Free trade zones for reform, not bonuses

Local governments must pay more attention to initiating bold reform rather than waiting for preferential policies meted out by the central government, says an article in 21st Century Business Herald. Excerpts:

The habitual needs of securing stable economic growth may make many local governments divert their attention from deepening reform to struggling for preferential policies from the central authority.

Nearly 30 provinces and cities have applied to set up free trade zones this year. Compared with slow economic restructuring, it is much easier to obtain marked economic growth through winning preferential policies from the central government.

In recent decades, there has been hot competition among local governments to establish “high-tech development zones” at various levels. The central government’s preferential policies on land, tax and exports for such zones bring immediate effects to boost the local economies.

But the time of seeking policy bonuses for development zones in China has passed. The renewal of China’s manufacturing industries lies in technological innovation and the improvement of management. That’s why development zones have weakened remarkably.

FTZs mainly benefit the service sector, but opening the service sector in a limited area cannot bring about immediate effects. The main purpose of service sector reform in FTZs is to trial policies and explore the borders of government administration.

Thus, it is predictable that if FTZs flourish across the country, there will be a lot of speculation arbitrage in their service sectors. However, some less-developed regions do not even have the necessary conditions to seek free development of the service sector.

Although the central government regards FTZs as experimental fields to deepen reform in some hoped-for areas, such as the financial industry, many local governments still regard such zones as another arena in which to fight for central government preferential policies, and they just want to copy their experience drawn from development zones to FTZs.

The misunderstanding of FTZ reform by governments at various levels, if unchecked, will weaken the foundation for these important reform experiments.