Competition for Investment: Causes & Consequences of the Rise of the Special Economic Zone

Why do national and subnational governments enact special economic zones (SEZs)? My dissertation uses cross-national statistical analysis, country-case studies, and municipal-level comparisons to examine why governments enact SEZ programs. I created an original dataset of SEZs for all countries from 1970 to 2014, testing several theories of SEZ enactment. I find that countries with a fixed exchange rate are more likely to enact SEZs as they open their financial system. There is also a statistically significant relationship between regime type and SEZ enactment, but I do not find support for the hypothesized regime type mechanisms. Counterintuitive to conventional SEZ wisdom, democracies are more likely to enact zone programs than non-democracies.

Using the cross-national findings as a foundation, I then ask, how is enactment different in a set of national- and subnational-level case studies? Case studies relied on field research in China, Jordan, and the United Arab Emirates (UAE), where I collected primary source materials and interviewed local leaders. Additional case studies of the Dominican Republic, Mauritius, and Sri Lanka utilized the secondary literature. Using four national-level case studies, I examine the role of regime type and external actors in SEZ enactment. Mauritius and Sri Lanka are examples of how regime type shapes the impetus for SEZ creation. In Mauritius, leaders responded to electoral demands from constituents thus illustrating labor demand arguments consistent with the current FDI literature. In contrast, Sri Lanka’s initial SEZ enactment coincided with a shift away from democracy, as leaders centralized both economic and political control. In Jordan and the Dominican Republic, external actors played a key role in enactment. The United States encouraged zones in Jordan and the Gulf and Western corporation spearheaded SEZs in the Dominican Republic.

In China, early SEZ enactment (occurring between 1978-1984) is consistent with the macroeconomic logic tested in the cross-national study. However, later phases of enactment are not explained by international macroeconomic factors. Instead, we must look to domestic explanations for later waves of SEZ program expansion. In the 1990s, land-use policy in China and the commodification of land explain a decade-long period of “zone fever.” Since the mid-2000s, the latest phase of SEZ creation has been focused on centralization of political control over economic and financial policy. The final set of cases focus on the role of local leaders and land politics showing how authoritarian patterns of land-use may not be unique to China. I examine the role of land and SEZ enactment in Aqaba, Jordan; Dubai in the United Arab Emirates; and Shanghai, China, to show how local leaders shape SEZ policy.

The creation and implementation of SEZs is not monolithic. However, there are macroeconomic and political patterns associated with the use of this policy. The rise of the special economic zone is associated with financial opening, fixed exchange rates, and regime type. While strong correlations exist between macroeconomic factors and enactment, the explanations for SEZ creation are not complete without also examining external (foreign) actors and the influence of local authorities. China once served as the model for using SEZs, and is now exporting that model across the developing world. Understanding the scale and scope of SEZs is critical for current debates on trade, exchange rates, investment, and export-oriented growth strategies. SEZs are also an ideal microcosm of local-global interaction and highlight the growing role of China in the global economy.