Deng Xiaoping, China’s great reform leader, faced a serious problem in the 1970s. Thousands of young Chinese were crossing to Hong Kong, risking their lives. Rather than cracking down on the migrants, Deng sought to understand why they were migrating. Clearly the economic opportunities in Hong Kong were greater than in mainland China.
Deng was also impressed by the rapid rise of some Asian economies, in particular the modernisation of Singapore. Singaporeans, like the residents of Hong Kong, were majority Chinese by descent and had even less natural resources. How did they achieve something that China couldn’t?
The answer was that these countries had better rules, better incentives and better economic governance systems. Deng knew he needed to ‘reboot’ China with reforms that allowed markets to coordinate economic activity, protect private property and allow for foreign direct investment (FDI): radical reforms in communist China at the time. He also knew that implementing these reforms in the entirety of the country would be a nonstarter.
Entrenched interests who benefit from the status quo would fight to keep the existing order. To solve this, China demarcated the Shenzhen area as a special governance zone and implemented a new – more open – economic system. This was the start of the Special Economic Zones (SEZs) in China. It was promoted as a laboratory to experiment with market principles to serve ‘socialism’.
The results are astounding. In the past 40 years, Shenzhen has been transformed from a fishing town of less than 30,000 to the third largest and rapidly growing city in China. The population of Shenzhen has grown to more than 12 million residents. In 2018, the economy of Shenzhen was US $ 366 billion, four times that of Sri Lanka. Many more SEZs now exist in China and around the world.
In some ways, Deng’s problem is now Sri Lanka’s problem. To be sure, emigration out of Sri Lanka is not as severe as it was in 1970s China. Sri Lanka’s business environment is also not as bad as the Chinese system at that time. Yet, market-based reforms started in 1977 have all but stalled.
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