Chapter 1 Introduction

Section 1：Research background

Free Economic Zones（FEZs）have a long history in helping developing economies. According to Meng（2005a），“many kinds of areas with special economic privileges-like the right to raise lower taxes-have been established since the 16th century”. In addition，these “geographically defined zone[s] where certain economic activities are especially allowed and where free trade and other preferential policies and privileges different from the host country are granted” are called FEZs. After the Second World War，various different types of Free Economic Zones（FEZs）with different objectives were set up throughout the world in order to boost domestic economies. However，as Meng（2003）stated，“until the 1960s，however，these FEZs only played a minor role in the world economy”. Since then，“a variety of new models has been developed，and their importance has risen on a global scale”. According to Meng（2003），the modern type of FEZs began with Export Processing Zones. The first two Export Processing Zones（EPZs）as a form of FEZs were established in Ireland and Taiwan in the 1960s as a result of the relocation of industrial production between developed countries，and from developed countries to less-developed countries. China saw its FEZs established in 1978. Unlike FEZs in other countries，FEZs in China also have a special responsibility in testing the country’s new economic policy and in helping transforming the economic system. It is believed that FEZs in China are thus more significant than those in many other countries. The brief historical review below will help to understand this.

1.1 1949-1978：Poor Economic Performance

China，as the third largest country in terms of its area，and with the largest population in the world^[1]，used to be a country with a closed and centrally-planned decision-making economy. Under the socialist economic system，the development of the Chinese economy developed far slower than those of the capitalist markets of the west. Nevertheless，some authors such as Lin and Koo（1991）and Guo and Liu（2007）used different economic statistics to demonstrate how the success of the Chinese economy had been boosted，and how a good foundation had been built up prior to 1978. They nonetheless acknowledge that people’s living standards did not increase as fast as the statistics suggest. Both of these pairs of writers have recognised that the economic figures were misleading，and the country was lagging behind as its economic efficiency was so low.

As Guo and Liu（2007）note in the abstract of their article^[2]，“the 30 years before the reform and open policy witnessed the glorious achievements of China’s socialist construction，and laid a foundation for further development. Simultaneously，with an undeveloped economy，China was devoted to improving the living standards of the people，providing its people with the maximum potential to enjoy the advantages of economic growth. However，behind the promise of high-speed economic growth，improvements in the standards of living could not keep pace with the economic growth，and the disparity between China and the developed countries grew，and it paid a heavy cost for economic growth”. Guo and Liu（2007）also provided several external reasons to explain why China had this experience，and these are analysed and explained. However，there are several factors that were not taken into account before they obtained their results. First，they used the increase rate（%）as the only yardstick to measure how the Chinese economy was progressing. However，they did not recognise that the 6% average economic growth rate from 1952-1974 might not be a high rate for a country which had just emerged from war，as the original Chinese economy had largely been destroyed by the 2nd World War and the Civil War. What is more，they failed to answer the question of what Chinese economy would be like if China started to roll out a market-based economic system from that time：would it be better or not？Finally，the issue of GDP per capita should also have be considered，but in terms of increase rate only.

However，this is beyond the scope of this thesis；what needs to be affirmed here is that in China，before the “opening up”，various revolutionary activities carried out by the CCP^[3]（e.g. Great Leap Forward，Cultural Revolution and so on）badly damaged the economy of the country. Consequently，the country developed slowly in an unhealthy way，and people’s living standards were low.

1.2 Policy Changes with Deng Xiaoping-Transition from State Control to Market

When Deng Xiaoping became the leader of China，things began to change in China. He reformed the economic structure fundamentally，and led the Chinese economy towards a new direction of growth under a “socialist-market economic system”. The economic and political reforms initiated by Deng Xiaoping led to a remarkable economic growth and structural changes in the national economy. China’s closed economic policy pre-1978，which was based on import substitution（IS），was replaced by a policy of openness（Sun and Meng 1990）. This transformation included reforms in macroeconomic management and the functions of the government. The core of the “open-door” policy was the establishment of special “free” or “open” economic zones. Large areas and numerous industrial sectors，particularly those near the coast，were opened to foreign investors. Numerous preferential policies were formulated and exploited in order to attract foreign investors. The aim of the reforms was to link China’s economy to the world economy，and to enable China to play a more important role globally. These FEZs were not only used as a tool to effectively enhance the economic performance of the country，but also used as a tool to promote the transition from a centrally-planned and governed community to a socialistic market economy within the global economy.

The first four FEZs to be established in China，also known as Special Economic Zones（SEZs），were set up in the south coastal region as an experiment and on a trial basis. 6 years later，the Economic & Technological Development Zones（ETDZs）were set up in 14 coastal cities from the south to the north，based on the successful experience of SEZs，as a step to enabling further opening up. The Pearl River Delta（PRD）region was opened between 1985 and 1987. From the 1990s，more FEZs were established，and they spread from coastal areas to interior areas. By the end of 2010，the number of SEZs totalled 5 and the number of national level ETDZs 116. Besides these two types of FEZs，the number of other different types of FEZs has been growing since the 1990s. These different types of FEZs are：High-Tech Industrial Development Zones（HIDZs），Free Trade Zones（FTZs），National Tourist and Holiday Resorts（THRs），National Border and Economic Cooperation Zones（BECZs），Taiwan Investment Zones（TIZs），National Agricultural Hi-Tech Industrial Demonstration Zones（AHIDZs）and Export Processing Zones（EPZs）.^[4]

Since the initial implementation of SEZs in 1978，China has maintained a high economic growth rate，and GDP per capita has continuously grown. Furthermore，China has been changing the ways in which it has been developing its economy. The establishment of the FEZs constitutes one of China’s most important steps towards the liberalisation of its economy，signifying a milestone in China’s integration into the world economy. FEZs marked a deep structural reform in China because they put an end to the monopoly of the planned economy，and replaced it with a hybrid system which includes，albeit largely limited to the FEZs，a capitalist economy and socialist politics（a socialist market economy）. China’s FEZs have become the engines to promote the economic development at both national and regional levels. They have also become the bases on which to foster the experiences necessary for the open policy and the structural reforms in China. Therefore，FEZs can be used as keys to the understanding and explaining China’s sustained economic growth，its unbalanced regional development and integration into globalisation.

Since the first group of 14 ETDZs was established in 14 coastal cities，increasing numbers of ETDZs have been established in more Chinese cities from the coast to inland. The number of ETDZs in China far exceeds the number of SEZs.^[5] However，most of the literature focuses on studying the SEZs but ETDZs. Although ETDZs are the FEZs which use SEZs as a model to push the economic development and economic transition processes forward，they are all different types of zones. The objectives，characteristics and the ways they operate and exist are also different. The SEZs are actually special economic cities，not zones. And，ETDZs are regarded as the main driver for China’s boosting of the economy and accelerating the transition of the economic system. Therefore，the developmental experiences of ETDZs warrant study，and their lessons are more valuable to be learned than those of other zones.