Comparing the Developments of the Nkok SEZ, Gabon and Qingdao, China

by Philippa Noble

Development is the key method for economies to improve standards of living and compete meaningfully on the world market. In this essay, due to the governments’ heavy emphasis on improving infrastructure and industry in both areas, judgements and comparisons will be focussed on the UN’s Sustainable Development Goal 9: Industry, Innovation, and Infrastructure. These goals were created to follow on from the UN Millenium Goals, continuing to strive for greater global development of key areas: including industry, education, and poverty. This includes the quality, reliability, and equitability of the resulting development and these factors will be considered in the overall judgement of each case study. Nevertheless, the key points that development will be measured against in this essay are comprised of industrial output, equity in placement, and sustainability.

Investopedia (2018) defines FDI as “an investment made by a firm or individual in one country into business interests located in another country”. This has played a major role in both Qingdao under Deng Xiaoping (seen here through the lens of 1982-1989) and the Nkok SEZ (Special Economic Zone) since 2011 in bringing new business to the countries and diversifying production.

In the following essay, evaluations have been focussed on two main sources: An article by economist, Jae Ho Chung in The China Quarterly, and the official Gabon SEZ website. The former was written by an economist of South-East Asian descent, potentially leading to biases in interpretations due to emotional links to the area. However, none of the author’s interpretations have been included, only the raw data referenced in his article so biases of that nature have been avoided. Although, as typically sceptical Western economists, we may be wary of statistics forged by China itself, we should recognise that socialism only works with a high level of economic planning. If data is inaccurate or skewed in any way, the necessity of planning within China would cause a collapse of administrative functions. Therefore, despite acknowledging potential biases or corruption (in order to promote Qingdao as a thriving area), a reasonable level of accuracy is very likely as it had an important role within Chinese governing. The latter was created and is maintained by employees of the Nkok SEZ, again making skewed data for managerial gain likely. Furthermore, data inconsistencies between the website and an official presentation could signal either corrupted data reporting or outdated online content. For the purposes of this essay, where data inconsistencies have been found, the lower bounds have been quoted so as not to overstate the development in the Nkok SEZ. There is unfortunately no way to show any skews in the data due to misreporting or corruption as there is no other public source of data for the area. Nevertheless, as it is used to promote investments, the data should be accurate so as to afford trust and confidence in the management of the Nkok SEZ. It should also be noted that exact comparisons of data were difficult to obtain as the produced data reflected their different purposes. Jae Ho Chung’s quoted data set was organised and extensive, making it easy to compare the growth between years, however statistics found on the Gabonese SEZ website followed their need to be promotional - making them circumstantial and likely only representing the successes of the SEZ.

i) Qingdao, China 1982-1989

Between 1982 and 1989, China used preferential policies and favourable tax rates within Qingdao to promote development and entrepreneurship (via FDI). Due to a change in philosophy (from socialism to “socialism with Chinese characteristics” - in essence, “whatever works”), it became general policy to open up markets and ports to foreign business. However, at the beginning of the 1980s, after counsel from Ohira of Japan, the focus was to build institutions and ensure vital resources were accessible. This is an important goal in a planned economy, yet the move out of complete socialism was on the horizon. The country-wide improvement and creation of institutions would go on to found more business confidence - allowing firms to access credit, patents, and general security. This would then boost innovation and entrepreneurship as new companies had greater support and reward for their work.

Crucial policies behind opening up Qingdao’s markets include its designation as a Coastal Open City in 1984. Three key effects of this (almost) immeasurably aided Qingdao’s development. Firstly, the creation of development zones allowed for hugely favourable tax rates in those areas. Enterprises were afforded a two-year exemption from tax and a three-year reduction of tax (which Jae Ho Chung shows amounted to 15% instead of the normal 33-55%). Lower tax rates encouraged the relocation to and creation of firms within Qingdao as profits increased for business owners, allowing potentially more research and development (leading to recurring benefits for both the Chinese state through a greater future tax revenue and for the business through new opportunities to gain a greater market share). As seen in Fig. 2, a more favourable tax rate led to a shift right in Supply. Having improved the profitability of producing within this market by reducing total costs (and, thus, increasing the profit margin), the quantity produced increased from Q1 to Q2. This shows the greater desirability of the market (Qingdao) and its effects on increasing output within the area. Secondly, duties on imports of advanced technology were completely removed. This made it easier (and more desirable) for technology firms to relocate to Qingdao, supporting the previous incentives. The policy also supported home-grown companies in bringing a new sector into the economy. Furthermore, with incentives to import advanced technologies, capital stocks swelled within Qingdao, bringing China to the forefront of production and innovation with the capital to support it. Thirdly, the area was deregulated and became, to an extent, autonomous. The Qingdao local council gained approval authority over FDI projects of up to USD5 million (which was later increased to USD30 million); the need for provincial licenses to export was also removed. This deregulation made doing business with foreign countries and companies much easier, as suddenly there was an easy way to bypass the bureaucracy of the Chinese government at the time. Qingdao was now a much more attractive area to do business in: it had been deregulated, taxes had been slashed dramatically, and advanced technology imports were encouraged.

These policies cumulatively brought not only trade to Qingdao, but also technology, capital, skills (as foreign companies would train their workers from the local community), and jobs for its population. A drive by Deng Xiaoping supported this by sending students to universities across the world. Some feared a brain drain, where the top skilled workers and thinkers are lost to other countries. However, a large proportion of the students sent overseas returned, allowing China to profit from new, foreign knowledge, leading to recurring benefits such as better quality innovation and education. As seen in Fig. 3, an increase in skill in the workforce of an economy, increases efficiency and thus the amount of a good able to be made in any given timeframe. Therefore, Supply shifts right, extending Demand and reducing the price of the good to P2. Furthermore, a secondary effect shows production increasing to Q2 - amounting to a greater production level within the market. This explains the recurring impact of FDI within the Qingdao area, which continued into the late 1990s. The immense benefits of these policies were later furthered by Qingdao’s CEC designation in 1987, opening the city even more to foreign business.

Table 1: Gross Value of Industrial Output in Qingdao and the entire People’s Republic of China in 100 million Yuan

	Qingdao	PRC Total	% of PRC Total (self calculated)
1982	67.28	5,577.45	1.206
1983	77.63	6,166.54	1.259
1984	85.00	7,029.85	1.209
1985	99.37	8,294.51	1.198
1986	111.10	9,028.46	1.231
1987	129.00	10,364.67	1.245
1988	160.01	11,577.85	1.382
1989	176.84	12,294.56	1.438

Note: Data for GVIO in Qingdao and the PRC total from Robert Ash and Y. Kueh (1996).

Table 2: Gross Value of Agricultural and Industrial Output in Qingdao in Renminbi 100 million^{^[1]}

1978	68.3
1985	141.1

Note: Reprinted from “A Sub-Provincial Recipe of Coastal Development in China: The Case of Qingdao.”, by Jae Ho Chung, retrieved from The China Quarterly vol. 160, 1999.

^{^[1]} Renminbi is interchangeable with the Chinese Yuan

This heavy focus on FDI and streamlined development of one city reaps its reward when we look at the contemporary data. Table 1 shows the accelerated growth in industrial output between 1982 and 1989, almost tripling within the given time period. The benefits of Qingdao’s preferential policies are even clearer when compared to the PRC total for each year. Qingdao as a city keeps up with the PRC’s ambitious goals for rapid growth and even begins to expand its share of the country’s output by 1988 and 1989. Although accounting for less than 2% of the PRC’s total industrial output, it is important to remember the comparative sizes of the entire country and the sea port. In fact, its share of output grew by almost 20% between 1982 and 1989. These impressive statistics are reinforced by Table 2, showing the growth of not only industrial output but agricultural production as well. As a historically agriculture-based area, the impacts of preferential policies within Qingdao would not be fully observed if agricultural output was ignored. 1978 marks a period before open policies were passed, making an apt comparison with Qingdao in 1985, during the time these policies were enacted. Table 2 shows that overall output had more than doubled within the data given.

A final point of crucial and telling data, the value of foreign investments swelled almost immediately after the policies and statuses mentioned above were implemented. In 1984, after being declared a Coastal Open City, foreign investment totalled USD29.5 million (USD17.4 million contractual, USD12.1 million actual, as detailed by Jae Ho Chung). Impressive on its own, Qingdao really outdid itself when previous data is compared (where the past 5 years had totaled only USD8.9 million, calculated by Professor Chung). The dramatic increase in foreign investment amounted to more than triple what was received in the half decade beforehand. Similarly, having gained CEC status in 1987, Jae Ho Chung records that 14 foreign firms were established in Qingdao in 1988 - the delay being due to political opposition from Shandong causing issues in obtaining permits for foreign trade.

There were many characteristics which were crucial to this example of developmental accomplishment. Primarily, the frequent leadership changes within Qingdao’s local authority allowed politicians to move past the traditional ideology. This was key in promoting open policies and ensuring full commitment to encouraging foreign investment. In comparison, earlier leaders were “conservative and lukewarm about [open city reforms]” according to Jae Ho Chung. A potential cause for its success was the political system in China. The level of control upheld by the government meant that it could fully enforce its policies and was generally not reliant on a favourable economic situation. Furthermore, reforms could cover all parts of life. Qingdao was afforded control of foreign investment contracts, but the government could change tax rates, foreign policy, and growth goals in order to fit their own ambitions. In this way, the reforms that Qingdao benefited from were supported in many ways from many different sectors. It is important to note in comparing the two cities in this essay that this introduction to the global market was welcomed and encouraged by many other countries, and so China received support and advisors from the World Bank and Japan (from the aforementioned Ohira). The extent of the World Bank’s evaluation and recommendations to the Chinese government certainly played a part in Qingdao’s development. Furthermore, the welcoming stance taken by major trading partners contributed heavily to the acceptability and encouragement of trading with a former Communist country. This, therefore, promoted China as a trading partner, channeling business through Coastal Open Cities such as Qingdao. Nevertheless, Qingdao’s success was, like many things, tainted by inequality. These preferential policies represented China’s focus on selected areas; by making some cities more appealing, they focussed trade and development solely into these areas. Therefore, Qingdao attracted more business for China as a whole, but also became a hub for international trade for the surrounding area - meaning that other cities suffered. In a country-wide sense, these reforms and this development was not equitable. However, within Qingdao it could be assumed that there was a reasonable level of equity, due to creation of jobs, training of workers, and focus of advanced technology. This covers the broad sectors of society - low skilled workers, skilled workers, and the well-off (as the technology would likely have been marketed to them and by them).

Overall, the development of Qingdao must be deemed a great success. As a stand alone city, its growth showed in its increased production and share of the PRC’s output. Despite developing to the detriment of other cities, a central hub of foreign trade could have also aided China as a whole in providing a well-known, centralised place of business - cutting costs of institutions, administration, and strengthening business confidence. The main factor in this city’s history, I believe, was the openness of its leader, Deng Xiaoping. In moving away from the dogmatic ideology of complete socialism, Deng Xiaoping allowed the country and Qingdao to use its assets (such as major ports) in new and profitable ways. And this, despite high levels of inflation in the later years, is what I believe let Qingdao flourish, not only between 1982 and 1989, but well into the 1990s.

ii) Nkok SEZ, Gabon 2011-present

Ever since the agreement between the government of Gabon and the international company Olam in 2010, the economy has been diversifying and expanding - following the goals of the Gabonese government after the crash of oil prices in recent years. In 2011, Nkok was created as a SEZ (Special Economic Zone). This follows the Chinese model of development in specific areas, creating a hub of foreign investment by using preferential policies. For instance, Kate Dougla reports how foreign firms setting up in the Nkok SEZ benefit from full tax exemption for the first ten years, then a lowered tax rate of 10% for the next five years, following the theory in Fig. 2. This is notably more generous than China’s example in Qingdao, however global markets are substantially less enthused about the small Gabonese market than the booming economy of 1980s China.

Kumar Mohan, head of GSEZ finance (as quoted in GSEZ.com, 2018) states that "up to 80% on land acquisition and up to 60% on plant construction can be financed by ECOBANK." Making transactions and investment as easy as possible, the Gabonese government has done well in removing any answers to the question “Why not?”. Strong institutions such as ECOBANK increase business confidence and enable companies to gain capital or be set up. Fig. 5 shows that as institutions make investors feel more comfortable supporting and creating firms within an economy, AD shifts right (from AD1 to AD2) as more investments enter the markets. This pushes real GDP from Y1 to Y2, showing an increase in production and price, encouraging more firm activity through the promise of higher profits. To further this, deregulation of the area means that a company can be created in just 48 hours. For investors, Ruth Maclean reports (in theguardian.com, 2016) how visas can be obtained in three days. This again enables companies and investors, encouraging business through comparative ease in tax, moving, and finance. Despite all the encouragement in these policies, the area has worked hard to ensure that impressive infrastructure is in place to support companies. For example, the Nkok SEZ has constructed a 230m long quay to aid transport and shipping in supplies and encouraging exports.

The above policies have proved a great success. In the process of creating the Nkok SEZ, Gabon has created “reliable” (as quoted in GSEZ.com, 2018 by Shailesh Barot) infrastructure supporting FDI. A functional water and electricity supply, a police department, and residential areas are only a few examples of the city-like infrastructure built into Nkok. It should be noted that FDI is coming towards infrastructure, rather than infrastructure developing due to FDI. Therefore, Gabon has made itself attractive instead of being an initially desirable market. On another note, there has also been external industry development (mainly through the Gabon-Olam partnership). Olam’s position in Gabon has grown within the palm industry and by promoting entrepreneurism. Program GRAINE has led to the development of 200,000 hectares of plantations which are owned by smallholders (structured into cooperatives). A primary goal of the Gabonese government was to diversify the economy, having suffered following volatile oil prices. Thus, the multi-sectoral zone that is Nkok SEZ has certainly met their aim, housing companies from different industries including furniture, cement making, and electronics. Finally, a goal of any developing, or indeed developed, country is to create jobs. The Nkok SEZ website (GSEZ.com, n.d) boasts the creation of 1800 direct jobs in 2016, 60% of which were local workers. It shows that the Nkok SEZ is supporting not only the Gabonese economy, but the local community as well.

Overall, Gabon’s development of the Nkok SEZ has been widely successful. Likely due to slightly desperate preferential policies, around 80 companies have been involved in the Nkok SEZ, showing great progress for the area. Plots within the zone are still empty or being constructed, meaning that there is potential for even higher returns, however also insinuating that interest in investments is not incredibly high. Referring to Goal 9, infrastructure has been developed by the Gabonese government and by links with foreign investment, leading to greater security in institutions, residencies, and jobs in the area. Furthermore, innovation has also been addressed through Olam’s promotion of cooperatives in Program GRAINE. Industry has grown and diversified, achieving one of the core goals of the Nkok development area. From the partnership with Olam International to the latest investor within Nkok SEZ, the development in the zone has been not only due to the work of the government but also FDI. This has played a major role in improving, driving, and adding to the community in Nkok. Gabon has even bypassed the worries of many: growing Chinese political control over Africa. China has only been represented in a small way within Nkok’s development, an area that was built and improved by Gabon itself and therefore avoiding all the finance issues linked with China’s so-called “Debt Trap Diplomacy”.

The two case studies explored above are remarkably similar. Their existence as port cities lends both Qingdao and the Nkok SEZ to FDI-led development. Shipping and international links are much easier to uphold when the quayside can be seen through the window. Thus Gabon’s tendency to make trade incredibly easy shines through from even the most fundamental of characteristics - its geography. Aside from the concrete, Qingdao begins to differ from Nkok. Preferential policies used in each city are very close in essence, yet the extent to which the Nkok SEZ almost begs for trade is not matched by Qingdao. With prior links to South Korea and Japan, perhaps Qingdao did not need to drop tax rates as far or cater to companies as much as Nkok. Furthermore, the small 2.07 million person market of Gabon really cannot compare to China’s historic population of over 1000 million. This naturally makes the investments into Qingdao more attractive as there is room for a business and market to grow within a much larger population. As Wu Jingchun, an economic advisor, said about Gabon (chinadaily.com, 2014): “If you sell everyone in the country two cellphones that is only 3 million phones”. Perhaps lower tax rates and more extensive preferential policies makes up for Nkok’s lack of a large market. Nevertheless, the use of such policies is a defining characteristic in both cases. On a similar note, the focus on one area and the creations of SEZ or CEC-esque zones are typical of Qingdao and Nkok. Therefore, the role of the government is also very similar. With Deng Xiaoping looking to move away from all-encompassing socialism, the ideologies and participation of (local) government are almost identical. Due to the smaller population, Gabon’s government can act directly in the Nkok SEZ but plays a similar role to the local government in Qingdao. Deregulation, preferential policies, and central rule are common features that allow some areas to benefit from development while others are neglected.

The main difference between these two examples is the substantial GDP growth that China benefited from within the period 1982-1989. Here, China averaged 10.575% growth each year, whereas, between 2013 and 2016, Gabon only averaged 3.975% growth per year. Of course, there are other factors dictating growth, however as the instances studied above are typical of the development in each country (Qingdao was only one of many designated Coastal Open Cities) it seems a fair comparison of the respective effects of each development. Both are taken in comparable stages of their development - i.e. in the early stages of FDI where the effects have not fully been realised. So perhaps, despite the modest growth enjoyed by Gabon since Nkok has been open for business, in the future there will be higher rates comparable with Qingdao’s rocketing growth in the 1990s. The evidence shows that China has benefited from much higher growth than Gabon can ever aim for - yet this appears to be reliant on China’s goliath population and its ideological revelation under Deng Xiaoping. Unfortunately, Gabon has neither a large population, nor been a menacing political rival to the First or Second World resulting in a warm welcome when they return to capitalism or socialism respectively. These assets cannot be easily manufactured, so it seems that Gabon’s growth will follow the pattern of China’s yet at a much lower level.

To comment on the effectiveness of these policies, it appears that in coastal cities with FDI-led development, making trade as easy as possible is a guarantee for success. The evidence from Qingdao suggests that initial growth is much lower than after a 2 to 5 year lag. Nevertheless, support from the global scene must be achieved to attract business - through links with the World Bank, IMF, or other international trade links. China benefited from World Bank counsel and the West’s welcome after rejecting complete socialism; Gabon also received loans from the IMF and generally has trade backing from China and other countries looking to cash-in on emerging markets. This certainly paints a rosy picture of the future for Gabon; following all logic, growth should boom within the next few years. Yet perhaps, more Special Economic Zones should be created to properly follow the model of China - not to focus all development in one city, but still focus it enough to create multiple hubs of foreign investment within the country.

References

(n.d.). Retrieved from https://www.google.com/maps/place/Qingdao, Shandong, China/@31.7855396,110.2362425,5.04z/data=!4m5!3m4!1s0x35960fd582f8f06b:0x614d82fa614cf2f3!8m2!3d36.067108!4d120.382609

(n.d.). Retrieved from https://www.google.com/maps/place/GSEZ GABON SPECIAL ECONOMIC ZONE SA/@-0.7349906,10.239211,8z/data=!4m5!3m4!1s0x107f3b75eb3b31cf:0x62026a7e8ce2ecb!8m2!3d0.4079131!4d9.4381574

About the Sustainable Development Goals – United Nations Sustainable Development. (2018). Retrieved from https://www.un.org/sustainabledevelopment/sustainable-development-goals/

Bucknall, K. (1997, 07). The Chinese Economy Under Deng Xiaoping.Robert F. Ash , Y. Y. Kueh. The China Journal, 38, 188-188. doi:10.2307/2950348

Chinese companies face challenges in Gabon. (n.d.). Retrieved from http://africa.chinadaily.com.cn/business/2014-04/14/content_17431432.htm

Chung, J. H. (1999, 12). A Sub-Provincial Recipe of Coastal Development in China: The Case of Qingdao. The China Quarterly, 160, 919. doi:10.1017/s0305741000001387

GSEZ - Gabon Special Economic Zone | gsez.com. (n.d.). Retrieved from http://www.gsez.com/

Gabon luring foreign companies through attractive incentives. (2014, February 21). Retrieved from https://www.howwemadeitinafrica.com/gabon-luring-foreign-companies-through-attractive-incentives/28506/

Maclean, R. (2016, August 16). Gabon aims to cut yawning poverty gap by ending its dependency on oil | Ruth Maclean. Retrieved from https://www.theguardian.com/global-development/2016/aug/16/gabon-yawning-poverty-gap-end-dependency-oil

Staff, I. (2018, April 22). Foreign Direct Investment - FDI. Retrieved from https://www.investopedia.com/terms/f/fdi.asp

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Comparing the Developments of the Nkok SEZ, Gabon and Qingdao, China

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