Special Economic Zones: How one city helped propel its country’s economic development

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Richie Santosdiaz, Executive Economic Development Advisor, The Corporate Group

• Special Economic Zones (SEZs) have been established to liberalize economic regulation in a country and promote economic development.
• Schenzen’s SEZ in China is a success story and the country, which has several SEZs throughout its landmass, has prospered and reduced extreme poverty.
• Successful SEZ implementation is dependent on several factors including government support, sector focus, innovation and long-term vision.

Special Economic Zones (SEZs) have been around since the 1950s. Shannon Airport in Ireland, Dubai South in the United Arab Emirates (UAE) and Xiamen in China are just some examples. However, through pro-globalization work, their importance can be truly felt.

Vehicles for growth

According to PriceWaterhouseCoopers (PwC), there were 845 SEZs in 93 markets worldwide in 1997, growing to 5,400 zones in 147 markets in 2018. States have used these areas, which have special economic regulations separate from the rest of the country, to help bolster economic development. China has been one of its main proponents.

The country has grown from being a closed economy with little interaction beyond its borders to ranking as the second-largest economy after the United States with such growth due to economic development spread across different verticals.

If done well, SEZs are a great vehicle for international trade and foreign direct investment (FDI) to drive economic development. They reassure investors and those exploring business in a particular jurisdiction that the mitigation of risk can be reduced or eliminated in a market. From the proper infrastructure (i.e. seaports and airports) to legal exemptions provided by the host country or alignment with Western models, SEZs have been used as a bridge to encourage and accelerate the development of trade and investment.

Shenzhen Special Economic Zone

Few may remember when Shenzhen wasn’t China’s largest city – 17 million people in 2020 – but a humble fishing village of 30,000 over 40 years ago.

In 1979, it became one of China’s first SEZs and began attracting increasing numbers of people searching for employment, leading to overpopulation. While most Chinese cities were still developing their manufacturing base, Shenzhen had developed a strategy to transition its economy.

Over 90,000 foreign enterprises have been established since economic reforms began in China.—Richie Santosdiaz

Between 2012–2016, the cultural and creative industries grew on average 14% annually; in 2016, they represented 10% of Shenzhen’s GDP. The former humble fishing village has received nearly $300 billion in FDI and over 90,000 foreign enterprises have been established since economic reforms began in China.

Shipping and logistics arguably played a large part in its success, benefiting from a good location and proximity to the British colony Hong Kong, a source of most of its investments, high technology and financial services. Shenzhen initially attracted significant manufacturing, its location enabling it to export to the rest of the world and become a major manufacturing hub.

It spurred its economic development by attracting high-value and knowledge-intensive sectors like high technology and financial services and is home to world-renowned Chinese innovative brands such as Huawei and Tencent.

China is the world’s largest country by population – at present, over 1.4 billion people, according to the UN. In 1978, when economic reforms were introduced, there were over 975 million people living there, with 250 million belonging to the rural poor. However, after reforms were introduced, the population classed as poor decreased to 32 million by 2000, according to some measures. In 2021, Chinese President Xi Jinping announced that China had eradicated extreme poverty.

Successful SEZ implementation

China and Shenzhen are success stories when implementing SEZs that promote economic development. And there are lessons other cities and countries can extrapolate from the Schenzen example:

SEZs need government support from strategy to implementation

The government must work with other relevant stakeholders, including national, regional, local and private-sector. This process of input and collaboration must take place from developing the SEZ strategy to implementing it with measurable key performance indicators.

Areas should focus on sectors

There may be a better chance of excellence if an SEZ focuses on specific sectors. It was understood that Shenzhen’s SEZ was advantaged by its geographical location with shipping and logistics enabling it to become an important manufacturing hub for the world as its foundation. Later, it could focus on technological innovations. The city’s economic development and diversification then grew organically.

SEZs must foster innovation and creativity

When Shenzhen opened to the world, it attracted people from across China at a crossroads – a generation slowly coming to terms with a free market that encouraged entrepreneurship. This openness allowed for creativity and innovation by migrating entrepreneurial talent, who developed some of China’s most innovative products and services with Shenzhen as their base.

Long-term vision

Jurisdictions can move beyond just an idea and implementation through a long-term vision of further innovating, with or without an SEZ. In the case of Shenzhen, being a global manufacturing hub wasn’t its game plan and as a result, it is a centre of high knowledge and innovation that has included the likes of Huawei in its destiny.