1 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…

2 Just Imagine… And you see this….

China’s Economic Growth and Special Economic Zones: A good thing? Aaron D. Brooks NS Mar 08

4 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

5 Special Economic Zones (SEZs) “It doesn’t matter whether the cat is black or white, as long as it catches mice.” -- Deng Xiaoping ( ) 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

6 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%)

7 Where is this Shenzhen Place?

8 Shenzhen SEZ Land area: 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 ( ) Shifted development inward for comparative advantage (land/labor costs)… “ripple effect” By 1994, more FDI than target for 2000 ($5.35B) B/t , real growth 35.5% (China 10%)

9 State Investment in Shenzhen SEZ “If you build it, [they] will come.” -- Field of Dreams

10 Shenzhen SEZ FDI “Show me the money!”

11 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

12 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

13 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

14 Conclusion Questions?