December, 2014

Why No Chinese Miracle in Africa?

Special Economic Zones and Liberalization Avalanches
  • Lotta Moberg

  • Vlad Tarko

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Continue reading at SSRN. 

Special economic zones (SEZs) have been touted as “tools for development”, and yet their results have often been disappointing. We explain how SEZs can be used to reform a country from a system dominated by rent-seeking to a liberalized economy, where officials derive their revenues from taxation rather than rent-seeking. We provide a model of elite dynamics to explain the conditions under which governments can create SEZs that promote country-wide development. Our model predicts that SEZs may only lead to country-wide development in fiscally decentralized countries with heterogeneous elites. SEZs allow areas of a country to liberalize further than the standard theory of federalism suggests. An elite minority in favor of liberalization can therefore introduce SEZs that have external liberalizing effects on other regions in the country. This in turn incentivizes more elite members to promote liberalization. Comparing the SEZ programs in China and Ghana illustrate how seemingly similar SEZ programs can have very different results.