One of the most intriguing questions is why did the special economic zones (SEZ) in China succeed. They are the brainchild of Deng Xiaoping, the paramount leader of China. As a former state leader, he was instrumental in bringing the country out of the chaos and turmoil of the Cultural Revolution. With a strong government, he led the nation toward reform and prosperity, resulting in the creation of SEZs.
The Chinese government has long sought foreign investment, and it has succeeded in attracting them through SEZs. Today, there are over 2,500 SEZs in China, ranging from small business parks to cities with millions of inhabitants. According to the World Bank, these zones contribute nearly two percent of the nation’s GDP, forty-five per cent of its FDI, and 60 percent of its exports. Now, China is hoping to export its success by creating SEZs in other countries.
After the initial SEZs, the Chinese government decided to expand the program to broader areas. In 1984, the government designated 14 coastal cities as SEZs. The SEZs were open to foreign investment and trade. As an added benefit, they were able to offer tax benefits to foreign investors. The Chinese government even allowed these cities to import equipment and technology tax-free. Because of their success, the SEZs were a catalyst for rapid economic development and helped China attract millions of new foreign companies.
After establishing the first four pilot SEZs in the 1980s, Deng Xiaoping opened up the coast to foreign investors. These “open” cities were similar to the SEZs, but they were more open and had higher corporate income taxes. In 1989, Hainan Island became a separate province, and the Pudong area of Shanghai municipality became a SEZ. The SEZs have played a pivotal role in China’s market oriented reforms, and by 1993, FDI had increased thirtyfold to $672 million USD. By 1992, economists estimated that SEZs accounted for fifty to eighty percent of China’s GDP growth.
The success of the SEZs in Shenzhen paved the way for other SEZs to follow. Zhuhai never achieved the same astronomical growth, but its success had a dramatic impact on the pace of economic development throughout the country. The government’s success in Shenzhen led to a massive expansion of the SEZ program in other parts of China. This included the three river deltas of the Yangtze, and Hainan Island.
In the 1980s, China added Hainan Island to the list of SEZs. In 1984, the government also made 14 “open coastal cities” that enjoyed similar benefits to the SEZs. These cities can approve investment projects and offer foreign investors incentives. These open coastal cities have a lower tax rate, and their business enterprises can import technology and equipment tax-free. In addition, SEZs are considered the ultimate economic success story in China.
The initial SEZs of China were designed to stimulate economic development. The most successful SEZ in the country was Shenzhen, a pilot zone established by Deng Xiaoping. Within the first twelve years of its creation, Shenzhen attracted more than $4.3 billion USD in FDI each year. It now boasts one of the largest electronics factories in the world.
The SEZs were created as a way to attract foreign investment to the country. In addition, the Chinese government also opened 14 cities along the coast to foreign trade and investment. These “open” cities had similar incentives to the SEZs, though their corporate income tax rates were higher. In 1988, Hainan Island became its own province, while the Shanghai metropolis’ Pudong neighborhood became a special economic zone.
The first SEZ to be established in China was Shenzhen. The city’s population grew from 314,000 to 12.5 million in less than 40 years. The SEZs were the first markets in the country. By 1992, FDI had increased thirtyfold, and the city’s economy grew to become a highly competitive and prosperous region. This was a great success, and the success of other SEZs in China was based on the fact that they were modeled after this model.