Anurag Viswanath & Manoranjan Mohanty: SEZ lessons from China

India seeks to emulate China's SEZ policy though it is increasingly under attack there.

Deng Xiaoping's emphasis on "One Focus, Two points" "" focus on Economic Construction, Reforms-and-Open Door and Four Ideological Principles "" constituted a turning point in China's economic history. The Reforms-and-Open Door strategy steered China's economic destiny, and catapulted it on the road to becoming an economic powerhouse. Reforms (Gaige), began in the countryside with the introduction of the Household Responsibility System (HRS) in agriculture, a policy which entailed a break with communes and accelerated the development of rural industries. The success of rural reforms propelled a bold experimentation in other key sectors. Open Door (Kaifang), on the other hand, was envisioned to throw open China's doors "" which had remained closed and confined in the socialist cloister to the outside world "" to foreign capital and technology. An important component of Open Door was the creation of SEZs.

China's experimentation with SEZs began in the backdrop of the end of Mao era and the reinstatement of Deng Xiaoping. Mao had established the defense-oriented Third Front, which meant concentration of capital projects in the interior region (Third Front), avoiding both the First and Second Fronts (coastal and adjacent areas). Deng Xiaoping believed that China needed to open up and prioritised developing the coastal region (southern and eastern) for foreign investment. Rather than throwing the doors wide open, these coastal areas were envisioned as "small environments" (xiao huanjing) which were to serve as experimental testing grounds of foreign capital. The spread effects, it was envisaged, would trickle to the interior. The idea was simple "" tap the comparative advantage of the dynamic coastal belt.

Deng quite often claimed that reform and opening up was without a blueprint of action, but the strategic positioning of the first SEZs in 1982-84 shows that neither the strategy nor the vision was accidental. Shenzhen (opposite Hong Kong), Zhuhai (opposite Macau), Xiamen and Shantou (across the Taiwan straits) were carefully positioned and geo-strategically placed. The long-term vision was economic and political integration as well as investment opportunities offered by the overseas Chinese. This "same native place" (tong xiang) connection has been very critical to the SEZs' success in China and explains the massive long-term investment fuelled by the Taiwanese and Chinese in Hong Kong.

On top of the first five SEZs, 14 coastal cities (Open Coastal Cities) were opened to foreign investors in 1984. Between1984 and 1988, 12 Economic and Technological Development Zones (ETDZs) were established and after 1992, an additional 18 ETDZs were set up. In 1990, the Pudong District of Eastern Shanghai was declared an SEZ and was to spearhead the reform process. Between 1985 and 1988, five coastal economic open zones were created in the deltas of the Yangtze, Pearl, Yellow rivers; also SEZs were opened in South Fujian and the Liaodong Peninsula.

In the first decade, there was heady optimism "" SEZs seemed the most promising opportunity and panacea; in fact, local governments (provincial-level or state-level) were joining the frenzy, building nests for birds "" creating or building SEZs or developing zones (the nests) in the hope of attracting foreign capital (the birds). The SEZ boom created what the Chinese proudly showcased as the "golden coastline" (huangjin haian).

It was only later, in and after 1989 (the Tiananmen demonstrations), that the SEZ policy and its outcome was critically analysed. Though Deng's famous Southern Tour in 1992 had signalled no backtracking on reforms, by 1994-1996, critics, despairing the increasing divide between the coast and inland region, asked for a reappraisal of the policy. Building selected pockets of development had its pitfalls. While the coastal region was shining, the inland, interior western provinces were not. The boom was leading to a widening gap and uneven, skewed development "" reflecting internal colonialism, so much so that critics argued that China was two countries in one.

While SEZs contributed to economic growth, the scissors gap in prices favoured coastal provinces at the expense of the inland provinces which sent low-priced primary goods and agricultural products, which were recycled back to them as finished products at higher prices, leading to allegations of unfair, unequal competition and the lack of a level-playing field. To guard against the outflows, some provincial governments (largely in the interiors) set up administrative barriers restricting the flow of raw materials which led to unprecedented local commodity wars and protectionism. Conflicts between the central and local government and between provinces were also noted. The imbalance eventually forced the central government to drive investment westwards "" and a policy to "Open up the West" (xibu da kaifa), was announced in 2000.

Besides regional imbalance, SEZs also escalated intra-provincial divide. In well-chronicled studies of the Jiangsu province on the eastern coast, in close proximity to Shanghai, investors seeking favourable environments sought out the Sunan region (south of the Yangtze river) which outpaced Subei (north of Yangtze), creating a rich-poor, north-south divide within the same province.

There were and continue to be other downsides. Many regions eager to join the gold-rush of segmented deregulation jumped to produce consumer goods, though lacking in skills or technology base. The boomtowns also led to the duplication of sectoral development and unprecedented migration of both unskilled and skilled labour from the poorer provinces. SEZs' supposed flexible labour policies "" including contentious hire-and-fire policies and a clampdown on unionisation "" created a whole new class of poor in sweat shops and shantytowns, the infamous labour dormitory regime, and a new breed of dispossessed women who turned to prostitution or turned housemaids for a living. A regime that talks of a "people-first" policy and "harmonious society" finds the practices in SEZs most embarrassing.

More problematic was the development from above (state) and outside (foreign investors), which created entrenched cliques and interests. As zone-fever grew, clientelist and predatory local governments circumvented national laws and sold land use rights "" some of them good farmland. Real estate companies made hay, as did officials who floated companies for family and sold land to connections (guanxi). Hasty land grabs and hastier policies led to widespread protests which have not died down. Rural anger has been on the rise in recent times "" an estimated 120,000 public security-related "mass incidents" in 2006 are indicative of severe, simmering social unrest (considering the Communist Party's emphasis on social stability and order); this forced China's leadership to steer the policy towards the countryside "" a formulation of a policy called "Building a New Socialist Countryside" (Xin Nong) in 2006.

China's zone fever "" showing off prosperity in selected areas "" has abated or at least there is cautious optimism. The focus has since moved to industrial and innovation clusters, with science, technology and innovation as the new byline. As China grows in dynamic, new ways, we in India are debating about an experiment that is open to question. Trying to replicate China's success in India without taking into account the unique historical and geographical context "" of 1949-1976, of overseas Chinese investment, a strong social sector, rural reforms, internal debates about the development process and finally, a state and leadership that formulates cohesively and implements firmly "" is fraught with India repeating the mistakes.

Manoranjan Mohanty is Co-Chairperson, Institute of Chinese Studies and is currently Durgabai Deshmukh Professor at Council For Social Development, Delhi. Anurag Viswanath is a sinologist who writes frequently on China