperative Saysettha Development Zone (SDZ) located only 1.5 km from the railway’s terminal station of Vientiane. Laos’ SEZs are expected to host labour-intensive industries, some of which have left China for Southeast Asia due to its more expensive labour and land and upgrading to high-tech manufacturing in new zones. Being built by Yunnan Construction and Investment Holding Group Co., a large SOE specialized in construction from Yunnan, to host more than manufacturing to include logistics, commerce and other associated functions of a new city, the SDZ is larger version of the Mohan-Boten ECZ and also stands to benefit from being on the outskirts of Laos’ capital of Vientiane (see Map 1).

 

Building industrial parks in Ethiopia

Powered by the same internal push of high production costs, Chinese companies, both state- and privately-owned, have brought SEZs to Africa, Ethiopia in particular. The establishment of an SEZ in Ethiopia was reportedly linked to Chinese economist Lin Yifu, a former chief economist for the World Bank, who had convinced former Ethiopian Prime Minister Meles Zenawi of the value in SEZs (Pairault, 2019). The then Prime Minister called for Zhang Huarong, Founder and CEO of Huajian Group, a huge shoemaker based in the southern Chinese city of Dongguan and a major global shoemaking center, to open a factory in Ethiopia. Three months later, in 2011, Huajian entered the Eastern Industrial Park (EIP) and began producing footwear for giants such as Nine West, Guess and, later, Ivanka Trump’s fashion line (before it closed later).3 Located 35 kms southeast of Addis Ababa in the town of Dukem, EIP is Ethiopia’s first industrial park and has helped spearhead the country’s export-oriented industrialization since 2011 when it was built with Chinese investment and is currently owned by the Jiangsu Qiyuan Group, a private Chinese investor (Zhang et al, 2018). Dukem is located on the Addis Ababa-Djibouti highway and the Addis Ababa-Djibouti Port railway, which was built by China with a loan of $3 billion from the Export-Import Bank of China and started operation on January 1, 2018. This rationale is similar to building SEZs along the China-Laos Railway discussed earlier. Like land-locked Laos, 95% of Ethiopia’s trade passes through Djibouti and accounts for 70% of the activity at the Port of Djibouti. Now shoes made by Huajian’s factory in EIP can be easily shipped by rail for export to the US and European markets. After opening a second factory in 2016 in an industrial park of its own near Addis Ababa, Huajian now employs over 7,000 local workers (see Photo 1) and churns out 5 million pairs of shoes for export every year, earning $31 million in foreign exchange earnings for Ethiopia in 2017 alone.4

 

In 2019, Huajian stepped up further in cooperating with Ethiopia on manufacturing by acquiring the right to operate Ethiopia’s Jimma Industrial Park (JIP) for 40 years. Located in Oromia Regional State in western Ethiopia and 350 kms from Addis Ababa, JIP was constructed by China Communications Construction Company (CCCC) with an investment of $61 million. Stretched on 75 hectares of land with 35 hectares already developed, JIP aims to attract clothing and shoe factories. Huajian has already taken the lead in leasing 9 factory buildings covering 39,000 sq meters and committed to invest $100 million to build more shoemaking facilities. This production plan is expected to create 12,000-15,000 jobs. Huajian also plans to develop the other 40 hectares in JIP to build a coffee-processing plant taking advantage of being in Ethiopia’s coffee-growing region and add other agricultural production activities that may create additional jobs through larger and more varied exports.5

China has recently further strengthened its role in building industrial parks for Ethiopia by agreeing to start building a new, $300 million industrial park before the end of 2019. Located in Adama city, 99 kms southeast of Addis Ababa in central Ethiopia, this industrial park, which will focus on equipment manufacturing, is funded at 85% through Chinese government concessional loans while the remaining 15% will come from the Ethiopian government. This park follows from the first Adama industrial park, which was built by China Civil Engineering Construction Corporation (CCECC) at a cost of $146 million and inaugurated by Ethiopian Prime Minister Abiy Ahmed in October 2018. The two parks combined can create around 25,000 jobs as an important part of Ethiopia’s grand plan to transform its largely agrarian economy into an industrialized one by 2025.6

 

China’s has recently further strengthened its role in building industrial parks for Ethiopia by agreeing to start building a new, $300 million industrial park before the end of 2019.

China’s Impact and Lessons

Global SEZ development over the past four decades (Table 1) has been accompanied and reflected by China’s own SEZ development for a comparable period of time (Table 2). Around 1980, China adopted the main elements of the early generation of EPZs through its experimental version of SEZs, crystalized in Shenzhen. China then expanded the “learned” SEZs geographically to scale up export-oriented manufacturing based on its low-cost labour and land advantages by building physical and transport infrastructure for all forms of SEZs. As China upgraded its low-cost manufacturing, heavily concentrated in industrial zones in the coastal region, towards the end of the 1990s, it created more SEZs in its inland and border regions and began to “export” SEZ development, notably to Laos and Ethiopia. Starting out as a follower or learner of SEZs with its adaptations, China has recently become a global leader in developing SEZs.

Regarding China’s own SEZs, two main policy lessons can be drawn. The first lesson, of a positive nature, has to do with a national government commitment to using SEZs of various kinds and locations to achieve multiple goals: driving industrialization, creating jobs, promoting exports, inducing technology transfer and innovation, and stimulating broader regional development to reduce spatial inequality. The second lesson, with an undesirable twist, pertains to many local governments competing to build identical SEZs and ending up with wasteful investment, unfair competition and partial failure. The combination of these two lessons points to the critical importance of vertical and horizontal policy coordination and operational sensitivity in creating truly needed SEZs for clear and achievable development goals from and beyond most favourable locations.

The Chin-Laos (Mohan-Boten) SEZ, being built by a regional private Chinese company under a bilateral agreement at the national level, offers two quick lessons, one likely positive and one potentially negative. First, taking the form of an integrated city in a border region like Shenzhen with a large scale and diverse activities, this SEZ is capable of stimulating broad regional development in northern Laos where development has lagged. The potential downside of heavy Chinese involvement poses a risk that this zonal development will produce exclusive spaces only for Chinese investors, workers, and residents while marginalizing Laotian citizens. This scenario is likely since the Chinese private development company is also heavily involved in local governance. In this kind of large-scale development driven by a powerful outsider, local “others” can be excluded and lead to the erosion of political and territorial sovereignty and governance of Laos or other countries hosting China-built SEZs.

China’s venture to build SEZs in Africa invokes two other policy lessons that harken back to its domestic experience. The first lesson reinforces the two-sided trend that SEZs can continue facilitating economic development and that the successful aspect of China’s SEZs can be transferred to other developing countries with necessary adjustments. The growing number of special manufacturing zones in Ethiopia built by China have shown expected results in inward investment, job creation and exports. This contradicts earlier studies that had showed the China-sponsored SEZs in Africa to be largely unsuccessful (UNDP, 2015). Secondly, with multiple actors including the state and private firms involved, China-built SEZs in Ethiopia point to the challenges such as ensuring high-level political commitment and support for effective inter-ministerial collaboration and integrating SEZ programs into national development strategies and plans. These features not only define China’s more successful SEZs but also reflect Ethiopia’s commitment to using them to accelerate industrialization.

At this critical time for evaluating China’s growing role in the global economy, we are only beginning to understand China’s leadership in global SEZ development. In spite of China’s success with SEZs at home, often inflated by the singular prominence and reputation of Shenzhen, we should be cautiously optimistic that certain elements and practices of China’s SEZs may be adapted to some developing countries, either inter-country policy mobility or China-foreign cooperation zones. As this potential grows from the further implementation of the BRI, it alerts us to fully assess the policy lessons of China’s SEZs that can inform and foster sustainable economic development through South-South cooperation.

This article was adapted from the author’s recently published much longer paper “Change and Continuity in Special Economic Zones: A Reassessment and Lessons from China,” Transnational Corporations 26 (2): 49-74 (2019).

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About the Author

Xiangming Chen served as the founding Dean and Director of the Center for Urban and Global Studies at Trinity College in Connecticut from 2007 to 2019. He has been Paul E. Raether Distinguished Professor of Global Urban Studies and Sociology at Trinity College and a distinguished guest professor at Fudan University, Shanghai. He has published extensively on urbanization and globalization with a focus on China and Asia and conducted policy research for the World Bank, the Asian Development Bank, UNCTAD and OECD.

Endnotes
1. “China, Laos sign railway deal”, Zhao Lei, The China Daily, 14 November 2015; http://www.chinadaily.com.cn/business /2015-11/14/content_22456633.htm.
2. “Laos and China come to terms on loan interest rate for railway project”, Radio Free Asia, 4 January 2016; http://www.rfa.org/english/news/laos/laos-china-come-to-terms-on-loan-interest-rate-for-railway-project-01042016163552.html.
3. “Employed by China,” Jenni Marsh, CNN, August, 2018; accessed from https://edition.cnn.com/interactive/2018/08/world-china-africa-ethiopia -manufacturing-jobs-intl/.
4. “Chinese firm signs agreement to manage Ethiopian industrial park,” Xinhua, May 31, 2019; accessed from http://www.xinhuanet.com/english/2019-05/31/c_138103636.htm.
5. “Huajian takes over management of Ethiopia’s state-owned Jimma Industrial Park and plans to build shoemaking and coffee-processing plants,” Sina.com, June 5, 2019; accessed from http://www.timedg.com/2019-06/05/20836228.shtml.
6. “Ethiopia, China to partner to build new 300 million USD industrial park,” Xinhua, August 13, 2019; accessed from http://www.xinhuanet.com/english/2019-08/13/c_138304130.htm.

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