The Chinese Special Economic Zones - IBP Union · PDF fileAuthors: Emilie C. L. Jaillot -...

Authors: Emilie C. L. Jaillot - 0604952700 Oskar B. Krabbe - 0503932687

Advisor: Professor Aradhna Aggarwal [email protected] +45 3815 3374

Second Year Project BSc International Business Politics Copenhagen Business School 2015 Number of pages: 46 STU Count: Submission accepted by: _______________________________________ Date: 27/05/2015

. The Chinese Special Economic Zones - Key factors for sustainable growth in the future?

Oskar Borup Krabbe, 0503932687 Second Year Project Emilie Christine Lucie Jaillot, 0604952700

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Table of Contents

Table of Contents ............................................................................................................................... 1

1. Introduction .................................................................................................................................... 2 1.1. Contextualization and Research Question ................................................................................. 2 1.2. Structure of the assignment ............................................................................................................ 4 1.3. Key concepts ......................................................................................................................................... 4

2. Analytical Framework ................................................................................................................. 6 2.1. Philosophy of Science ........................................................................................................................ 7 2.2. Naturalism ............................................................................................................................................. 7 2.3. Constructivism ..................................................................................................................................... 8 2.4. Critical Realism .................................................................................................................................. 10 2.5. Chosen perspective ........................................................................................................................... 11

3. Sustainability of Chinese SEZs: Theoretical Perspectives ............................................ 11 4. Identifying the issue .................................................................................................................. 15

5. Methodology ................................................................................................................................ 17 5.1. Empirical data and Sources ........................................................................................................... 17

6. Analysis ......................................................................................................................................... 18 6.1. Organization Theory application: Institutionalism .............................................................. 18 6.2. Political Economy of Development theory application: Developmental State-‐ and Neo-‐liberalist theory ................................................................... 24 6.3. Comparative Political Economy theory application: Constructivism ............................. 32

7. Limitations of the study ........................................................................................................... 37

8. Conclusion and strategic recommendations .................................................................... 38 9. Bibliography ................................................................................................................................ 41 9.1. Books ..................................................................................................................................................... 41 9.2. Webpages ............................................................................................................................................. 44

Appendix I ......................................................................................................................................... 45

Appendix II ....................................................................................................................................... 46


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1. Introduction

1.1. Contextualization and Research Question

In 2014, the People’s Republic of China (PRC) officially became the world's number one

economy-‐ its real gross domestic product (GDP) in terms of purchasing power parity

exceeding the US's one1 -‐, and the previsions for its future are not any less optimistic (IMF

in Duncan & Martosko 2014). China’s GDP has grown with an average annual rate of

around 10 percent for several decades 2 (World Bank 2015) and this economic

development has not only made the country an important growth engine and a “leader in

international trade and investment” (Zeng, p.3), but has also led to profound social

progress. Since 1990, more than 650 million Chinese have been lifted out of poverty, the

child mortality has been reduced with up to 70% and the life expectancy has increased

with six years (Forbes 2014). China attaining this “unprecedented growth miracle” (Zeng,

p.1) is described as a result of Deng Xiaoping’s groundbreaking Open Door Policy reform

of 1978, which shifted the country’s economy away from being centrally planned towards

being market-‐based. Some actual policy tools of the Chinese economic expansion played a

crucial role. This is the case of the Special Economic Zones (SEZs), considerable

contributors to turning China into a magnet for foreign direct investments (FDIs) and

more generally for enhancing economic development. However, in more recent times,

SEZs face an increasing number of challenges threatening their success (Ibid., p.39). As

economic competitiveness in China increasingly moves away from low-‐tech labor-‐

intensive sectors towards competition on knowledge-‐, innovation-‐ and technology-‐based

ones, the Chinese industry can be said to be moving up the Global Value Chain -‐ which

provides a genuine challenge for the Chinese SEZs. Simultaneously, growing ecological

challenges, particularly the deterioration of natural resources together with the Chinese

population’s socio-‐political structural changes, call for new action strategies so that the

1 See Appendix I 2 See Appendix II 2 See Appendix II


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Chinese SEZs remain sustainable as an industrial policy-‐tool for growth creation. Through

an analysis constructed by applicable theoretical structures from economic, political and

management perspectives, this paper aims to answer the following research question:

As the core engine for economic growth and openness in the 1980s, how can Chinese SEZs

remain a viable source of economic growth in the current context of sustainability concerns

rising from the environmental degradation and changing social structures?

The research question will be answered by creating an analytical framework consisting of

key theories provided by relevant courses from the International Business and Politics

(IBP) program. The Organization Theory (OT) course, through the Institutional theory,

will allow us to grasp the challenges faced by SEZs in the form of coercive, mimetic and

normative pressures. Based on the theoretical assessment that organizations are not only

depending on traditional resources, that is to say raw materials, capital, labor, knowledge

and equipment, but also on the acceptance of the societies in which they operate,

conforming to those pressures enables organizations to ensure their legitimacy and their

survival. Thus, we will study which pressures the SEZs would be better off complying

with, and what kind of growth those pressures advocate. From the Political Economy of

Development (PED) course, the Developmental State (DS) theory with its rationale for the

relevancy of interventionist behavior will be used to discuss the Chinese government’s

political-‐economic agenda that lead to the implementation of SEZs. From the same

course, the opposing theory of Neo-‐liberalism will be brought into the discussion, in

order to perceive a complete understanding of the use of SEZs as industrial policy tools

and their function as “windows” to promote exchange between the PRC and the outside

world market. The DS theory will also help us identifying some of the actions the Chinese

government could take to ensure the future sustainability of the Chinese SEZs. The third

and final course contributing with theories enabling us to answer our research question

is the Comparative Political Economy (CPE) course. Here, the Constructivist approach will

allow us to explicit and justify the shift in ideas from growth to sustainable growth we

believe to be essential for SEZs to efficiently transform and consequently remain viable.


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1.2. Structure of the assignment

This paper aims to answer the research question by constructing a line of argument

developed through the following structural framework: First of all we will introduce a

number of key concepts deemed fundamental to define before being able to conduct an

analysis. These consist of the Special Economic Zones, Sustainable growth, Foreign Direct

Investment and finally the Lewis turning point concepts. Then follows an in-‐depth outline

of the Philosophy of Science course and a development of its three theoretical schools of

thought; Naturalism, Constructivism and Critical realism, proceeded by a justification of

our chosen perspective, to construct our argument. This will lead us to introduce the

theoretical framework that will be applied, from the selected courses of the International

Business and Politics program including Organization Theory, Political Economy of

Development and Comparative Political Economy. Subsequently, we will identify the

issues of growing social and environmental challenges the Chinese Special Economic

Zones are facing. This will be proceeded with a discussion of which methodology we find

applicable to the paper, that being the empirical data and sources we will base our

argument on so as the delimitations of the scope of the analysis. Having identified the

theoretical paradigm, the issues the SEZs are facing and finally which empirical data the

paper will be build on, a clarified foundation will have been constructed for us to build

our analysis on. This part will consist of the application of the previously mentioned IBP-‐

courses in order to identify how SEZs can remain a viable source for sustainable growth

for China. In the end, this will be furthered into our conclusion and strategic

recommendations to the Chinese policy-‐makers and the SEZs.

1.3. Key concepts

Special Economic Zones (SEZs)

Finding a universally accepted definition of Special Economic Zones can be very difficult

as there are many different versions of the concept depending on where in the world the

policy tool is used or by which author it is being described. Falling under the classification

as a Special Economic Zone are subdivisions such as Export Processing Zones (EPZs),

Free Trade Zones (FTZs), Freeports, Enterprise Zones (EZs), and finally the more recent


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additions such as Economic and Technological Development Zones (ETDZs) and High-‐

Tech Industrial Development Zones (HIDZs) etc. (Zeng, p.5). Although differing in

configuration and aim, there are a few essential features all SEZs have in common. The

definition we have decided to recognize for this paper is the one developed by the

Foreign Investment Advisory Service (FIAS), a joint facility of the International Finance

Corporation and the World Bank in 2008. FIAS has defined a generic term for the modern

SEZ aiming to capture the core elements of all the subdivisions. 1) a SEZ consists of a

geographically delimited area, usually physically secured, 2) it has a single

management/administration, 3) it offers benefits based upon physical location within the

zone, and finally 4) it has a separate customs area offering duty-‐free benefits and

streamlined procedures (FIAS World Bank 2008). Due to the limitations imposed by the

required maximum length and the scope of this paper, we will not elaborate on each of

the specific subdivisions. Instead we will consider FIAS’s generic term in a broad sense as

an overall concept when conducting our analysis, hence addressing our strategic

recommendations to the modern Chinese SEZ, whether it being an EPZ, ETDZ or an even

third configuration. Finally the main characteristics and initial aims of the Chinese Special

Economic Zones will be defined by drawing on the explanations found in Zeng’s 2010

Building Engines for Growth and Competitiveness in China. As stated here, SEZs are

industrial policy tools with the main objective to attract foreign direct investment,

promote exports and finally generate employment that can spillover to the local economy

(p.8).

Sustainable growth

It appears essential to characterize what this paper refers to when using the concept of

sustainable development, since we investigate how it can be pursued in China via the

SEZs. In order to do so, the characterization provided by the World Bank will be

combined to the definition of sustainable development given by the Brundtland

Commission. We thus define sustainable development as a "development that meets the

needs of the present without compromising the ability of future generations to meet their

own needs" (Brundtland, 1987), which can be achieved by balancing properly economic,

social and environmental needs today (World Bank, 2001). Thus, sustainable economic


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growth differs from simply economic growth, the latter focusing primarily and essentially

on economic needs and performance.

Foreign Direct Investment (FDI)

As one of the core motives of SEZs existence, it is found relevant to introduce the key

concept of FDI. Once again we shall turn to the World Bank’s definition. Here Foreign

Direct Investments are explained as the net inflows of investment aimed to acquire

lasting management interest in an enterprise functioning in an economy other than that

of the investor (World Bank 2008, p.355), which will henceforth be the definition

applied.

The Lewis turning point

This concept, developed by A. Lewis in 1972, characterizes the point an economy reaches

when the pool of labor supply that the rural areas constitute is exhausted and thus when

demand for labor is exceeding the supply of labor, engendering an increase in the general

level of wages (Song & Zhang, p.209). This concept will not be developed further since it

will mainly be used as a point of reference rather than studied it in depth in this paper.

2. Analytical Framework

Before moving on to conduct the actual analysis on the viability of SEZs for sustaining

Chinese growth, an introduction to Philosophy of Science and an assessment of the

relevance and limitations of its three major fields; naturalism, constructivism and critical

realism, will be provided. This will lead to a justification of the rationale for choosing the

constructivist paradigm to analyze the development of Chinese SEZs and provide action

strategies for their future sustainability. Afterwards, the theoretical framework, falling

under the constructivist perspective used to conduct this academic paper, will be

introduced and explained.


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2.1. Philosophy of Science

The study of Philosophy of Science is concerned with the existence of the world, what it

consists of and how we understand it and obtain knowledge about it. It is an academic

frame within social science that explores the relationship between truth and science

through three fundamental building blocks; ontology, epistemology and methodology

(Moses & Knutsen, p.4). Ontology means “theory of being” and is the branch of

Philosophy of Science studying the assumptions about existence and the definition of

reality. Epistemology on the other hand studies what defines knowledge. It is interrelated

with ontology, as it is the epistemological assumptions of knowledge that are used to

address what our ontological assumptions define as real (Hatch, p.11). The third and final

branch of the Philosophy of Science framework is methodology, which refers to the ways

in which knowledge is acquired. Methodology is the study of which methods are deemed

suitable to acquire and produce trustworthy knowledge (Moses & Knutsen, p.5). It is

these three essential questions that naturalism, constructivism and critical realism

disagree on. Having introduced the study of Philosophy of Science, a concise outline of the

three major fields’ position towards ontology, epistemology and methodology will now

follow, with an especial comprehensive introduction of the constructivist framework as

this will be the overall paradigm in which this paper’s line of argument will be construed.

Subsequently, a discussion of this particular choice so as the limitations of each of the

three fields’ analytical structures, will be developed.

2.2. Naturalism

Naturalism is an overall paradigm capturing a number of traditions rooted in the belief of

the presence of a Real World independent of our experience of it, with an existing reality

explainable by natural sciences. Therefore the methodological features of its theoretical

structure are based on observations of the nature. This process allows scientists to reveal

explainable patterns and thereby move further towards fully comprehending the reality

in which we exist (Moses & Knutsen 2007). The prevailing methodology used in

naturalism stems from Sir Francis Bacon, and uses the methods of deduction and

induction. Deduction being a top-‐down approach where general principles are used to

explain events moving to concrete conclusions, and induction being the bottom-‐up mode


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of reasoning where empirical details generates more general theories. Thereby it is

believed that the Real World exists and we can access knowledge about it through

inductive and deductive methods of observation and thinking. Contributing to the

naturalist methodological position, Karl R. Popper developed the position known as

falsificationism. The main proposition of the falsification principle is that the world is too

varied and diverse for anyone to conclude a general claim to be true. Instead the scientist

can create a deductive hypothesis and then see if it can be proven false. It is through the

falsification process of questioning hypotheses, that scientists can gain true knowledge

about the Real World (Popper, p.19).

Ontologically, naturalists believe that the Real World is based on “independent

particulars” (Moses & Knutsen, p.48). Thereby it is considered that there exists a reality

even without human observation. Epistemologically, naturalists believe that knowledge

can only be obtained by observing and documenting the regularities of nature and then

re-‐state them as natural laws. Finally the naturalist position adopted on methodology is

that the regularities and repetitions in the Real World can be explained scientifically, and

that it is the main purpose of naturalist science to identify these regularities (Ibid., p.49)

2.3. Constructivism

Directly opposable to Naturalism is the Constructivist perspective in Philosophy of

Science. Indeed, even though it shares a common goal with Naturalism in "mapping and

explaining the patterns in the world" (Moses & Knutsen, p.169), Constructivism can be

considered as Naturalism's antagonist to the extent that it provides strong criticisms

against it. Some of the main points of dissension between the two perspectives regarding

ontology, epistemology and methodology will be explicated in the following paragraph.

The main Constructivist divergence from Naturalism comes with ontological doubts, in

other words what falls upon the conception of reality and Empiricism. Constructivists

refute the vision of patterns existing as a part of the real world; they allude to the role of

the observer and to its impact on those patterns (Moses & Knutsen, p.147). Both William


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Whewell and Immanuel Kant stress the impossibility to be neutral when observing a fact:

Kant writes about the active role of the mind, which organizes the perception (Ibid.,

p.175), and Whewell states "all facts involve ideas unconsciously" (Ibid., p.185). Ideas

affect perception, and some ideas are shared by all (Ibid., p.175). Thus, there are no

existing patterns in the real world; they are instead made by human minds through

experiences and perceptions, which are in turn strongly influenced by ideas. It is those

ideas that prevent knowledge from being objective, as Kant highlights (Ibid., p.176).

Those assumptions also go against the Naturalist presumption that there is a truth,

insinuated for instance by Descartes emphasizing the need for verification in Science

(Ibid., p.31). The doubt about the realness of one universal truth implied by

Constructivism, as well as other Constructivist elements about reality, have provided the

main pointers for the epistemology specific to this perspective of Philosophy of Science -‐

ontological and epistemological assumption being related (Hatch, p.11), as mentioned

earlier.

Finally, the methodology advocated by Constructivists is equally distinct from the one

suggested by Naturalists. Constructivists demonstrate the inappropriateness of Naturalist

science and methods when studying the social world, by revealing the differences

between the natural and the social worlds. Firstly, the subjects studied are not the same

in the social world than in the natural world (Moses & Knutsen, p.150). Secondly,

Fereyabend argues that there is no elements proving the superiority of the scientific

knowledge; this approach should consequently not be used to study social phenomena

(Ibid., p.167). Thirdly, the disagreements between Constructivists and Naturalists on

methodology itself are used as an argument against using Naturalist methodology in

Social sciences. Kuhn contradicts Popper's argument about obtaining knowledge via

testing hypotheses with the notion of incommensurability, which assess that even testing

hypotheses cannot be purely objective and obviously includes some degrees of

interpretation. In a nutshell, Constructivists either opt for methodological pluralism and

acknowledge that the study different phenomena presupposes the use of various

methodologies, such as Michel Foucault (Ibid., p.165), or are against methodology, such


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as Fereyabend. One thing is certain; Constructivism rejects the use of Naturalist

methodology when studying the social world.

The Constructivist ontology is thus complex and assesses that there is a real world, but

that we cannot access it. As for the social world we have access to, it is the product of our

minds (Ibid., p. 169). Constructivists conceive epistemology as subjective; because of our

ideas and perceptions, the phenomena we observe cannot be completely free of all

judgment or of all personal believes. Knowledge depends on the context (Ibid.). Finally,

because of the influence of the observer and of the society on knowledge, which then

becomes subjective, Constructivists are aware that experiences as ways to access

knowledge are not neutral (Ibid., p.10). It is the reason why they advise the use of various

methodologies, or epistemological tools.

2.4. Critical Realism

Critical Realism can be considered as a third perspective in Philosophy of Science, which

includes some elements of both Naturalism and Constructivism (Ibid., p.12). If they

acknowledge the complexity of the social world and are in this matter closer to

Constructivists, Critical Realists assume that a real world exists separately of what we

experience and of our ideas. In that sense the Critical Realist perspective is agreeing with

the Naturalist one in terms of basic ontology (Ibid.). Critical Realism could have been an

interesting approach since it combines features from the Constructivist and the Naturalist

approach, and thus seems less intransigent, in particular when it comes to methodology.

Indeed, Critical Realists do not advocate any specific methodology, they simply advise to

use questions rather than methods (Ibid., p.13). However, since this paper aims to

investigate how a potential change in ideas could affect growth in China positively rather

than what effects a change in mechanisms could cause, the Critical Realist perspective is

therefore not the one retained.


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2.5. Chosen perspective

The Constructivist approach to Philosophy of Science seems to be the most appropriate

perspective to build this paper onto, rather than the Naturalist or Critical Realist one,

given the role of ideas in the case studied. Indeed, the aim of this assignment is to

investigate how the institution, embodied by SEZs, can be a vector of change and a key

driver for sustainable growth in China. The transition from growth to sustainable growth

represents in itself an important shift in ideas and conceptions, which can be best

analyzed through theories presenting some Constructivist features such as

Institutionalism. Moreover, the scope of our analysis goes beyond what we can describe

as the Natural World, that is to say resources and raw materials, hence leaving out

Naturalism as an accurate approach. Both the research question and the concept of

sustainable growth imply a focus on components of the Social world, such as social

capital or social inclusion. Those are best studied with the methodological pluralism

advocated by Constructivists, rather than with Naturalist methodology. To the same

extent, Critical Realists are said to favor Naturalist approaches when studying the

complexity of the Social world (Moses & Knutsen, p.13), which is why this perspective

appears to be less suitable for this paper.

3. Sustainability of Chinese SEZs: Theoretical Perspectives

To conduct the analysis of the sustainability of the Chinese Special Economic Zones and

provide a strategic recommendation for its future success as a key growth factor, it is

found adequate to introduce a number of relevant theories from the academic fields of

PED, OT and finally CPE, all arguably allowing analysis conducted through the

constructivist position. In this section the theories will be introduced and described in

order to provide an inherent basis for understanding their features and contributions to

the line of argument furthered in this academic paper.


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Developmental State theory

The first theoretical perspective introduced stems from the PED-‐course and was first

conceptualized by the American professor Chalmers Johnson in his 1982 work MITI and

the Japanese Miracle. According to Johnson the success of the country’s development

could be traced in the Japanese state’s intervention-‐strategy where especially

bureaucratic involvement from the Ministry of International Trade and Industry (MITI) in

the country’s private sector affairs and the market that led to the rapid economic growth

(Leftwich, p.403). From the initial use of the theory to explain Japan’s development,

towards a more general explanatory framework to understand all of the South East Asian

“miracle”, the Developmental State (DS) theory is, by its scholars, capable of explaining

the best way for an underdeveloped state to achieve rapid economic growth (Bolesta,

p.105). The theory postulates that if a state adopts five features from the DS theory into

its mainstream policies, the state will eventually be able to “combat Western imperialism

and ensure national survival” (Ibid., p.108).

As portrayed in Bolesta’s China as a Developmental State, these five features agreed in the

course of international research on the subject are as following: 1) the states authorities’

objectives must be to achieve fast socio-‐economic development, 2) these objectives must

be achieved through the process of industrialization, 3) although strategies and goals

might be drafted by ruling elites, the transformation of the state in itself must be

conducted by competent bureaucracies, state administrations where the agenda is

independent from possible democratic choices of the society, 4) the processes of change

must take place in an institutional environment where the state has full authority over

the norms and rules of the social, economic and political existence so as the directions of

development. Therefore the DS must be an interventionist state. 5) The economic

environment must be capitalistic with a strong private sector leading the development of

the country (p.109). Following these structures recommended by the DS theory, the

country can become and exporter of its own products and might eventually reach such

standards of living that it can be the domestic consumption generating the economic

growth. With such progresses, the developmental state has become a developed state,


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and the DS theory has proven accurate in explaining the key from underdevelopment to

economic prosperity (Ibid.).

Neo-‐liberalism

From the same theoretical framework presented in the PED-‐course, follows the Neo-‐

liberalist argument, which opposes the view of the DS theory as the prevailing key to

economic development as they believe interventionist behaviorism should be avoided at

all costs. Neo-‐liberalist theory instead argues that it is through the opening of the market,

privatization of companies and with the removal of unnecessary barriers to free

movement of capital that countries can gain economic growth (Chang, p.25). Extensive

development goals are better reached in an environment where authorities have very

limited power over the market, which is instead controlled by the “invisible” market

forces of supply and demand (Corrales, p.133).

Institutional theory

Organizational institutionalism can be classified as being part of the symbolic interpretive

perspective in Organization Theory, perspective that in turn presents some Constructivist

features. Indeed, this theory views the organization more broadly than a theory falling

under the Naturalist approach would do. This is done by for instance granting importance

to the society and the environment in which the organization operates, as well as taking

into account abstract concepts such as legitimacy and political power, rather than only

focusing on the material dependencies of the organization that raw materials, labor,

capital and equipment represent (Hatch, p.74).

More specific and most relevant for our study of the Chinese SEZs, is the Institutionalism

and isomorphism theory developed by Paul DiMaggio and Walter W. Powell in order to

explain similarities and changes in the structures of organizations. They define

isomorphism as a concept that describes the homogenization mechanism taking place for

organizations that are part of the same environment (Di Maggio & Powell, p.149). Three

pressures emanating from the organization's environment that affect its structure are


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identified: coercive isomorphism that occurs as a result of political pressures, mimetic

isomorphism that happens as an answer to uncertain situations, and normative

isomorphism that is due to expectations from the organization's members (Ibid., p.152).

Organizations have an interest in conforming to those pressures to the extent that it

would guarantee them legitimacy as well as approval from the society in which they

operate and thus ensure their stability (Hatch, p.74). In overall, this theory is part of a

more general school of thought, Institutionalism, and contributes to develop a more

sociological perspective of institutions by studying their interactions with one another as

well as with society.

Constructivist theory

The fourth and final theory deemed relevant for the scope of analysis in this project, is the

Constructivist theory as it is developed in the CPE-‐course. Constructivist theory

acknowledges institutional change through the illumination of the role of economic ideas

as key drivers. At the center of the argument, the theory treats actors, not as mediums of

institutions following pre-‐programmed scripts, but instead as contemplative entities

capable of reinterpreting and restructuring their environment (Campbell, p.382). As one

of the main contributors to the Constructivist approach to CPE, Mark Blyth explicates the

role of actors’ economic ideas as influential in three different ways; as institutional

blueprints, -‐ weapons and cognitive locks (Blyth, p.2-‐5). Ideas as institutional blueprints

are defined as the agents involved in the changing institutions’ economic ideas (Blyth,

p.3) and explain how these have the power to drive institutional change. The notion of

ideas as weapons describes how economic ideas under distributional struggles can be

used to restructure institutions, as the existing ones are outcomes of past economic ideas.

Therefore, by questioning and analyzing the current, agents can replace the old ideas and

help shape a new set of institutions (Blyth, p.4). The third and final concept granting great

importance to economic ideas in driving institutional change is ideas as cognitive locks.

This concept claims that if path dependency appears in policy making, it might be

explained as a result of cognitive locking. Therefore it must be seen as an ideational

rather than an institutional phenomenon (Ibid.).


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4. Identifying the issue

As mentioned earlier, SEZs have without a doubt been huge contributors to China's

dazzling economic growth, focused essentially on manufacturing-‐oriented exports and

investments, both foreign and domestic. Thanks to preferential policies such as tax

exemptions and research funding, the SEZs became the most efficient tool of Chinese

industrial policy by appealing considerably to investors (Carter & Harding, p.4). This

paper will refer to the expansion phase of China characterized by the focus on pure

economic growth with attraction of FDIs through low-‐cost labor and physical capital, as

the first development stage. Since the Chinese growth is facing emerging challenges from

the internal and external environment, it is essential to shed light upon some of the

biggest concerns before being able to conduct our analysis.

Social concerns

China's reach of the Lewis turning point in 2003 (Cai & Du, p.602) marks the emergence

of new challenges in terms of labor and of social issues and is therefore a step towards

what we describe as the second development stage. Indeed, China has reached a point

where the majority of the migrant and unskilled labor force is working in non-‐

agricultural sectors in urban areas (Ibid.). This phenomenon can thus be compared to a

labor shortage, agricultural sectors having been until then the source from which firms

would draw extra workforce. The slow down of the increase in Chinese working age

population, due to the demographic transition, is reinforcing the exhaustion. Additionally,

the unemployment rate being supposedly lower, we can deduce thanks to

macroeconomic insight that the workers obtain stronger bargaining power and that the

wages consequently increase, because of the demand for labor being unappeased. This

last assumption is supported empirically: between 2003 and 2009, the annual growth

rate of migrant workers' wages was of 10.2% (Ibid.). It seems logical to think that a rise in

workers' bargaining power is accompanied by more focus on social issues from firms and

authorities, and that a shortage in unskilled labor implies an increase in skilled labor

resulting from China's development and shift towards a knowledge and intellectual-‐


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based industry (Zhao 2008, p.803). Because of those evolutions, the Chinese economy is

not able to rely on its low cost labor to attract investments anymore. What was "made in

China" is progressively becoming "created in China" (Wuwei & Keane, p.50), which

represents a considerable shift away from what initially impulsed China's economic

growth and thus from what constituted the original strength of the SEZs. The second

development phase we model would thus be reached when the focus is set on social

concerns and development, as well as when social capital is valued and constitutes if not

the main, an important source of economic growth.

Environmental concerns

Another desirable evolution that Chinese development we believe hasn't reached yet is

one concerning the environment and the ecology; this evolution is modeled in this paper

as the third development phase. The impressive economic development of China during

the past decades did imply important environmental degradations, whose consequences

are felt more and more and are gradually turning into threatening issues for China, its

population and its economic growth. If some steps have been taken by the government

towards environmental impact reduction through for instance the establishment of

concrete objectives, like the environmental targets for the 10th five year plan (World

Bank 2007, p.I), some new environmental challenges keep on emerging simultaneously,

in both rural and urban areas (Ibid., p.XI). This is affecting the Chinese population in

terms of health, but it is also likely to negatively impact economic growth on the long

term, via the deterioration of natural resources. As an example, water surface pollution

contributes to water scarcity, particularly in Northern China (Ibid., p.81). It thus seems

pretty rational to think that Chinese SEZs cannot base their contribution to economic

growth on low environmental and pollution regulations anymore, at risk of

compromising economic growth itself in the near future. There is a need for redefining

the role of SEZs at the environmental level. Therefore, we define the third development

phase we introduced earlier as a phase characterized by the focus on ecology and

environment concerns and improvements in growth, leading ideally to a more

responsible type of growth.


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Concluding remarks

As a conclusion, in such a social and environmental changing context, it seems adequate

to investigate why the Chinese SEZs have to contribute differently to growth whose

nature is also evolving, and how they can do so. However before being able to move on to

the analysis of the SEZ’s potential new role in this altering setting, the methodological

considerations and rationale of the use of certain empirical data to conduct the analysis,

so as the delimitations of this paper, will briefly be discussed.

5. Methodology

5.1. Empirical data and Sources

The empirical material that will be draw upon is mainly constituted of 2nd degree sources

where the authors use qualitative methods to compose their arguments. These will

consist of academic articles like, papers, books, expert statements and speeches, where

the last two are especially useful for conducting our analysis under the constructivist

theoretical perspective this paper will take. Passages from selected speeches by former

chairman Deng Xiaoping will for instance be relevant to analyze the discourses and

economic ideas behind China’s fast economic development. When it comes to defining

economic and political terms, we will mainly turn towards the World Bank for their

definitions of these indicators. We will also make use of acknowledged works

investigating Special Economic Zones, including Zeng’s Building Engines for Growth and

Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters

and Mohiuddin et Al.’s The Special Economic Zone as a Locomotive for Green Development

in China in order to analyze their development and possible future sustainability as

growth vectors. The selected books and articles have been chosen by primarily using

authors basing their argument on relevant fieldwork such as interviews and field

investigations, or deemed experts in their academic fields.


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6. Analysis

6.1. Organization Theory application: Institutionalism

Introduction

The application of institutional theory will provide, through an analysis of the current

situation of Chinese SEZs and of the challenges they are facing, important elements for

answering the research question as well as landmarks on which we will be able to base

our strategic recommendations. Taking a close look at the various pressures exerted on

SEZs will allow us to first analyze to what extent Chinese SEZs' configuration and

contribution to growth can be considered as obsolete, and second to determine to which

pressures SEZs henceforth should conform in order to generate viable growth and still be

efficient tools of industrial policy. Indeed, as evocated previously, the institutional theory

assesses that the survival and the well functioning of the organization depends on the

degree of compliance with the environment's and the society's expectations and

pressures. In the present context of social changes in China and rising environmental

degradation problems, getting inspiration from the requests emanating from the SEZs

environment could constitute an excellent basis for re-‐orienting and reforming SEZs in a

sustainable way. The following section will thus, after having explicated the interest

residing in viewing SEZs as organizations in the symbolic sense, identify some of the

different coercive, mimetic and normative pressures operating on SEZs thanks to the

framework of institutional theory. Both the actual and the possible effects of those

pressures on SEZs will be studied, finally leading to the conclusion, which will provide

some components to construct an answer to the research question, thanks to the analysis

of what developmental path the pressures encourage SEZs to take.

SEZs as organizations

SEZs fit into the modern concept of organizations presented in the OT-‐course to some

pretty limited extent. If they possess some features of it, since they are entities interacting

with their environment and economic agents, and as they are subject to competition, only

considering those characteristics and using the modern concept of organizations for SEZs


19

would be simplistic and the analysis could become incomplete. The conception of

organization we will thus apply to SEZs differs from the modern or naturalist definition of

the organization. Indeed, SEZs' structure is not similar to the one of the traditional

organization, it is not physical, but abstract. We thus rather argue for the use of the

symbolic approach, which sets no objective boundaries to the concept of organizations

(Hatch, p.33) and which is in line with the constructivist perspective of paper. Some

scholars embracing the symbolic perspective, such as Karl Weick, developed a concept of

the organization based on the enactment theory and consequently assumed that

organizations were to some extent equivalent to cognitive processes (Ibid., p.34). Having

found some evidence in Hazakis' work that SEZs components such as their structures or

patterns are steeped in cognitive values (Hazakis, p.88) makes applying the symbolic

concept of organizations to SEZs justifiable.

Coercive pressures

As defined in the theoretical part of this paper, coercive isomorphism is a consequence of

the pressures exerted by agents that possess a form of authority on the organization

(DiMaggio & Powell, p.150). The actors on which the SZEs are directly dependent on will

be identified, as well as the claims that are conveyed via the exerted coercive pressures.

In December 2001, China's accession to the World Trade Organization (WTO) implied

that the country complied with some specific regulations directly touching on SEZs, such

as the Agreement on Subsidies and Countervailing Measures (SCM Agreement), which

forbid to some extent manufacturing-‐oriented export subsidies (Carter & Harding, p.21).

As a result, the Chinese government had to make some alterations of the incentive system

for domestic companies that was based on export performance, as well as of the limited

volume of sales that the subsidies were allowed to make on the domestic territory (Ibid.,

p.22). According to DiMaggio and Powell, a government mandate can directly create

organizational change, and thus be considered as a coercive pressure (DiMaggio &

Powell, p.150). To the extent that SEZs enjoy government support (Zeng, p.8), them

conforming to the new norms constitutes a coercive pressure, coming directly from the

Chinese national authorities and indirectly from an international organization, the WTO.


20

Finally, on a more abstract level but not less important, it seems rational to think that the

political instances responsible for the administration of SEZs such as the national, but

also provincial or local governments exert some kind of coercive pressure on the SEZs,

since they provide infrastructures and financing with the objective that the development

of SEZs is successful. If finding concrete empirical data regarding this pressure for SZEs to

perform economically is difficult, we still consider this coercive pressure relevant.

Thereupon, we identified coercive pressures exercised on SEZs by political institutions

that are to some dimension contradictory. Whereas the pressure coming from the local

and provincial governments encourages the economic performance of SZEs through

exports and low-‐cost strategies, the WTO SCM Agreement condemned the actual

configuration of SEZs in those points, constraining the Chinese government in making

some changes in the regulations. The coercive pressures originating from the local and

provincial political institutions hence intend to maintain the SEZs' strategy within the

scope of the first development stage we identified earlier in this assignment, whilst the

WTO pressures, in spite of criticizing this SEZs' strategy, do not provide any concrete

elements on what other strategy it could be substituted for, such as a more sustainable

one.

Mimetic pressures

Mimetic isomorphism, that is to say when organizations tend to imitate other

organizations in their environment, is described as a consequence of uncertainty

(DiMaggio & Powell, p.151). Different levels of governments, -‐local, provincial and

national-‐, play a crucial role in developing Chinese SEZs, since they ensure their financing

and sometimes administration (Zeng, p.37). It has been found that competitiveness

among local governments responsible for SEZs is very high, each of them trying to supply

the best infrastructures and business environment for the SEZs (Nee et al., p.43). In the

case of Chinese SEZs, as industrial policy tools, their aim is to be great sources of

economic development; the uncertainty leading to mimetic behavior could consequently

be embodied by this competition about the degree of growth SEZs end up generating, as


21

well as how attractive for investments every special zone is. In a way, what is at stake for

SEZs is their own survival. Because local governments attempt to provide the best

conditions to the SEZs and that competition makes them willing to keep up with the

general standards, we assume that the comparison with the performance and

configuration of other SEZs' must lead to a homogenization process of SEZs. Logically,

once a certain feature designed to attract investors, such as import duty exemptions,

proves to be efficient, the SEZs that haven't implemented it yet have a strong incentive to

do so. Indeed, organizations imitate other organizations from their environment that they

perceive as successful or legitimate (DiMaggio &Powell, p.152).

In order to conclude on how the mimetic behavior of SEZs as organizations affects the

transition from SEZs as vehicles for growth to vehicles for sustainable growth, two trends

of the mimetic pressures among SEZs will be studied. If those we will study occurred

especially during what we refer to as the first development stage and explains the "racing

to the bottom" process, we will also stress afterwards the potential of the mimetic

pressures in between SEZs for facilitating the transition from the first development stage

to the two next ones which were defined earlier in this paper, and thus to sustainable

growth. The trend studied is the one of relaxing regulations within the Chinese SEZs as

an incentive for investors. Here we will pay attention to what are the consequences of

having lax social and environmental regulations, and we will examine what effects it has

on growth and sustainable growth. If lowering the labor and environmental regulations

attracts investors to the SEZs because the costs are generally reduced and it is easier to

settle production facilities as well as to hire and fire workers, it can also lead to a "race to

the bottom" provoked by the competition phenomenon and mimetic pressures between

SEZs, and consequently not lead to as much growth as wished for in the long term. For

instance, the few rules in terms of working conditions led subsidiaries operating in SEZs

to initiate what is known as the "dormitory labor regime" (Ngai, p.33), a practice which

can probably be positive for creating "just growth" but which is not converging towards a

socially-‐responsible growth The same goes for the environmental aspect; if SEZs with

high pollution tolerance and low environmental norms contributes to immediate


22

economic growth, it definitely also has a cost and prevents the transformation of SEZs as

vectors for sustainable development.

However, only stating the negative effects of the mimetic pressures at force between SEZs

as organizations would be a mistake. As a matter of fact, the homogenization of

organizations resulting from the competition has some potential in initiating a

sustainable growth process. If a few SEZs changed the nature of the incentives used to

attract investors, the mimetic pressures would probably spread the trend generally, and

ideally all SEZs could become promoters of a new kind of growth, more responsible and

ensuring future rents thanks to a better management of resources and of labor relations.

The kind of incentives we are talking about here could for instance be of the form of

bonuses allocated to firms operating in SEZs to the condition that those comply with

environmental and social standards. In a large time scale, such an action plan could avoid

a race-‐to-‐the-‐bottom effect and instead result in an efficient leveling upwards, turning

SEZs into vehicles for viable growth and accessing the development stages 2 and 3. As a

conclusion, it is important to see the positive capability in the homogenization

mechanisms affecting SEZs, and not only the negative one, which is too often highlighted.

Normative pressures

We have now reached the last kind of pressures operated on SEZs we will analyze:

normative pressures. The main source of those pressures is what Larson and Collins

define as professionalization, that is to say the "collective struggle of members of an

occupation to define the conditions and methods of their work, to control the production

of producers and to establish a cognitive base and legitimation for their occupational

autonomy" (DiMaggio & Powell, p.152). In short, the pressures exerted on the

organization emanate from the organization's members. In the present case, the

pressures we will analyze are those deriving from the workers employed in firms and

subsidies located in SEZs. Even though those pressures only affect SEZs indirectly, it is

still accurate to study them to the extent that workers exert pressures on their

companies, which have to conform to those requests -‐ Institutionalism stating that it is


23

for the organizations a matter of survival -‐ and therefore impact SEZs. Through the

analysis of workers' social claims, this section of the application of Institutionalism aims

to conclude how normative pressures can impact SEZs in their role as promoters of

economic growth, and possibly of sustainable growth.

Our example of normative pressures will be the wave of protests occurring in 2010,

known as the Chinese Labor unrest. This was one of the biggest movements of strikes

indexed in China, involving among others Foxconn, Honda and Toyota factories. The

workers had proactive demands, notably a rise in wages and more power for the workers

union (Gray & Jang, p.9). Seeing as the claims touched upon the conditions and methods

of work, the pressures fall under the normative classification. Unlike what has happened

before, the management authorities of those striking factories engaged in negotiations,

and their answer was described as conciliatory (Ibid., p.3). The organizations hence

conceded to the normative pressures; In Nanhai Honda, a raise in wage of 800 Yuan was

decided (Ibid., p.11). The movement of strikes propagated to several production sites

within SEZs, consequently affecting the SEZs' labor standards as well. This normative

pressure was in line with the social challenges faced by SEZs identified in the "Identifying

the issue" part of this paper, and could be explained by China's reach of the Lewis turning

point, as well as by the emergence of a class consciousness (Ibid., p.2). It is probable that

pressures aiming to improve the social conditions will be more and more frequent,

emphasizing that SEZs strategy of low-‐wage production is now obsolete. When aiming to

improve social standards, such as working conditions, normative pressures can more or

less directly shape SEZs so that they become more sustainable and socially responsible

industrial policy tools.

Concluding remarks

The analysis of the coercive, mimetic and normative pressures exerted on SEZs enables

us to reach a conclusion about their effects on the configuration and strategy of SEZs.

Some of the pressures convey the increasing social and environmental concerns, but

others do not take those issues into account, giving instead priority to immediate


24

economic performance. Concluding about a general trend towards which SEZs are

heading might at first seem complex, given that the pressures operating on SEZs are

different and encourage different strategies and kinds of growth. However, it is rational

to think that the pressures that are advocates of the social and environmental causes are

not going to diminish; they will intensify in a context of resources rarefication and of

increase in the structural power of labor, engendering organizational changes. In that

sense, the SEZs as organizations, having an interest in conforming to those pressures to

ensure their survival via societal acceptance, should and will probably increasingly take

steps towards a more sustainable development strategy. If we are less certain about SEZs

having yet conformed their growth strategy to pressures advising more preoccupations

about the preservation of the environment, some empirical data shows that some SEZs

have already become more sustainable socially, presenting some pioneer social standards

for China. For example, in the late 1990s, the SEZ of Shenzhen put in place a minimum

wage and a social insurance package (Zeng, p.17). Additionally, the mimetic isomorphism,

which is operating between SEZs, has some potential in spreading and accelerating the

transition from SEZs facilitating growth to them encouraging sustainable growth.

However, initiating the transition to a more sustainable growth strategy can be a

challenge as the high competition between SEZs reinforces the mimetic patterns, from

which it is consequently difficult to be the first one to break out. The following part of this

assignment will thus investigate the potential of state intervention in helping SEZs in

their transition to become sustainable industrial policy tools through the DS theory.

6.2. Political Economy of Development theory application: Developmental State-‐

and Neo-‐liberalist theory

Introduction

As developed in the part where we identify the issue, China has shifted into a new stage of

development, as low cost labor and low environmental and pollution regulations no

longer remain sustainable solutions for the future of the Chinese SEZs. The rationale for

conducting further analysis using the DS theory, as presented in the PED course, is to


25

investigate how the Chinese government might amend and re-‐implement certain features

of the DS model for their contemporary development trajectory through the use of SEZs

to remain sustainable. The contradicting Neo-‐liberalist theory will also be included in the

analysis to act as a counterbalancing argument ensuring that the full perspective is

reached. Although continuing the focus on SEZs, the subsequent analysis will now move

up from the organizational level towards the governmental level, by seeing the SEZs not

as autonomous organizations, but as an industrial policy tool of the government. We do

not use the DS theory to contradict the perception that SEZs are capable of orchestrating

their own development directions by taking measures to avoid for instance race-‐to-‐the-‐

bottom trends, as portrayed in the findings from the institutional theory. Instead, the use

of the DS model should be seen as a complementary theory used to assess how state

intervention through industrial policy measures might or might not contribute to the

future success of Special Economic Zones as vectors for growth, by once again making use

of their unique features to reach a higher stage of development. Before being able to

conduct this analysis, we find it of great importance to explicate the initial role and

development of SEZs as seen through the lens of the DS-‐ and Neoliberal theoretical

arguments. The first segment of this part of the analysis will therefore constitute an

investigation of how these PED theories can contribute to the enlightening of the initial

reasons for the implementation of SEZs in China. Afterwards this will allow us to analyze

if the Chinese government still has the ability to use certain aspects of the DS model, to

promote future sustainable growth with SEZs as instruments.

Rationale for the use of DS-‐theory in a constructivist framework

The DS theory is considered a collection of several theories capturing a number of

economic ideas constituting the conception of the best way for an underdeveloped

country to reach fast development (Gilpin, p.317). Thereby the theory is to some extent

falling under the field of constructivism as it relates to the ideas about how economic

performance is best achieved and thus about the economic reality. It is with this

perception of the DS-‐theory the upcoming analysis will be conducted.


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A Chinese Developmental State

As introduced in the theoretical framework, DS theory was first described by Johnson

(1982) and encompassed the opinion that state should be the very center of the solutions

to underdevelopment. Later Bolesta (2007) contributed to this notion by clarifying the

five characteristics of a Developmental State likewise presented in the theory section of

the paper. It is indeed with these five features we will aim to analyze to conclude if China

can be considered to have followed the Developmental State model to reach its economic

growth. Once it has been determined if the Chinese development can be explained with

the DS theory, it will be possible to further the analysis into including the rationale

behind the implementation of SEZs.

The first feature of the model argued how the government’s aim had to be achieving fast

socio-‐economic development for it to be considered following the DS model. Proceeding

along Dirlik’s argument on China’s developmental successes, the country’s post-‐socialist

transformation should be seen as a product of the legacy of revolution where an efficient

party state, successfully transformed itself from an instrument of revolution to a manager

of fast development; a Chinese state which trained and mobilized workers to efficiently

achieve the collective goals of national socio-‐economic progression thereby creating a

“functioning machinery of development within the context of global capitalism” (Dirlik,

p.301). Supporting this conception, Lin (2006) noted how the primary aim of the Chinese

Communist Party (CCP), was to defeat backwardness and reach state development as fast

as possible (Bolesta 2007, p. 109). Hence the first feature of the DS-‐theory appears to be

met. The second feature proclaims how the development objectives must be achieved

through an industrialization process, and can also easily be deemed obtained when

conferred with pertinent academic sources like Grivoyannis’ The New Chinese Economy,

Dynamic Transitions into the Future. Here it is stated how the process of industrialization

emerged when the state opened the market, which lead to the rapid development of the

secondary sector driving the socio-‐economic progress (p.54).


27

The third factor consists of the requirement that the transformation is facilitated by a

bureaucratic state independent of democratic choices of the society. Already in the first

stages of Chinas restructuring through the economic reform, the influential American

sociologist and political scientist of Harvard University Theda Skocpol called China’s

Leninist regime for “an affective Weberian bureaucracy” (Skocpol, p.279), and praised the

government’s role in creating an extraordinary evolution in economic development and

social equality in her 1979 book on social revolutions (Ibid., p.274). Of more recent data,

Gilley’s Two Passages to Modernity explains the Chinese state’s autonomy of democratic

choices from the society by stating that it is “difficult to speak of the existence of any

rights in China given that the party [CCP] reserves the right to override them all”

(Friedman & Gilley, p.31). The fourth aspect dictates that the DS needs to be

interventionist, which also seems to hold true in the case of China, when referring to Nee

et al.’s Developmental State and Corporate Governance in China. Their findings conclude

that the Chinese state did indeed play a strong and developmental role, having all the

tools to intervene in multiple aspects of political, economic and social life (p.42-‐43).

Fifthly and finally it was argued that a state is a developmental state only if the economic

environment is capitalist. To analyze if this aspect is met, we will now turn to Bolesta’s

own findings on the matter where it is concluded that although communist and thereby

social, China’s economic system is a type of capitalism where the rights of private

production, an important part of every capitalist system, are “extremely unlikely to be

abolished, regardless of the ideological and institutional direction the PRC decides to

follow” (Bolesta 2007, p.110).

This analysis shows that the Chinese state undeniably possesses an active developmental

role. Although this opinion is contested and conceived differently by many different

academic scholars, including Breslin (1996) and Howel (2006), there are also many

voices including Bolesta (2007), White (1988) and Baek (2005) who argues that the

contemporary China is a genus of the developmental state. This is substantiated by Baek

in his Does China Follow "the East Asian Development Model"?, where the Chinese aspects

of the DS model are developed and found to include, among other features, the high rate


28

of domestic savings, the enormous infrastructure of heavy industry, the legacy of central

planning, labor-‐intensive industry followed by import-‐substitutive capital-‐intensive

industry, a strong central government with huge bureaucracy and corporatist control

over the society, and finally the promotion of industrial policy (p.487).

SEZs as tools of the DS-‐model

Our findings of the analysis on the aspects of Chinese development explainable by the DS

theory, makes the initial reasoning behind the implementation of SEZs clear. As it is now

deemed rational to consider the post-‐reform PRC a genus of a developmental state, it thus

also holds that the DS theory of the PED course proves applicable in explaining parts of

China’s initial economic success. As mentioned by Baek (2005) one of the main aspects of

the interventionist behavior following the DS model is the implementation of industrial

policies. As stated in Zeng’s Building Engines for Growth and Competitiveness in China,

when China launched its Open Door reforms in 1978, Deng Xiaoping, the main architect

behind the systemic change, decided to implement special industrial policies as a key

feature of their economic development model, aiming to kick start socio-‐economic

expansion (p.9). As the World Bank (2008) states, Special Economic Zones can be a

“useful tool as part of an overall economic growth strategy to enhance industry

competitiveness and attract foreign direct investment” (p.1). These immediate reasons

for the implementation of SEZs thus seem perfectly aligned with Xiaoping’s wish for rapid

economic expansion. However, moving further into an analysis of the reasoning behind

the development of Chinese SEZs, we find that there is more to it than the usual

objectives of implementing SEZs, which was touched upon when we developed the key

concept of SEZ, such as attracting foreign direct investment, promoting exports and

generating employment that can spillover to the local economy (Zeng, p.8). The

additional intensions can be traced to Xiaoping’s famous words from 1978, “crossing the

river by touching the stones”, which can be analyzed to rather accurately explain China’s

pragmatic and gradualist approach to economic reform over the past three decades

(Chen & Scotland, p.1). The first SEZs were therefore not only used as “windows” to

promote exchange between the PRC and the outside world, but also as vectors of change


29

and laboratories which could experiment with economic and political reforms

(Mohiuddin et al., p.109).

SEZs as Neo-‐liberal testing labs for the market economy

To understand the benefits of using the SEZs as “testing labs” we find it relevant to draw

in the Neo-‐liberal economic thought as it has been depicted in the introduction of our

theoretical framework. Seeing the Chinese development through this perspective, it was

the post-‐reform Chinese government’s neo-‐liberal policy pursuit of “market adapting”

economic development strategies, the reduction of the role of the state in the economy

and the implementations of export-‐led growth strategies that led the extraordinary

Chinese economic success (Gilpin, p.317). We find that this conception of the reasoning

behind the growth, seems evident to a certain extent with the concept of the

liberalization of the markets, but forget to encompass the crucial role played by the state

through the application of industrial policies. We believe Neo-‐liberalism proves relevant

to explain the market forces emerging from their political and economic actions leading

to FDI attracting incentives, like tax holidays, but on the other hand these neo-‐liberal

qualities would not have happened in the first place had China not followed the DS-‐model

with a state controlled, pragmatic and gradual implementation of Special Economic Zones

to test and explore its own way towards an open market economy.

A future for state intervention in SEZs?

So far our analysis has led us to the conclusion that China’s economic success partially

can be explained by its Developmental State features combined with the Neo-‐liberal

opening of the market. We have explained how SEZs were initiated as an industrial policy

tool, created and used through committed and controlled state intervention. Finally we

argued how the implementation of SEZs could be explained by objectives stretching

beyond the usual aims of such zones, by acting as a testing lab for new policies and

institutions for a marked-‐oriented economy. We now aim to investigate if there still is a

potential for the Chinese state to make use of certain aspects of the DS model to promote

future sustainable growth through the use of SEZs, or if it would be better off completely


30

giving in to the market forces of the Neo-‐liberal open market capitalist system. Quite a

few scholars have concluded that the times where East Asian developing states could

benefit from following the model proposed by the DS-‐theory were over, and that the

triumph of the Neo-‐liberal economic ideology “rendered interventionist policies useless

and wrong in achieving economic prosperity” (Bolesta 2007, p.111). In line with this

argument professors including Hayashi (2010) and Evans (1998), seems to highlight that

in the post-‐WTO global context as a result of globalization, the role of the state in national

economies is diminishing as governments are incapable of controlling the economic

processes when situations in one part of the world influences the conditions in another

(Bolesta 2012, p.60). Beeson (2004) even go as far as stating in his The Rise and Fall (?) of

the Developmental State: The Vicissitudes and Implications of East Asian Interventionism,

that extensive interventionism hinders the innovative behavior of private companies

necessary for survival in a competitive global economy (p.33). It must thus be noted that

several scholars appears to believe that the role of the states is diminishing on a global

level. Does that mean the Chinese state is best advised to remove all interventionist

behavior and their control of the SEZs thereby removing some vital features of the DS

model?

SEZs as social and environmental testing labs for the market economy

As explicated in our issue identification part and backed by the findings through the

application of the institutional theory from the Organization Theory course, China has

entered a new stage of development and can thus no longer rely on low cost labor and

low environmental regulations to attract investments. This arguably has a big influence

on the Chinese SEZs as these were some of the main strengths constituting their success

as growth vectors in the past. Having previously identified some of the actions SEZs can

take themselves by conducting an analysis composed on the organizational level, we now

turn the analysis to the governmental level by making use of the DS theory to identify

some of the actions the Chinese state can take to amend the use of SEZs towards a

sustainable engine for China’s progress, leading in the direction of the introduced higher

stages of development.


31

Having previously been used as experimental grounds for testing new policies for an

open market economy, SEZs proved useful for conducting a pragmatic and gradualist

approach to the economic reform of China by “crossing the river by touching the stones”,

(Chen & Scotland, p.1). This ideology might still prove effective when it comes to the

sustainable actions China allegedly has to take to fight the increasing social and

environmental pressures encompassing the emergence towards entering the second and

third stage of development. Australian Professor Hans Hendrischke visited China at the

SEZs 30th anniversary in 2010, with the primary aim to investigate the potential for a new

generation of Special Economic Zones to drive social justice and welfare leading the

country into the next stage of development (People’s Daily, 2010). Instead of abandoning

the DS model’s trajectory of active industrial policies conducted through state

intervention, the Chinese government can once again let the SEZs play a significant role

for the country’s future development. As proposed by Mohiuddin et al.’s The Special

Economic Zone as a Locomotive for Green Development in China the Chinese SEZ’s, being

relatively small geographic areas and well organized in terms of administrative services

and infrastructures, can be once again used as prototypes to address the social and

environmental issues on a small scale and “then expand their experience to the country

as a whole in the same way as the foreign investment capitalistic product model was first

introduced in the SEZs and then to whole of China” (p.113). This would require that the

Chinese government sees SEZs as dynamic and organic entities with the ability to quickly

adapt to market fluctuations, rather than sees them as static and fixed organizational

entities who do not have the autonomy to regulate and change their features with the

market demand in order to stay competitive (Hazakis, p.87). It appears possible that the

SEZs can act as an engine of the gradual move towards social and environmental

sustainable development and help China enter the next stage of social inclusion and eco-‐

friendly growth.

As previously touched upon, the contemporary Shenzhen SEZ has continued to play an

important role as an experimental zone for innovative and technological methods. As we


32

see it, it seems rational that the Chinese state should allow these experimentations to be

conducted in not only a few selected zones, but actively in all of the SEZs to investigate

which innovative environmentally and socially sustainable policies works best and then

let them spill over to the rest of the country. As these actions arguable wouldn’t happen

on their own through the market powers, we can thereby recommend the Chinese state

to continue the use of interventionist methods through an active and market dynamic

industrial policy as explicated by the DS theory with SEZs as experimental zones driving

the development.

Concluding remarks

To sum up our argument and clarify our findings of the analysis, the government could

develop both innovative labor and environment policies and test their ability to attract

skilled labor, technology and FDI, and if successful, let it spill over to the local

environment by implementing the policies on the national level. The creation and

execution of innovative environmental standards in SEZs could even “help create a

market and training ground for entrepreneurs and firms in environmental management,

while also creating better living conditions that will help attract a well educated, affluent

workforce” according to Krusekopf in his SEZs and improved environmental management

(p.96). This would indeed require a dynamic and strategic state intervention executed by

a state promoting the use of industrial policies to achieve socio-‐economic growth, leading

to our overall conclusion to this part of our SEZ sustainability-‐analysis. Using the DS

theoretical framework, which we have deemed prevailing to understand the Chinese

economic “miracle”, the Chinese government should keep certain aspects from the DS-‐

model allowing them to intervene on the market through SEZs by using them as dynamic

experimental grounds for sustainable policy implementations.

6.3. Comparative Political Economy theory application: Constructivism

Introduction

The Constructivist approach in CPE applied to the case of Chinese SEZs, will allow us to

study the evolution of the ideas behind those industrial tools and thus to explain the


33

evolution of their configuration. We aim to reach a conclusion about which conceptions of

the Chinese economy and of SEZs’ role would induce SEZs to change their configuration

to become vectors of sustainable development, and how this arrangement could be

instituted. This will be done by comparing conceptions about SEZs and their objectives, as

well as economic ideas in two time periods, the first period being around 1978, the

introduction of the Open Door reform, and the second one being more recent, after 2001,

China’s accession to the WTO. The theoretical tool which will enable us to characterize

the two time periods and consequently to compare them is Marc Blyth’s framework about

economic ideas as institutional blueprints, as weapons and as cognitive locks. To

complete this comparison, we will integrate an analysis of the discourse presented by

Deng Xiaoping in 1978, a method in line with the Constructivist approach.

Economic ideas in 1978

To start of the comparative Constructivist analysis, we will investigate some of the

economic ideas behind the Open Door reform of 1978 by using components of Blyth’s

theoretical framework. Turning to empirical sources depicting the events leading to the

socio-‐economic reforms and the opening of the market enables us to analyze some of the

economic ideas behind this change. In Yeung et Al.’s China’s Special Economic Zones at 30,

it is portrayed how with the ending of the decade-‐long struggle of the Cultural Revolution,

the Chinese people were “physically and emotionally drained” (p.222). It is also stated

how this time of crisis led the path to the emergence of new ideas (Ibid.). With the launch

of the 1978 Open Door reform, Xiaoping took action of these emerging ideas and created

a fundamentally new path for China to follow. Conducting a discourse analysis, we find

that Xiaoping at the previously mentioned speech where he said his famous phrase on his

vision for future development: “crossing the river by touching the stones”, also promised

the Chinese residents that “the national economy [would], wave-‐like, surge forward, with

all the people becoming relatively well-‐off” (Deng Xiaoping 1978 as quoted in Xu and

Chen, p.14), and that this would happen, as stated in a speech one year later, through the

liberalization of the market with an agenda focusing on “economics and less about

politics” (Deng Xiaoping 1979 as quoted in Tisdell, p.6). Thereby representing a change of


34

ideational agenda, away from Chairman Mao Zedong’s focus on political power

demonstrations such as during ‘The Great Leap Forward’ and the ‘Cultural Revolution’

which involved heavy costs to China (Ibid., p.2), towards a focus on economic power

demonstrations to create a strong growth engine for the Chinese economy (Ibid., p.6). By

applying theories from the CPE Constructivist framework, this line of thought emerging

from the leaders of the CPC can be analyzed as a new set of economic ideas as a response

to periods of uncertainty (Blyth, p.2) which we believe is best described by Blyth’s

concept of institutional blueprints. The theory claims how new ideas about institutional

changes constitutes a way out of a period of crisis eventually ending up being used as

institutional blueprints for the foundation of a new set of institutions (Blyth, p.3-‐4).

Xiaoping did indeed follow suit on his promises of liberalizing the Chinese economy

through a pragmatic and gradualist approach to economic reform, thereby allowing the

economic ideas to form new institutional settings.

In his 1978 speech he introduced the concept of SEZs as a core engine for this change and

explained how “they will engender powerful demonstrative effects on their neighbors

and lead people in other regions, work units to follow their examples” (Deng Xiaoping

1978 as quoted in Xu and Chen, p.14). Thereby arguing for their applicability to work as

experimental grounds that could eventually spill over to the local economy. The economic

ideas of 1978 were however not focusing on the importance of sustainable development

whatsoever. As there were no talks of environmental degradation and an almost

inexhaustible supply of cheap labor from rural china (Yeung et Al., p.224), the first SEZs

and in particular Shenzhen acted as powerful economic growth engines through their

ability to provide favorable conditions for FDI. Thereby we can conclude that the

institutional blueprints behind the 1978 Open Door reform were solely embodied in the

initial configurations and functions of SEZs as drivers for economic success, with few

attributes paid to sustainability of neither the ecological environment nor social

inclusions of the workforce.


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Ideas as cognitive locks

The concept of ideas as cognitive locks emphasizes the important impact of ideas, once

they are institutionalized, on future policy-‐making (Blyth, p.4). It is related to the notion

of intellectual path dependency, implying that the ideas behind a set of institutions are

cognitive locks to the extent that the principles they embodied will be found in all future

policies within a country. In our case, the cognitive locks are the ideas described in the

ideas as institutional blueprints part, that is to say the ideas about economic reality and

the role of SEZs that led China to its economic “miracle”. Those ideas about the initial role

of SEZs and about the way to achieve economic performance are linked to the

manufacturing-‐oriented exports as the main source of economic growth creation, which

has been for that matter one of SEZs' most used strategies. As previously mentioned, the

notion of development as conceived when SEZs were introduced thus did see

development as first and foremost economic, and did not consider any social or

environmental aspects, economic growth as being based on low cost labor as well as high

energy consumption, and not implying any direct social improvement or responsible

management of resources whatsoever.

If a great number of SEZs seem to have moved towards more technological and

innovation activities, some others, and China in general, still use low cost manufacturing

strategies, consequently competing at the "low end of the global value chain" (Zeng, p.39).

Hence Zeng identifies the causes of this difficult transition as being the low technology

equipment of those industrial zones. The concept of cognitive locks allows using the

previous ideas about economic performance in China and about SEZs' role as an

explanation. Indeed, the transition to high value added activities might be restrained by

the ideas at the very root of China's impressive economic development, which are not yet

fully adapted to the contemporary context. Regarding ideas about a social dimension of

growth and SEZs, we will briefly analyze some empirical data from an investigation led in

2004 by the Hong Kong Christian Industrial Committee (HKCIC) which interviewed

Chinese employees working at some Swedish toy retailers located in SEZs in the

Guangdong province. The investigation was about to what extent subsidies complied with


36

the Codes of Conduct, which are among others imposing regulations for improved

working conditions. The results showed that none of the nine suppliers completely

complied with the regulations on working time and minimum wage allowed (Egels-‐

Zandén, p.51). From that we can conclude that even after 2001, social concerns are still

not shared equally among SEZs members and that the ideas about how to perform

economically rather than sustainably, definitely still constitute to some extent active

cognitive locks.

Ideas as weapons

If there still is some non-‐negligible constraints to SEZs turning entirely towards

sustainable development, we cannot deny some crucial progress has been made and is

gaining ground. Blyth’s concept of ideas as weapons stresses the role of contesting ideas,

which can become genuine motors for institutional restructuration (Blyth, p.4). The ideas

we judge as having the potential to carry this function, are about an evolution in the

function of the SEZs, as well as ideas about environmental and social awareness. We will

analyze them and explain how they can induce SEZs to become vehicles of sustainable

development.

The challenges to SEZs’ contribution to growth we identified in this paper as being social

and environmental issues are gradually becoming advocated for in China. Because of the

growing middle class and the increasing number of skilled workers, thoughts about the

ability to conciliate growth with higher social standards are more frequent. Likewise for

environmental causes: the concern about environment is higher, and the idea that

preserving resources and fighting environmental degradation has become a necessity, is

spreading. A good example of this growing awareness is the creation in 2008 of the

Chinese Ministry of Environmental Protection (MEP). Besides that, the experience of

SEZs in China in terms of the initial objective of being points of impulsion for economic

growth has long been considered as a success. The vision of SEZs as symbols of China’s

emergence as a whole (Mohiuddin et al., p.113), is responsible for the rise of a new

conception about SEZs’ utility, which transposes the traditional role of SEZs to the


37

contemporary context. As explicated in the DS analysis, some argue that SEZs should be

used again as pioneer laboratories, but this time for policies leading towards a

sustainable kind of growth, through empathic social development and green policies

(Ibid.). To conclude, as weapons, the trends in ideas we identified can certainly shape the

future direction of SEZs, which will hopefully include more dimensions than the economic

one.

Concluding remarks

Through the application of the Constructivist approach and of Blyth’s framework as

developed in the CPE course, we have examined how the economic ideas behind the

Chinese development processes and SEZs have changed over time. First analyzed as

institutional blueprints, the economic ideas of 1978’s China can be found in Xiaoping’s

rationale for the Open Door policy reform liberalizing the market through a gradual and

pragmatic opening with the development of SEZs as an industrial policy tool to act as its

core engine. It was concluded that the institutional blueprints with their focus on rapid

growth by no means comprised focus on sustainability, since natural resources seemed

plentiful and there appeared to be an almost inexhaustible supply of cheap labor from the

primary sector (Yeung et Al., p.224). Those same ideas about economic performance

thereafter became cognitive locks, anchoring the concept of growth in China and of SEZs

in the pure economic dimension, thus ignoring the rising social and environmental

claims. Finally, some challengers of the cognitive locks were identified, embodied in the

innovative conceptions of a new role for SEZs, which would combine economic-‐efficiency

with social-‐efficiency and eco-‐efficiency (Mohiuddin et al., p.113). Therefore, the

Constructivist perspective highlighted the responsibility of ideas about economic reality

in the setting of SEZs as just growth contributors, as well as their promising role as for

restructuring SEZs' configuration in a viable way.

7. Limitations of the study First of all, if generalizing and gathering all sorts of SEZs under one terminology seemed

the most convenient thing to do regarding the allowed length of this paper, it might have


38

occulted some important elements to our research. Indeed, there is a ground for the

existence of such a variety of SEZs names; all those appellations "display very real

differences in terms and function" between the SEZs (Hazakis, p.86), and this

classification we had to ignore, if studied, could have brought more nuances to our

analysis. Second, had the maximum page requirement been greater, it could have been

interesting to analyze the case of the Shenzhen SEZ in depth as this is not only the first

zone to be developed, but also the leading one acting as China’s main “window to the

world” and “an experimentation field” ever since the Open Door reform (Zeng, p.55). As

Shenzhen still today plays as an experimental and modeling role as it is considered the

main frontrunner in developing and using innovative and technological methods (Ibid.,

p.62), an analysis of this particular zone could have been used to investigate which

features the competing SEZs could adapt to and refrain from in order to stay viable as

future growth engines. Thirdly, had we had the option and possibility to do so, the use of

1!" degree sources like interviews with both officials involved with planning the future

developments of SEZs, as well as with workers in companies operating in these zones

could have contributed to a more comprehensive and unbiased analysis.

8. Conclusion and strategic recommendations

As the main engines behind the rapid development of the Chinese economy the past three

decades, China’s Special Economic Zones have proven very successful in leading the

country to the first development stage with a focus on pure economic growth and

attraction of FDI through low-‐cost labor and physical capital. Yet the context has evolved,

and after identifying the social and environmental challenges SEZs are increasingly

facing, it was concluded that some features of SEZs’ initial configuration were henceforth

obsolete. This paper aimed to provide a strategy plan for SEZs to become contributors of

a sustainable growth in an evolving context by answering the following research

question: As the core engine for economic growth and openness in the 1980s, how can

Chinese SEZs remain a viable source of economic growth in the current context of


39

sustainability concerns rising from the environmental degradation and changing social

structures?

The application of the theoretical frameworks provided by the Organization Theory,

Political Economy of Development and Comparative Political Economy courses, all

belonging to the Constructivist philosophical perspective, determined which elements

and conceptions of SEZs have the potential to generate sustainable growth. The

Institutional theory investigated the nature and interest of the different pressures

exerted on SEZs as organizations, highlighting which ones SEZs should conform to in

order to ensure their own survival and active role in creating viable development. The

coercive and normative pressures conveying social and environmental concerns should

be prioritized, contrary to those only centered on economic performance; while the

effects of the mimetic pressures could be exploited in a positive way, if some incentive is

created for some SEZs to be the first ones leading the way, ultimately accelerating the

transition to sustainable growth and making it more efficient.

By applying the Developmental State and Neo-‐liberal theory we analyzed how the

Chinese government have been using interventionist industrial policies to open their

economy gradually and used SEZs as testing labs to experiment with economic and

political reforms and let them spill over to the rest of the society if proven successful.

Having identified how China is faced with emerging social and environmental concerns,

we reached the conclusion that the state should not abolish its interventionist

instruments and completely open up to Neo-‐liberal market forces, but instead once again

use the SEZs actively as dynamic experimental grounds to test new policies to fight the

increasing social and environmental pressures encompassing the emergence towards

entering the second and third stage of development introduced.

Finally, Blyth’s framework of ideas as institutional blueprints, cognitive locks and

weapons allowed a study of the evolution of the ideas about economic reality in China

and about SEZs’ objectives in between 1978, the institution of the Open Door Reform, and


40

2001, China’s accession to the WTO. This analysis stressed the link between the initial

ideas about how to pursue economic development and the configuration of SEZs that is

not taking into account any social or environmental dimension. Although these economic

ideas prevailed for some time, leading to institutional path dependence and in some cases

to race-‐to-‐the-‐bottom effects, they were eventually challenged by new emerging notions

advocating a renewed role for the SEZs, which would still consist to create economic

growth while including social and environmental improvement goals.

Summing up, our line of argument have led us to the conclusion that in order for them to

remain viable vectors for development, SEZs have to adapt faster and more efficiently to

the evolving social and environmental challenges. This should be done by following the

next recommendations. Firstly, exploiting the potential of the special status of SEZs to

once again use them as testing labs for policy implementations seems promising.

Secondly, in order to remain updated and in phase with the next stages of development,

policy makers should adopt a more market dynamic state intervention by listening to the

various pressures exerted on the SEZs. Finally, in a more general manner, SEZs should

reorient their activities towards human capital, innovation and green technology, which

could be a great way to conciliate economic growth creation while simultaneously

responding to the concerns related to environmental and social challenges.


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Appendix I

Source: International Monetary Fund in Duncan Hugo, and Martosko David, October 9th 2014: America usurped: China becomes world's largest economy -‐ putting USA in second place for the first time in 142 years http://www.dailymail.co.uk/news/article-‐2785905/China-‐overtakes-‐U-‐S-‐world-‐s-‐largest-‐economy-‐IMF-‐says-‐economy-‐worth-‐17-‐6trillion-‐America-‐falls-‐second-‐place-‐time-‐1872.html


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Appendix II

China's GDP growth (annual %) between 2005 and 2013 Note from the source: GDP growth (annual %): Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 U.S dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Source: World Bank national accounts data, and OECD National Accounts data files, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/CN?display=graph

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