Improving Infrastructure: a cost-benefit analysis of the economic performance of the Huli industrial Zone

Abstract

China established four special economic zones in 1980 to stimulate exports, to assist the transfer of modern technology to China, to attract foreign investment for these purposes, and in general to enable economic experimentation to take place without detrimental effects to the Chinese economy. Protection levels were lowered and special subsidies provided to foreign and domestic investors. The special economic zones absorbed considerable public funds. Following the lead of other East Asian countries, China provided a considerable infrastructure in the zones, in fact going further than most export processing zones in Asia. Thus not only were roads, serviced sites and public utilities provided, but harbours were upgraded with capital­intensive technology and factories and living quarters for foreign investors were built. Financial and economic cost-benefit analysis that analyses the returns on such investment has not, however, been widely applied. This paper applies such analysis to the Huli industrial estate of the Xiamen special economic zone. The cost-benefit methodology required the calculation of the shadow prices of capital and wages. These indicated that the shadow price of capital is considerably higher, and the shadow price of unskilled labour considerably lower, than the prices facing public and private decision makers. The shadow price of capital is about 4 times the official interest rate. Detailed insights into the operation of firms in the Huli estate were also obtained. As the public and private investment already made is a sunk cost, the focus of the study is on how the cost-benefit analysis can be used to improve policies affecting the operation of firms in special economic zones and investment in future special or export processing zones. The case study suggests that, as cunently structured, the Huli estate is costly. Assuming a project horizon of 25 years the rate of return to the investment in the estate is around 4 per cent. Adjustments that would increase the returns to investment seem to be advisable. These should include the reduction of capital intensity in the infrastructure, less capital­intensive inputs into production, reduction of borrowing in China by foreign firms and the elimination of subsidies to public utilities. Raising labour productivity and thus reducing labour costs would also improve the rate of return on public and private investment.