Special economic zones and liberalization avalanches

Co-authored with Vlad Tarko

Journal of Entrepreneurship and Public Policy, Vol. 10 No. 1, pp. 120-139.

Abstract: Purpose: The purpose of this study is to show under what conditions a special economic zone will succeed at spurring development and at sparking broader liberalization. Design/methodology/approach – The authors use a combination of formal modeling and case studies.

Findings: Most special economic zones fail because of rent-seeking. Successful zones create positive economic and political externalities to other regions. Credible reforms are associated with turning the opposition to the zones into supporters, as a consequence to the positive externalities.

Originality/value: The authors add heterogeneity to the model of political elite dynamics, which leads to significant enhancements of the model and removes the pro-centralization bias of the Blanchard and Shleifer’s (2001) model. They also criticize Weingast’s federalism model as applied to China. Success of China is explained by a different mechanism, which we put forth in this paper.

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This paper presents export processing zones (EPZs) as a rent-seeking tool with the appearance of a development policy. My model indicates that EPZs do not benefit an economy via backward linkages but through marginal improvements to a country’s trade regime.

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