China Special Zones

CHINA’S ‘SPECIAL ECONOMIC ZONES’ KEY TO SHORT-TERM GROWTH

China’s ‘special economic zones’ helped to increase GDP by up to 10%, but they have not led to sustained higher growth rates or improvements in productivity. These are the central findings of research by Simon Alder, Lin Shao and Fabrizio Zilibotti, presented at the Royal Economic Society’s 2013 annual conference.

The study explores how China has managed to mix liberalisation and state control in being the world’s fastest-growing economy. Over the last three decades, the Chinese economy has grown at an average annual rate of well over 8%.

The researchers focus on the effects of special economic zones, where small areas of China were subject to different policies, including changes to labour laws and measures allowing foreign investment, ownership and exports. The local leadership of the zones also had the freedom to design some of their own policies.

Looking at data from 270 Chinese cities over 23 years, the authors compare the development of special economic zones with other cities. They find that:

  • The zones led to increases in the level of GDP of between 6% and 10%, depending on what type of zone and policy was established.
  • Economic activity as measured by electricity consumption and light intensity in the night sky also rose – which suggests that the official GDP numbers are accurate.
  • There is no evidence that the zones led to permanently higher growth rates or that they experienced larger increases in productivity than cities without a zone.

This research contributes to long-running debates about the right mix of free market and government involvement needed for development. The authors comment:

‘China’s active policies had strong positive effects on GDP and can be beneficial for a country at an early stage of development.

‘At the same time, our results also point to the limits of differential policy treatments as there is no evidence that GDP growth or productivity in a preferentially treated city is permanently higher’.

More…

China has been the fastest growing economy over the last three decades, sustaining an average annual growth rate well above 8% between 1978 and 2010. But this progress has been uneven across regions and sectors. This was partly due to an important feature of the Chinese development strategy, which is to combine general liberalisation and opening-up policies with targeted industrial policy.

On the one hand, liberalisation of the agricultural sector and the introduction of the ‘household responsibility system’ has led to large increases in output and lifted millions of people out of poverty. Township and village enterprises boosted output and accession to the World Trade Organization has further increased openness.

On the other hand, the state continues to play an important role in the economy by controlling strategic sectors with state-owned enterprises, distorting investments and targeting support and preferential policies to certain industries and locations.

Special economic zones (SEZ) are a particularly prominent example of the Chinese development strategy. The policy changes inside the SEZ included liberalisation of labour markets, foreign direct investment, ownership and exports. Furthermore, the local leadership of the zones had substantial autonomy in designing their policy packages and often engaged in active industrial policy.

This study uses the establishment of different types of SEZ across cities to estimate the effect of reforms with official GDP data and two alternative measures for economic activity based on electricity consumption and light intensity. It uses data from 270 Chinese cities over 23 years that make it possible to compare the development across cities and years and distinguish the effects of different types of zones.

The researchers first use data on GDP from the official Chinese City Statistical Yearbooks and find that the zones led to increases in the level of GDP of between 6% and 10%, depending on what type of zone and policy was established. There is no evidence that the zones led to permanently higher growth rates or that they experienced larger increases in total factor productivity than cities without a zone.

In a second step, the researchers use two alternative proxies for economic activity that are independent of the official GDP statistics and therefore make it possible to assess whether the reform effects are an artefact of the official GDP statistics. They use electricity consumption as reported in the yearbooks and light intensity as measured by weather satellites and find that the effects of the zones were also visible in these two alternative measures.

What can we learn from the Chinese experience about the role of economic reform and industrial policy during the process of development? Existing theoretical and empirical work suggests that the types of policies that backward countries should follow differ from those of advanced countries.

Some scholars have argued that in economies at early stages of development, there is scope for the government to support investment-oriented activities. The types of policies that the Chinese government tested inside the SEZ and partly implemented later in the rest of the economy did envisage an active role for the government. This active role of the government was crucial for the Chinese development because it supported a fast move towards more modern and productive sectors, which have positive externalities on the whole economy.

This study contributes to this body of research by providing evidence that the active policies indeed had strong positive effects on GDP and therefore can be beneficial for a country like China at an early stage of development. At the same time, the results also point to the limits of differential policy treatments as there is no evidence that GDP growth or productivity in a preferentially treated city is permanently higher.

ENDS


Contact:

Simon Alder: +41 79 625 49 01, simon.alder@econ.uzh.ch

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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