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 different mechanism, which we put forth in this paper.

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