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Special Economic Zones and Economic Transformation the Case of the People's Republic of China

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Special Economic Zones and Economic Transformation the Case of the People's Republic of China Special Economic Zones and Economic Transformation The Case of the People's Republic of China Dissertation zur Erlangung des akademischen Grades des Doktors der Wirtschaftswissenschaften des Fachbereichs Wirtschaftswissenschaften der Universität Konstanz Eingereicht von Claus Knoth Konstanz, März 2000 Tag der mündlichen Prüfung: 25. Mai 2000 Referenten: Prof. Albert G. Schweinberger, Ph.D. (Konstanz) Prof. Dr. Carsten Herrmann-Pillath (Witten / Herdecke) - 2 - ______________________________________________________________________________________________ Table of Contents Table of Contents ..............................................................................................2 List of Abbreviations ........................................................................................4 1 Introduction.......................................................................................................5 2 Transformation, FDI, and Special Economic Zones....................................12 2.1 The Transformation Process .............................................................................12 2.2 The Role of Foreign Direct Investment ............................................................17 2.3 SEZ - Institution and Effects.............................................................................20 3 The Reform Policy in China...........................................................................39 3.1 The Historical Development .............................................................................40 3.2 The Political Process in China ..........................................................................57 3.3 The Development Objectives of China.............................................................59 3.4 FDI and its Role in China's Foreign Trade .......................................................62 3.5 The Role of Ethnic Chinese as Foreign Investors.............................................69 4 Domestic and Foreign Interests in SEZs.......................................................78 4.1 The Political Economy of SEZs........................................................................78 4.2 Foreign Investors Interests ................................................................................80 4.3 Information, SEZ and the Investment Decision................................................84 4.4 SEZs as Laboratories.........................................................................................88 4.5 China's Negative Experiences with Foreign Capital.........................................92 4.6 The Development without SEZs .......................................................................95 5 The Development of the SEZs in China........................................................97 5.1 The Shenzhen SEZ............................................................................................97 5.2 The Zhuhai SEZ..............................................................................................113 5.3 The Shantou SEZ ............................................................................................125 5.4 The Xiamen SEZ.............................................................................................134 5.5 The Hainan SEZ..............................................................................................144 5.6 The Five Zones in Comparison.......................................................................153 6 Theoretical Analysis of SEZs .......................................................................161 6.1 The Modelling of Special Economic Zones....................................................162 6.2 Two Sector Models .........................................................................................167 6.3 An Extension...................................................................................................175 6.4 Multi-sector Models........................................................................................180 6.5 Special Economic Zones and Intermediate Inputs..........................................190 6.6 SEZ and Unemployment.................................................................................195 - 3 - ______________________________________________________________________________________________ 6.7 Conflicts from Further Reforms......................................................................197 6.8 Regional Aspects of SEZs...............................................................................199 7 Empirical Evaluations ..................................................................................202 7.1 Cost-Benefit Analysis .....................................................................................202 7.2 Inter-Regional Impacts of SEZs in China.......................................................209 7.3 Foreign Producers and Domestic Suppliers ....................................................214 8 SEZs as a Policy Instrument - A Summary ................................................219 8.1 SEZs in China .................................................................................................220 8.2 Policy Recommendations................................................................................228 8.3 Outlook............................................................................................................234 Appendix: Incentives for Foreign Investors ...............................................236 References ......................................................................................................241 Zusammenfassung.........................................................................................249 - 4 - ______________________________________________________________________________________________ List of Abbreviations ASEAN Association of South East Asian Nations CCP Chinese Communist Party CEE Central and Eastern Europe CICT Commercial and Industrial Consolidation Tax CITIC China International Trade and Investment Corporation CMSNC China Merchant's Steam Navigation Co. COMECON Council for Mutual Economic Assistance DFI Direct Foreign Investment DZ Domestic Zone EPZ Export Processing Zone FDI Foreign Direct Investment FIE Foreign Invested Enterprise FTZ Free Trade Zone GDP Gross Domestic Product GOVA Gross Output Value of Agriculture GOVI Gross Output Value of Industry IMF International Monetary Fund JV Joint Venture LDC Less Developed Country MNE Multinational Enterprises MOFERT Ministry of Foreign Economic Relations and Trade MOFTEC Ministry of Foreign Trade and Economic Co-operation N.A. Not Available NIE Newly Industrialised Economy PR People's Republic RHS Right Hand Side SEZ Special Economic Zone SOE State-owned Enterprise SZSYB Shenzhen Statistical Yearbook TVE Township and Village Enterprises UNIDO United Nations Industrial Development Organisation WFOE Wholly Foreign-Owned Enterprises WTO World Trade Organisation - 5 - ______________________________________________________________________________________________ 1 Introduction In many developing and transforming countries, foreign capital is seen as one of the key instruments for a faster development or a successful transformation. It is expected that foreign investors provide the much needed capital which is not supplied in sufficient amounts by the underdeveloped domestic capital markets. In addition, foreign investors are assumed to transfer modern technology and western management techniques, increase competition and thereby increase the speed of modernisation and help to get access to markets in industrialised countries. The combination of the foreign capital with the abandoned, often underemployed domestic labour is expected to increase the value of domestic production and to have an overall positive effect on the economic development of the country. Therefore, static effects as well as a considerable influence on the future dynamics of the economy are expected. The number of countries, opening up to the outside world, switching from an import substitution to an export promotion policy has tremendously increased in the last three decades, especially after 1989 and the disintegration of the Soviet Union. The changes were partly initiated by the disappointing results of the import substitution policy in many developing countries with its limited impact on the economic development of these countries and the very slow rise of the living standards. This policy was especially popular in the 1950s and 60s (Economist Intelligence Unit 1979: 1).1 The slow growth of these countries and the rapid development of the so-called Asian Tiger countries (Hong Kong, Singapore, Taiwan and South Korea) was the source for a redefinition of the development strategy. It was assumed that there is a positive correlation between the openness of an economy and its economic growth, including the growth of the export sectors and backward linkage effects to other parts of the domestic economy.2 The Asian Tiger countries followed an export promotion policy, focussing on the active encouragement of industrial production for export markets, combining an increasing market mechanism with a strong industrial policy. Part of the policy was that trade barriers were lowered and that the countries were opened for foreign competition so that the domestic enterprises were more integrated into the 1 The idea of an import substitution is based on the work of Prebisch (1950) and Singer (1950). The central assumption of this theory is
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