• Hamsini Hariharan

Shenzhen SEZ: Celebrating the hardware capital of the world and lessons for India

This article first appeared in CNBC TV-18 on August 24, 2020 and can be accessed here.

It used to be a fishing village with a population of 30,000 people, but now Shenzhen makes 90% of the world’s electronics. This is one of the Chinese government’s big successes, as it was the first Special Economic Zone to be set up in the country. For Xi Jinping, who visited the city last week to mark celebrations of 40 years of the Shenzhen SEZ, the place has a special place for him because his father Xi Zhongxun steered the policies in the Guangdong province and kicked off the development of Shenzhen.

With the US-China trade war heating up, Shenzhen has shot into the global spotlight not only as a city that creates cheap knock-offs but also as a city of entrepreneurship. It is home to products like the dual sim feature in phones, the selfie stick, and the most prominent Chinese companies like Tencent, ZTE, and Huawei. The Chinese government is keen to show off the Shenzhen SEZ successes, even though conventional economics argues that state intervention is antithetical to economic growth. So how has a highly centralized and hierarchical Chinese system allowed for flexibility and innovation? The Chinese say that this is embodied by policy experimentation in pockets of the country.

Policy experiments are usually defined as initiatives that help ministries and government departments test new ways to solve policy problems within a limited scale and within a set timeframe. The experiments in Shenzhen Special Economic Zone experimented in the 1980s included the preferential terms for investment, tax benefits, land management, incentives linking wage with performance, foreign banks, stock exchange, privatization of SOEs, boosting consumption, among many others. These reforms in land sales, labor markets, and international capital allowed market mechanisms to work unlike ever before in China.

Policy experiments go beyond finding novel solutions to problems. They require changes in incentives, results, and culture often, going against the prevalent norm and even requiring structural changes. In the Shenzhen experience, many of the SEZ policies went against the laws in the Chinese Constitution. Still, Deng Xiaoping did not stand any criticism against the model in the 1980s.

The vibe of the city, often nicknamed as the “Shenzhen Spirit,” is closely identified with a concept called shanzhai (山寨). An article in the MIT Tech Review describes the process as such, “the shanzhai method delivered “hardware memes”—gadgets quickly designed and built out of easily sourced and readily interchangeable parts. Just as digital news outlets might test multiple headlines and tweets to see which one gets the most clicks, a shanzhai manufacturer would release ten products with a mixture of copied and original designs, and go with whatever worked.”

Indian entrepreneurs will find that the Shenzhen Spirit is similar to the culture of jugaad that permeated much of Indian problem-solving in the 2000s. But why did Shenzhen succeed where Indian SEZs did not? The answer is a three-fold one: The first is that Shenzhen is the most successful of all Chinese SEZs because of its proximity to Hong Kong, which served as a gateway for global investment into China. This meant that other Chinese SEZs like Xiamen, Shantou, and Zhuhai that also started simultaneously, despite their relative successes, continue to lag at a pace similar to Indian SEZs.

The second point is that the Indian system could not carry out policy experimentation in the full spirit. TCA Ranganathan and TCA Srinivasa Raghavan point out that, “In India, SEZs are identified with tax and exchange control relaxations. But the Chinese SEZs were basically areas exempted from the application of various domestic laws, rules and procedures by giving each SEZ chief, usually a senior trusted party leader, wide discretion to adapt international best practices.” India was not closed off as China was, either politically or economically, but its bureaucracy remained a big stumbling block.

The Chinese SEZ experimentation was conceived to attract foreign capital, technology, and knowledge to the country. The Indian SEZ policy was partly inspired by China but was set up mainly to increase Indian exports, and government intervention continued to play a significant role. While Indian SEZs have worked for the IT sector and export-based manufacturing, spillovers to other parts of the economy have been limited. While tax breaks and concessions are essential, they are not enough to sustain an environment conducive to business. This just proves that at the end of the day, there is no replacement for effective governance