SEZs: Learning from China

This is continuation of my earlier posts on SEZs...

Economic & Political Weekly (April 28, 2007) has an interesting article about the SEZs in China. The learning from Chinese experience with SEZs is both instructive, and as the author points out, "frightening".

Here are some excerpts:

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Key differences with India’s policy often cited include the number of SEZs in China -ostensibly only six in total – the large size of Chinese zones and the fact that the government retains ownership over the land.... But this image of Chinese SEZs is both incomplete and, in many respects, simply incorrect. China has far more than six zones, they have by no means been an unqualified success, and they have brought about severe economic and social problems.

Economic Indicators

Even from the narrow perspective of economic indicators, Chinese zones have not had uniformly positive results... the investment in SEZs was driven by capital from Hong Kong, Macao and to some extent Taiwan; 88 per cent of the new ventures in the SEZs in the early 1980s were by investors from Hong Kong and Macao. By 1995, 96 per cent of Shenzhen’s textile industry and 95 percent of its garments industry were owned by Hong Kong investors. No such sources of convenient foreign capital exist for India....

Speculation and Land Loss

Perhaps the biggest concern about India’s SEZs is the potential for real estate speculation and loss of agricultural land. The Chinese experience on this is both instructive and frightening... by 1991 administrative allocation of land gradually gave way to property markets, with SEZs leading the way....

These markets are, in some respects, uncannily similar to those in India. In China, urban land belongs to the state and rural lands to the village commune, though families had been given individual contracts to their lands as part of the village commune reforms in the 1980s. Only urban land use rights could be transferred to private parties; rural land use contracts could be transferred only to the state, which then could change it to urban land and sell development rights on it. As the Chinese state swung in favour of big business, this system made farmers’ tenure insecure, especially in areas near expanding municipalities and within SEZs. Despite periodic revisions to the compensation standard, compensation for land acquisition was generally lower than the already low “market” value of these lands. Large-scale informal negotiations for land and administrative intervention also distorted the “market”...

The similarities with India’s land market are strikingly apparent. In China, this produced a speculative market in land rights with requisition by the state followed by rapid transfer through speculators... This large-scale transfer of land to developers was partly driven by “zone fever”, namely, the rapid multiplication of zones as a result of continual promotion of SEZs as models...

...The Hainan SEZ is a particularly striking example. In 1992, The Economist reported that Hainan was the “world’s biggest speculative bubble”; Hainan had “few industrial firms and little industrial output”.

"Everyone in Hainan has money to burn... Nobody any longer keeps track of the number of 30- and 40- storey office buildings being put up”, declared the magazine, stating that “This is not happening because anybody actually wants to use the space. Whole floors, indeed most floors, of the office buildings are empty, and practically none of the new flats and villas are lived in. What is going on? Speculation, almost pure and simple, and tax evasion.”

... In June 1998, the Hainan Development Bank, the main banker to the provincial government, closed down under bankruptcy. It was followed soon after by the Guangdong International Trust andInvestment Corporation of Guangdong province, where Shenzhen is located; this was the largest bankruptcy since reforms began...

Labour Abuse

In addition to real estate speculation, ... abuse of labour is rampant in Chinese SEZs. Seven million people out of Shenzhen’s total population of 12 million are migrant workers, with almost no legal or social protection... data for the Guangdong province, home of Shenzhen, shows very high death rates among industrial workers and more than 5,00,000 child labourers – a phenomenon which had been greatly reduced in post-revolutionary China. In 2003, at least half the firms in Shenzhen owed their employees wage arrears, and at least one-third of Chinese zone workers received less than minimum wage... Indeed, Shenzhen workers are so desperate that despite the lack of any independent unions, more than 10,000 wildcat strikes took place in 2006 alone.

This labour abuse is accompanied, unsurprisingly, by crime. Shenzhen now has a crime rate that is nine times higher than that of Shanghai, and is notorious for the trafficking of women and sex trade. Relaxed customs have also led to large-scale smuggling; two of the original zones, Shantou and Xiamen, were hit by massive tax and smuggling frauds in 2000 and 1999 respectively...

Etc. etc.....
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There is, indeed, much to learn from Chinese experience of SEZs, isn't it?