The Exportation of Chinese Special Economic Zones

The rise of China is the greatest humanitarian success story since the World War II. Over 700 million people were lifted out of poverty. Much of China’s success is due to special economic zones (SEZs). SEZs allowed China to improve their legal system on a local level, without threatening the political equilibrium.

China is exporting their SEZ model. In 2006 the Chinese government indicated its plans to expand the SEZ model worldwide. They wanted to create 50 SEZs. Deborah Brautigam and Tang Xiaoyang published a paper in 2011 on China’s SEZs in Africa, where Chinese SEZs abroad are proceeding most rapidly. This video by the Economist gives a more recent look.

There are currently six open Chinese SEZs in Africa. They are located in Egypt, Ethiopia, Mauritius, Nigeria (two), and Zambia. They focus on a variety of industries, from copper processing in Zambia to textiles in Egypt. Some are completely owned by Chinese companies while others are joint ventures. Chinese companies lead the projects, with help in negotiations by Chinese embassies. Some host governments or companies have ownership shares, but Chinese companies remain the main actors.

I was unable to find much discussion of what the SEZs actually entail. Given the lack of discussion as well as the connection to China I suspect they are traditional SEZs. This means they likely have a one of more of the following; tax incentives, simplified business registration, and expedited customs.

Recent reports suggest the SEZs are not having their expected impact. The zone in Mauritius, for example, remains empty today, a decade after it was announced. Initial problems involved a group of farmers living in the zone who refused a buyout offer. Basic infrastructure for the zone was completed around 2011, but was insufficient to attract companies.

Another example of an Chinese companies investing in SEZs abroad is in Georgia. A Chinese real estate developer, Hualing, refurbished an old Soviet factory and was granted a Free Industrial Zone (FTZ). FTZs in Georgia benefit from several forms of tax exemption. Unlike Africa, this Hualing has been successful in developing their FTZ. That being said, it remains unclear whether the FTZ is part of Chinese strategy, or if a Chinese company merely took advantage of pre-existing FTZ legislation.

Hualing is also building a new city in Georgia. Currently 1,000 families live in the new city. It does not appear to have any SEZ status.

Broadly speaking China’s exportation of their SEZ model is positive, but insufficient. The SEZs have had limited success, certainly not comparable to the success of SEZs in China.

Free cities, legally autonomous cities, can improve on the missteps of the SEZs. Free cities import successful legal systems. Charter Cities are the best known version, but free cities can be privately administered as well.

Free cities offer two potential solutions which SEZs are unable to address. First, free cities can offer a home to the world’s rapidly urbanizing population. Second, free cities can improve governance in the developing world.

The UN estimates there will be an additional 2.5 billion urban residents by 2050. While many of these residents will live in existing cities. Many will turn small villages and rural lands into the cities of tomorrow. Shenzhen, for example, grew from a fishing village of 30,000 people to have 16 million residents in the greater metropolitan area.

The developing world is plagued by governance issues. SEZs tend to improve governance on the margin. However, having a blank slate to import best governance practices would lead to more investment, more job creation, and faster growth. For example, a new city in sub-Saharan Africa which uses common law would have one of the best legal systems on the continent, becoming a destination for the youthful and the ambitious.

SEZs improve things at the margin. However, the relative failure of SEZs in Africa, both Chinese and otherwise, shows bolder thinking is needed. Free cities can rapidly improve governance while providing residential areas to the new urban population. Free cities are a viable next step in the evolution of SEZs.

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