China’s SEZs Miracle: Pakistan’s Path to Redemption

In the past 30 years, China has achieved rapid economic growth and unprecedented development in history. How did china achieve this rapid growth? What have been its key drivers? And most importantly, can China sustain its remarkable success? While policymakers, businesses, and scholars continue to debate these topics, one thing remains clear: the various Special Economic Zones (SEZs) and industrial clusters that emerged after the country’s reforms are without doubt important engines of China’s remarkable development. The state’s five SEZs namely Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan drive innovation, trade, and economic reform to promote foreign investment and development.

China found itself as the largest underdeveloped and was referred to as the Third World in the 1970s. In 1980, China’s Per Capita income was 230 USD, 30% less than Pakistan’s 280 USD at the time. Deng Xiaoping, China’s Reformist leader, knew that China had chosen an erroneous path of following perpetual revolution to achieve a communist egalitarian utopia. His decision to put China on a path of perpetual reforms, combining the goals of building a socialist society with the help of market economy and Chinese characteristics were not immediately  convincing. Deng believed that China could change if comprehensive policy reforms were introduced.

“We never permit the use of foreign capital to develop our domestic resources. And also never accept foreign loans. China has neither domestic nor external debt” [Kleinberg (1990)].

The SEZs were established to attract foreign direct investment, expand China’s exports and enhance the infusion of new technology. In fact, Shenzhen was one of the most crucial SEZs with the greatest innovations. In 1981, the four SEZs accounted for 59.8% of total FDI in China with Shenzhen accounting for lion’s share at 50.6%. In 1980-84, Shenzhen grew at 58% annual rate, followed by Zhuhai (32%), Shantou (9%), and Xiamen (13%). The country also progressively transitioned to High-tech Industrial Development Zones which promoted technology and innovation. According to UNCTAD (2019), China has estimated 47% share in total SEZs around the world. However, the Chinese model is unique, given its decentralized management structure, where committee formed by local governments has enough powers to approve FDI projects as well as regulate land and approve infrastructure improvements.

Following the success of China, SEZs became a popular tool for investment policies. In 1976 SEZs emerged in 47 countries. In 1986, the total number of SEZs increased to 3,500 across 130 countries. By 2018, this number had reached 5,400 SEZs in 147 countries, with another 500 new projects in the works. Around 89% of all the economic zones are located in developing countries. For developing countries, SEZs offer an opportunity to experiment and introduce reforms, and provide supporting infrastructure on gradual basis, since it is often difficult for them to roll these out all at once across the country. In these countries, the governments initially adopt free trade and multi-activity zones, with the primary focus on labor-intensive and export-oriented industries. They eventually moved towards specialized, innovation-oriented, and service-sector-focused SEZs.

To create a successful SEZs, a comprehensive strategy is required. The SEZs in China, have clear benchmarks and goals because they drive the overarching SEZ policy framework. Moreover, they are more likely to be successful if the goals are aligned with the broader national industrial policy, followed by a practical and actionable plan. It is imperative to have separate laws and institutional setups governing SEZs within the national legal framework. Success is not just about bringing all regulatory bodies together to streamline registration, licensing, and compliance processes. But more importantly, it is the explicitly notified preferential timelines and simplified procedures for SEZs that contribute to an SEZ’s success. In the long run, it has a strategic position and provision of infrastructure and other services of SEZs that make it successful. All the successful zones in Dubai, Singapore, China and Malaysia have quality infrastructure, whereas zones in South Korea provide recreation facilities for foreign investors. Fiscal incentives like tax holidays, duty-free imports, and exemptions on dividends and income tax, positively correlate with the zone’s performance and help it attract initial investment.  Special courts or arbitration tribunals, set up especially for swifter resolution of disputes related to zone enterprises, can be attractive for foreign investors as well.

There has been a policy debate within Pakistan about the utility of learning from China’s experience with economic production and generating trade activity through China-Pakistan Economic Corridor (CPEC). Pakistan and China have finalized nine SEZs to be developed in the first phase under the auspices of CPEC. Four SEZs, namely Dhabeji SEZ in Sindh, Bostan SEZ in Balochistan, Rashakai in Khyber Pakhtunkhwa (KPK) and Allama Iqbal Industrial City in Punjab, are at advanced stages of development. Moqpondass in Gilgit Baltistan, Mirpur in Azad Jammu and Kashmir (AJK), Mohmand Marble City in FATA, Industrial Park in Pakistan Steel Mill land and ICT Model Industrial Zone are at the feasibility stage. Historically, SEZs have been one of the main priorities of the government to initiate Pakistan’s economy on to the path of sustainable growth and development. One option for the Pakistan’s government is to replicate the Chinese model of development. However, China faced many challenges while developing its SEZs, and Pakistan might face similar ones as well. Some of the challenges might hinder the smooth functioning of SEZs establishment.  Previously, poor governance and weak institutions were major factors that have undermined the industrial base in Pakistan. The incentives offered by the government include five-year tax exemptions for zone developers, a onetime exemption from customs duty on all capital goods entering the SEZs, land tenure at cheap rates for 30 years, and repatriation of profits notably to attract FDI. The government has also proposed additional incentives for industrial zones, such as a one-window operation by Special Economic Zone Authority (SEZA), purchases of basic utilities in bulk etc. However, some of these incentives might result in revenue loss for the government, as foreign investors are often subject to income taxes in their home countries. In addition, bureaucratic inefficiency might undermine the one-window operation by the SEZA. Thus, policies should align with Pakistan considering its unique factors.

There has been a recent trend towards private zonal development. Without involving the private sector, the government will not be able to meet the higher costs, as well as entice investors. However, the government needs to demonstrate tangible commitment and build trust with the private sector.  Such bureaucratic measures hinder proactivity and need to be curtailed to encourage investment, and to allow the private sector to actively participate in developing the SEZs. According to the World Bank, Pakistan’s economy ranked 136 out of 190 in 2018 in terms of the ease of doing business. Moreover, confusion related to Pakistan’s SEZs stem from overlapping roles between the federal and provincial governments, and lack of clarity. It is important to note that Pakistan has a weak legal regime, a major hurdle when attracting foreign investments. Pakistan needs to offer strong arbitration rules in case of contract disputes. In this case, Pakistan should look at China’s experience which has drawn arbitration rules from the west and the current experiments at Shanghai free trade zone. Pakistan can learn to experiment certain policies when transitioning towards a market oriented economy. According to Acemoglu and North, strong institutions are necessary for economic growth. For this, strengthened property rights, reliable infrastructure and transparent regulatory frameworks are required to locate business to certain areas. Yet, policy analysts face political economy constraints, making it difficult to bring reforms and implement better policies. Pakistan can use its planned SEZs as laboratories for bringing the required economic reforms along with ensuring political and economic autonomy to the local management.

In the Past, Pakistan has tried to establish SEZs without success. However, this time under the framework of CPEC, Pakistan has revised its policies through experiences. Top decision-makers need to exhibit strong commitment to reforms both at the institutional and policy level.  Policies and practices on labour in connection with SEZs vary widely across countries.  After the passage of SEZs Act (Amendment) in 2016, they are entitled to enjoy a 10-year exemption from customs duties and taxes for all capital goods imported into Pakistan. Similarly, all income from the development and operations in SEZs is exempted from taxes. Improved commercial participation in SEZs can foster trust in both local and foreign investors. A working coordination between federal and provincial policymakers is also crucial. Top leadership must demonstrate strong commitment to develop institutional autonomy and flexibility to support businesses in SEZs.  Pakistan needs to have workable relationships with the neighboring countries, especially in Central Asia allowing for greater market access and open up new vistas for Pakistani products. The success of economic zones also depends on the security and socio-economic situation of the region; thus, it is essential to maintain peaceful relationship with the immediate neighbours, including India, Afghanistan, and Iran. Just as SEZs have effectively driven industrial development and growth in China, the development of green SEZs could serve as an indicator for the realization of a green development strategy in Pakistan.

The basic strategies can be:

1. Climate change mitigation priorities: The economic activities in the SEZ need to be low carbon, committing to mitigate the emissions of greenhouse gases. This may include shift to low carbon and renewable energy mix, as well as energy audits.
2. Sustainable and resilient infrastructure: Efficient use of resources in the planning and constructing the infrastructure of SEZs include resource saving technologies such as recycling system, water reuse, as well as green buildings and energy efficient systems.
3. Carbon Finance: A green financing system has a potential to provide new channels to transit to low carbon and green SEZs, such as Clean Development Mechanisms (CDMs), which can provide new source of funding to develop these SEZs.

As discussed in previous section, many developing countries have established SEZs to foster economic development which proved very successful in achieving their objectives. Pakistan’s SEZs need to create supporting business climate for foreign and domestic firms to invest. After all, it is too early to assess their performance. Many of the SEZs are still in development phase so ability to attract investments cannot be evaluated.

There are no professional or technical qualifications required to become an SEZ developer, and SEZ authorities lack experience and know-how with public-private partnerships (PPP) implementation. The state of Khairpur is example of non-functional zone due to poor business climate. However, in Pakistan, higher bureaucratic interventions with multiple interests of different stakeholders have made existing zones redundant. It is important to note that Pakistan has weak legal regime, which is a major hurdle to attract foreign investment in the country. For SEZs successful implementation, there is a need to have special attention accordingly seeing each SEZ as a separate entity and before making a policy, establishing core objective is important. It is noted that Pakistani Business community feels left out of SEZ policy design and implementation. Additionally, the machinery and capital equipment of SEZ investors are often delayed in customs clearance. China state that Pakistan’s challenges stem from execution rather than strategy. China’s observation may suggest the need for Pakistan to focus on strengthening its bureaucratic efficiency, reducing corruption and long term stability in project management.

In a nutshell, China’s rapid economic growth led by strategic reforms, export-oriented policies, investment in infrastructure with focus on innovation and governance. However, the sustainability of economic growth depends on addressing challenges like aging population, environmental concerns and adapting to shifting global economic conditions. Pakistan while attempting to learn from China’s success, has faced significant setbacks due to poor infrastructure, policy inconsistencies and weak institutional frameworks. These issues along with lack of skilled labour and unrealistic expectations have made SEZs unattractive to investors. To succeed, Pakistan needs to address structural challenges by improving policies, investing in infrastructure, ensuring security, enhancing education and skills, and strengthening local industries to fully realize potential of SEZs. While China’s growth offers valuable lessons, Pakistan must focus on its unique context to achieve similar success. Ultimately, both China and Pakistan’s paths highlights that sustainable growth is not just about opening markets but requires robust institutions, infrastructure, and a long term vision for development.