The Hindu Business Line : Two nations, two SEZs, two tales

"Imitation may be the best form of flattery, but imitating China's SEZs, set up in a socio-political-economic environment very different from India's, is not necessarily the best way to go forward."

A tectonic divide has been created in the country by the government's policy on Special Economic Zones. It runs across political parties, economists, civil activists and even ministries.

It was the brainchild of the late Murasoli Maran, who was impressed by what he saw in Guangdong during his visit to China and decided, on his return, to put it in the Exim Policy 2000.

It took five years for the SEZs Act of 2005 to take shape and a few more months for the Rules to be framed. Then came the flood of applications seeking approvals for SEZs across the country. States vie with one another to set up SEZs and large industrial houses wear approvals as badges of honour.

"Early birds" began to acquire land from hapless farmers at throwaway prices in cahoots with local authorities. The surge in land `deals' disturbed public opinion and created fear among economists over the adverse impact on agriculture, in particular food security.

Chinese vision of SEZs

What is missed in the debate is the vision of SEZs the Chinese had when they embarked on the strategy in the late 1970s, and its relevance for India. It seems to be an attempt to cut-and-paste a stereotyped version of China's SEZs on Indian policy. Unfortunately, China's policy was not etched in stone.

The historic decision on economic reform and opening was taken in 1978 at the 11th Communist Party meeting and SEZs flowed from it. Four SEZs were set up in 1980: Three in Shenzhen, Zhuai and Shantou in Guangdong Province, and the fourth at Xiamen in Fujian Province. Significantly, these bordered Hong Kong or were across Taiwan and Macao having close links with Chinese communities there and commercial networks.

Advocates of the policy led by Deng Xiaoping stressed its `experimental' nature and its role in developing state capitalism, which was viewed as a precondition for socialist modernisation. Hardcore socialists warned of the adverse impact of an `open door' policy, especially erosion of socialist relations of production.

The sceptics acquiesced when a longer-term strategy was unveiled by the Party high command.

Long-term strategy

It synthesised three elements. The first was that having regard to the record of political upheavals and uncertainty in China, foreigners would not invest in major cities. The second was the fear, rather a concession to hard-core dissenters, that economic and political risks would be higher if major economic centres, which had been sheltered for decades, were exposed suddenly to foreign investment. Finally, the historical mission of China to reclaim sovereignty of Hong Kong, Taiwan and Macao and integrate them with the mainland.

When Deng commenced the experiment in the late 1970s, he declared that he had no road map. He was tentative, hesitant and would move cautiously, "like crossing the river by feeling the stones under the feet." The locations of the SEZs were chosen with thought. They were on the southern coast and linked to Chinese territories and community networks. They had no record of industry or infrastructure and were thinly populated. They were chosen to reduce the risk of political and economic fallout with the intention of abandoning them if they were unsuccessful and extending them to others if successful.

Chequered record

The SEZs had a long and chequered record in China's development. Sadly, there are several myths attached to them. India's model is influenced by these myths. It did lean on the market but was not driven by it. The SEZs did not succeed in a decentralised manner but required regular monitoring and refurbishing by the Chinese government.

In the initial years, from the early to mid-1980s, the record of SEZs was poor. It was no doubt the transition stage. They failed to step up exports or attract foreign direct investment and technology. Low-value items were produced. There were bribes and real-estate scandals. Deng was on the defensive.

In 1984, Beijing reoriented its reform policy and designated 14 coastal cities and extended SEZ preferences to what were called `open regions.'

This led to a shift in FDI flows away from the SEZs. By the end of the 1980s and the early 1990s, Beijing extended the `open regions' to the `three deltas' — the Pearl River Delta, the Minnan Delta and the Yangzi River Delta, the Hainan province and the Pudong area in Shanghai.

Pudong was considered an "SEZ among SEZs." Open areas reached from south to north all along the coast. The much-publicised Deng's visit to the Southern provinces in 1992 was another landmark and led to radical opening of new areas and sectors.

Opening up of China

When a very large part of China was opened up, the relative importance of the SEZs declined. No doubt, this vindicated Deng's vision of treating SEZs as `experimental' and extending them to other areas gradually.

However, as later developments would show, the Chinese were moving away from the SEZs. They were concerned about rising income disparities and lack of regional imbalances. They are considering a new law to level the field between the foreign and domestic firms and to increase government's receipts.

Alongside the SEZs, the government set up smaller and more focused economic and technological development zones (ETDZs) in other Southern provinces and in the inland and western region. Following public demand, there followed high-tech zones, science and technology parks, incubation centres, industrial parks, etc.

Though there was abuse and mushrooming and overlap of these facilities, they were funded from public sources and contributed to higher production and exports. When the SEZs were marginalised, there were other zones, some of them more focused and larger, which could take over the role.

In India, it is doubtful whether the current policy would lead to similar support structures, especially as the zones are privately funded. China's SEZs were based on exports and after initial delays they did perform. There were global factors, which contributed to their stellar role.

The most important was the presence of overseas Chinese with their financing and trading networks. They could shift production from Hong Kong and Taiwan and also send large amounts of capital to finance exports.

The other wave flowed from the multinational corporations' strategies to relocate labour-intensive segments of manufacturing (especially electronics) in low-wage areas.

The last was the booming American economy and the New China Policy, which allowed open access to the US market. These have lost their relevance since . China's integration with Hong Kong and Macao is complete. In fact, the SEZ strategy contributed to it greatly. The multinational production strategy is no longer confined to any country in Asia or to any commodity. Now the corporations are able to play one country against another and no nation, except perhaps China, has special advantages.

The US economy is sluggish and is no longer taken as the engine of growth. China itself is reshaping its strategy and looking more inwards to domestic demand to sustain its development. Thus, if India hopes to gain any advantage through SEZs for exports, it is chimerical.

It is tale of two SEZs that have little in common. As Prof T.N. Srinvasan of Yale University remarked, "Imitation may be the best form of flattery, but imitating China's SEZs, that were set up in a socio-political-economic environment very different from India's, is not necessarily the best way to go forward." (Economic Performance and Reforms: First Year of UPA Government, May 26, 2005.)

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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