What the U.S. can learn from the success of China’s special economic zones

Tempo de leitura: 2 minutos

Developed countries are struggling to tackle growing geographic inequality, a phenomenon fueling populism and discontent at the polls in Europe and the United States. In the face of economic change, large, globally connected cities have thrived, while many former industrial hubs have shrunk. Governments are now looking for ways to help these “left-behind” regions. 

Traditionally, policymakers in the West have relied on “people-based” methods to precisely target families facing economic hardship with cash or benefits like health insurance. But given the social unrest and deep inequality that still persist, some are now turning to place-based policies to spur job growth and investment in specific neighborhoods, municipalities, and regions.

A recent paper in the American Economic Journal from economists Yi Lu, Jin Wang, and Lianming Zhu examines perhaps the most ambitious attempt by a country at this type of policy: China’s Special Economic Zones (SEZs). As the Chinese government has transitioned from a centrally planned command economy to one with a much larger role for markets and private ownership, SEZs have been a cornerstone of its national development strategy. The hundreds of zones spread throughout China act as semi-autonomous economic clusters that sustain a mixture of private and state-supported businesses. 

With a goal of fostering growth and innovation, firms in Special Economic Zones receive a slew of financial benefits, including special corporate income tax rates, discounted land-use fees, and prioritized loan applications with domestic banks. Administrators grant larger benefits to exporters, firms with foreign investment, and technologically advanced companies.

Using a census of manufacturing firms taken both before and after the establishment of SEZs in the mid-2000s, the authors employ a series of statistical techniques to compare the outcomes in SEZs to nearby or similar areas that were not directly impacted by the policy. Lu, Wang, and Zhu find this round of SEZs generated significant positive effects on investment, employment, output, productivity, and wages when compared to similar non-designated municipalities. 

They calculate that increased corporate profits and wages exceeded foregone corporate tax revenue by roughly $16 billion. Moreover, the authors find that most of these gains came from new firms rather than the expansion of incumbent firms. These results suggest that SEZs generated new economic growth that exceeded their cost to the government.

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