China in Transition
China's Special Economic Zones: Lessons for Japan
Chi Hung KWAN
Consulting Fellow, RIETI
The Council for Economic and Fiscal Policy is currently deliberating the introduction of special economic zones in Japan, in order to vitalize the Japanese economy. The idea is to introduce actively foreign businesses and capital, through the establishment of specific areas, which will be granted preferential measures, such as tax concessions. Economics Minister Heizo Takenaka admitted that this concept has been induced by the experiences of China. So, what can Japan learn from China's experiences?
In 1980, when reform and opening in China was at an early stage, Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen (Amoy) in Fujian Province were designated Special Economic Zones. Hainan Island was added to this list in 1988. In these Special Economic Zones, infrastructure has been built through government funding, and preferential measures were adopted regarding income tax, the import of raw materials and the introduction of foreign capital. The zones were to act as windows for economic exchange between China and the outside world, and as a "laboratory" for experimental reforms, they were expected to play a role as models for other regions to follow.
For China, which, until the late 1970s, had adopted a policy of near isolation from the international community, the establishment of the zones provided a place where goods, people, money and information could be introduced from other countries. By concentrating infrastructure investment and foreign capital in specified regions, efficiency was achieved in investment and administration on the one hand, while on the other hand it was possible to minimize the "corruption by capitalism" that concerned the country's leaders.
In the Special Economic Zones, various experiments have been undertaken, including drastic systemic reforms. In the early days, one of the advantages of the Special Economic Zones was that they enabled the implementation of reforms, even though it was not known whether or not a successful outcome could be achieved. Through implementing reforms only in limited areas, in cases where reforms ended in failure, the adverse repercussions could also be mitigated. In cases where reform proved successful, it was also possible to disseminate the successful practice to other regions in the country. In addition to the preferential policies for foreign capital, initiatives toward price liberalization, the free purchase and sale of land-use rights and the privatization of state-owned enterprises within these Special Economic Zones provided a model for the rest of the country.
Furthermore, the zones have served as a model for reform and opening for other regions. In particular, at the time when reforms fell into a period of stagnation in the wake of the Tiananmen Square incident, in the spring of 1992, Deng Xiaoping, visited Shenzhen, where he gave a series of talks advocating further reform. In those days in China debate was split between "Mr. Zi" (capitalism) and "Mr. She" (socialism). Yet based on the remarkable development that had taken place in the Special Economic Zones, Deng was able to quieten the voices of the conservatives and put the reform and opening process back on track.
Given the successes of the Special Economic Zones, however, their historical role is now coming to an end.
In the first place, the special privileges granted to the Special Economic Zones are now being applied to other regions. In fact, the reform and opening of China has begun from the starting "points" of these zones, and has proceeded to draw a "line" through the coastal regions, and is now spreading to form a "plane" with expansion into inland areas. In particular, through accession to the World Trade Organization (WTO), China's economy has now entered a stage of full opening, and as a result the Special Economic Zones are becoming less and less special. While some of the preferential policies for the zones that are in breach of the WTO's non-discriminatory principles must be gradually phased out, other regions are now in a position where they can directly develop overseas business with the same terms as the zones. As a result, the appeal of investing in the Special Economic Zones is now dwindling and the direct investment that originally was concentrated in the zones at the outset of the reform and opening policy in China is spreading to other regions.
In addition, since the mid-1990s, more and more people have started to question whether the Special Economic Zones should continue to be ensured of their special privileges. In particular, given the fact that the economic differential is growing between the different regions of China, there has been rising demand that the government should be giving priority to the development of rural and inland regions, which have been late to develop, rather than to the zones. In response, the central government is gradually reallocating fiscal resources from the Special Economic Zones to inland areas.
In this way, the stage where the Special Economic Zones developed dependent on preferential policies from the central government is now over. From now on, they have to capitalize on their rich experiences from being the first to open up to the outside world and use the advantages of their "prime mover" status to create new edges in such fields as high-tech and services. Given China's experiences, if Japan is also to introduce Special Economic Zones, it should be sure to prepare in advance an agenda for an "exit strategy."
May 2, 2002
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