Special economic zones and liberalization avalanches

Abstract

PurposeThe 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/approachThe authors use a combination of formal modeling and case studies.FindingsMost 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/valueThe 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.