Monday, Mar 27, 2017, 8:32 PM CST – China

Commentary

China’s FTZs can catalyze a new round of economic reform

By setting up FTZs to experiment with new policies and new models, the central goverment hopes to trigger a new round of competition between local governments

In the past months, as plans to establish free trade zones (FTZ) in selected localities have been formulated, debate has continued over their relative significance in China’s economy. For some, the newly proposed FTZs are merely geared towards promoting trade and investment through preferential policies. To these observers, there is little to distinguish FTZs from the economic development zones already set up by multiple local governments.

However, as details of the establishment of FTZs in Guangdong, Fujian and Tianjin are unveiled, it has become more and more apparent that the long-term vision for FTZs will go beyond promoting trade and investment and mark the start of a new round of economic reform aimed at transforming the country’s existing development model.

China’s economic growth in recent years has been achieved in part by encouraging local governments to compete with one another, which was the rationale behind the establishment of special economic zones (SEZs) in the country’s coastal regions in the 1990s. As the SEZs achieved economic success through reform and liberalization, their example fostered reform nationwide.

However, as China witnessed rapid economic growth, the dividends from the last round of reform have gradually dried up. To maintain growth rates, the government has resorted to massive stimulus spending, resulting in a litany of problems ranging from environmental disasters to excessive production capacity. As China’s growth rate stagnates, it is clear that a State-led, investment-driven development model has led to a dead end.

Despite consensus on the need for change, it is very difficult for local governments to initiate relevant reforms as they have become so entrenched in China’s existing development model. By setting up FTZs to experiment with new policies and new models, the central government hopes to trigger a new round of competition between local governments and provide them with the momentum to reform. There is some evidence that this strategy is working, as governments in several provinces such as Shandong and Anhui have declared that they will attempt to replicate the experience of the newly-established FTZ in Shanghai.

The goal of sparking national-level reform is enshrined in the rubric of the implementation plan for Shanghai’s FTZ, which states that it serves “a national strategy” to promote the transformation of the function of government in search for a “new governance model” in accordance with international practices and rule of law. A major focus is to reform China’s existing administrative system, which focuses on advance approval for commercial projects, rather than supervision and regulation after the fact.

There is no doubt that China’s FTZ strategy faces a number of obstacles. Firstly, the dependence of local governments on the existing development model means that many will resist reform that may hurt their interests. It is reported that there has been much disagreement between the central government and local governments over the proposed scale of the FTZ plan.

Secondly, as China’s economic growth may slow further, there has been mounting pressure for the government to prioritize boosting the economy over pushing forward reform. The recent suspension of a move to streamline local taxation practices reflects the delicacy of its issue.

Finally, FTZ reform will have a major impact on the administration of many localities, affecting the interests of many local agencies which have entrenched themselves in the existing administrative system. These agencies will be among the most resistant to reform.

Despite such difficulties, FTZ reform and the vision behind it marks out the future direction of China’s development. It could well prove as durable and long-lasting as the country’s previous, pioneering economic experiments.

The author is a co-founder of ShiJu Think Tank.

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