Special Economic Zones and Liberalization Avalanches

Abstract

Special Economic Zones (SEZs) have been touted as “tools for development”. China in particular has become the beacon of SEZ success, as the zones have played an important role in the country-wide reform process. However, in many other cases, SEZs have failed. To understand when SEZs succeed and when they fail, we describe SEZs as a peculiar form of top-down decentralization, and develop a model of political entrepreneurship to explain under what conditions SEZs can be expected to help generate a transition from a rent-seeking society to a liberalized economy. This model builds on the Blanchard and Shleifer’s (2001) model to provide a better explanation for China’s success than the federalism model proposed by Weingast, Montinola, and Qian (1995).

Keywords: federalism, rent-seeking, economic reform, China, political entrepreneurship

JEL Classification: B52, O19, O24, O43, P26, P52