Hello, welcome to visit Shanghai Forum
Graham Mather Interviewer: Yin Xiangshuo
Chairman, World Free Zone Convention Vice Dean, School of Economics,
“Although some people thought zones might be temporary transitional arrangement, they now seem to be both permanent and, here in Shanghai, a pilot for the whole economy. I think in the last ten years, a step up in the importance of zones and a reduction in criticism.”
Yin Xiangshuo: I know you are the president of World Free Zoon Convention, what role does your organization play in the world?
Graham Mather: The World Free Zone Convention is now about 12 years old, its object is to provide a meeting place for the free trade zones and special economic zones around the world. Each year we tend to have one major convention. We’ve had one in Shanghai in 2011. But we have conventions all around the world in Cairo, in Paris and a lot of places. Sometimes smaller regional meetings or meetings and talk with the international authorities, the world custom organizations and so on. Fundamentally it’s a meeting place.
Yin Xiangshuo: Since you have been involved in this activity for many years, you must be quite familiar with the Free Zone development in the world. Can you briefly tell us the development of various free zones in the world?
Graham Mather: The idea of Free Zone came from North Europe in 12 century in cities like Lubeck and Hamburg where the merchants who tended to be the leaders of opinion in those cities decided to reduce customs barriers, promote trade business exchange and to free themselves from the aristocratic princely rulers of the Holy Roman Empire. So there was division really opening up in the old-fashioned states which tended to be war-like and preoccupied with territorial expansion, and the free cities which formed eventually the Hanseatic League, the first European common market in which they traded with each other and reduce the barriers in trade. Then we come to the 20th century, we’ve seen three stages of free zones. First, simple transport shipment areas free of customers’ controls in which they could import goods, perhaps manipulate goods and then export goods again. And then we saw more complicated special economic zones like those in China. The third wave of zones has been a development of zones cities like Dubai, where a zone has all financial transactions, international financial center, or an internet city or a health care city in which the zone technique of lower controls, low taxes, more freedom, has spread to a wide range of activities.
Graham Mather: A zone is a defined area and it clearly has special economical regimes of some types, and zones are typically more liberal than in the rest of national economy. All zones fit into the three categories I have mentioned above.
Graham Mather: When you adopt a zone program, as a country you are sending a signal of several messages. One is to foreign direct investors, which is to say “welcome”. It’s putting up a sign open for business. The second element is often a reduction of controls in barriers. These may be customs barriers, they may be taxation levels and they may be how quickly it is possible to incorporate with business. It’s sending a message of speedy in cooperation. And there can be other aspects of the zone which are helpful. It may bring a cluster of activities which are a bit like a science park, or it may be a focus of expertise, or it may, in the older zones, be a focus on export and export processing. People may say that they are not sure about the workings of national economy in the whole country but they like the security and the predictability which the zone can offer.
Yin Xiangshuo: Are the zones playing the same importance in each country? Which kinds of zones are more successful? Is it a region-specific or type-specific?
Graham Mather: I think zones are rather region-specific than type-specific. For example, in Nigeria the main zones are in the Oil & Gas sector and they have been proved successful in providing an environment in which the trade can be done well. This has been copied in Iraq where there is going to have an Oil & Gas Trading Zone. In other parts of the world, they maybe focus on commodities, electronics and internet. I think it’s hard to generalize about all zones but it is easily noticed that zone programs have been growing in large economies. The way that China has built her economic growth on the special economic zones really sends a signal around the world that zones are here to stay. And the fact that in India there are several hundred zones, much smaller of a quite different type is also an interesting signal that although some people thought zones might be temporary transitional arrangement, they now seem to be both permanent and, here in Shanghai, a pilot for the whole economy. I think in the last ten years, a step up in the importance of zones and a reduction in criticism. Now those critics are seemingly to be a growth agenda.
Yin Xiangshuo: Why do you think after so many years of zones’ development China still need a pilot free trade zone?
Graham Mather: The significance of Shanghai Zone being a pilot is enormous, it’s very profound and there are lessons for the whole world in it. A zone is a small part of the nation’s territory but with a favored privilege regime. There’s a fundamental instability and asymmetry in that arrangement. A healthier sign is that people outside the zone say they would like the same benefits. The significance in Shanghai is that it’s being firstly designed explicitly as an experiment to test policies, and then to extend and replicate those policies across the whole Chinese economy. This seems to be a very innovative and healthy process because it removes the tension. It seems to me an excellent idea and one which is full of potential both for the zone itself and more importantly for the whole economy.
Yin Xiangshuo: If there is no privileges, no preferential policies, how can the zone do its experiment? What are the difficulties?
Graham Mather: There will be some differences between special zone’s privileges and its usage as an experiment. For example, inside the zone, the ownership of the banks of insurance companies and other arrangement, the model of the pilot is we are going to test this for several years, if it works, everyone will have the same policy. It is “test by doing” in a defined area. In designing the zone, counties in the world do not design a policy for the zone which they would be reluctant to have in the national economy. If there is zero tax of goods, zero tax services in the zone, is the country also able to have zero tax on those goods services across the economy? If not, there’s going to be a problem. If you have a differential regime over many years in a country, then that is distorting and unstable. It’s the synthesizing of what’s happens in the zone, what happens later in the national economy, which is the key both to the Shanghai experiment and to the whole future of zones.
Yin Xiangshuo: Can we take measures of the internationalization of Renminbi in the Pilot zone, and target it first at neighboring regions?
Graham Mather: Calibration and timing are very important to the liberalization. If liberalization is done too quickly, a flood of capital will come into the zone in an uncontrolled way which will be dangerous. Another risk to be bore in mind is the relationship between the prudential regulation of banks and insurance companies, the capital controls on them, the reserve requirements in applied them. Clearly this will be reduced in the zone, but reduced rather than eliminated. The question is how to reduce them and encourage a thriving financial services market without damaging the prudential regulation which we have seen from histories in U.S. and in London that lead to disaster.
Yin Xiangshuo: Recently our central bank issued a new policy in the pilot zone allowing business firms and individuals to open a separate account in the zone, what do you think of this new development?
Graham Mather: The policy which was announced by People’s Bank of China on May 22th about separating accounts and opening off-shore accounts is the first step in the liberalization process. It is limited to businesses which have established and registered themselves in the zone and the authority clearly wants to monitor closely the take up and use of these accounts. I think that’s a standard part of banking supervision and I’m sure they will do that carefully and the lessons from that will be the central messages to gage in further replication of those policies. So I think it’s a pilot in the true sense. I was discussing it with my colleagues in the World Bank and their message to Shanghai is “be patient”. There is plenty of time; there is no need to rash this and to expect a transformation over night. Maybe there are critics that it has been 8 months and nothing has happened in the zone, but we should ignore these critics, relax and be patient. And there will be people saying this is frightening and alarming, my colleagues said let us be patient and calm. Let’s see what will happen. I think this is a shrewd and good advice.
Yin Xiangshuo: What advice do you have for further development of Shanghai Plot zone? What kind of difficulty do you think that Shanghai Pilot Zone is facing?
Graham Mather: I think the difficulty Shanghai Pilot Zone is facing is the very high expectations. There is a lot of pressure. To achieve the liberalization on the capital account and in the service sector smoothly integrated with the existing regulatory systems is a very skillful task that needs to be adjusted with great care and precision. I think that’s why the Vice Mayor at the Shanghai Forum said that we faced challenges. I think they are serious but they are also good challenges, they are the right challenges. So by the advice from the Word Bank, we should be patient and cautious, step by step. Come from the governmental system in the UK, criticism is often the other way. In Britain we often think we make policy too quickly, we didn’t think it through, we didn’t secure consensus. Is it really sustainable if the world changes and will the government all be put into reverse? That particularly alarms international investors who like obvious predictability, certainty and long term. Now Shanghai and China have all this advantages, so let’s not rush blindly forward.
Yin Xiangshuo: Do you think there are any differences between private zones and those managed by governments?
Graham Mather: I have suggested the authorities here that in some point in the future it might be possible to consider allowing government owned contractor operated. Perhaps tried first in experiment somewhere, don’t put all your eggs in one basket, try out and see how it’s going. But I think the innovation of the private sector provided with a license environment could be a happy combination.
Yin Xiangshuo: What do you think of China’s trade development related to pilot zone?
Graham Mather: The zone’s spirit is to reduce barriers and tariffs and this is especially important in financial services. Although we have WTO, we don’t have WFO for financial services especially for their regulation. As we globalize, it surely would be better if we can say that in America, Europe and in the BRICS generally broadly are on the same page about how we regulate financial services and how we open up our markets to each other which we are not at the moment. We ought to be more imaginative and less legalistic. Significant part of our future growth is going to be financial services again. A genuine opening and multilateral spirit and positive endorsement by China and steps towards the talks by China would be a welcome development. If China advances towards them, we will then see whether people really want China, I believe they do.
Yin Xiangshuo: Do you think Shanghai Pilot Zone has any significance for development in other countries?
Graham Mather: The positions in the rest of the world where zones become numerous have become rather static. Once they established, they didn’t overflow for the rest of the economy and set the national policy agenda. I’ve always thought that was unfortunate and I believe that Shanghai Pilot Zone is the first zone in the world which is explicitly be seen as a test bed for the whole economy with the whole authority of the government and the president, prime minister behind it. This cannot fail to influence the rest of the world. If they see this succeeding, I think other governments will begin to think like “we have zones, let’s learn from their lessons”, or “why don’t we pilot these ideas and see if we can emulate China?” So I think it’s a brave step in original idea, and for those who are in the free zone movement, it’s sort of great encouragement and pleasure that the economy of China has used the zone for profoundly important purposes. So I think it can’t fail but to be emulated and followed.
Yin Xiangshuo: How many Free Zones are there in the world? What’s your expectation of these zones?
Graham Mather: The figure which is often used suggests that there are about 3500 zones in the world, and these include quite a large number of rather small zones. There are at least 1000 economically significant zones around the world. The academic literature of zones’ development is rather thin, given their academic significance. It’s where new young economists can make their names. But also the international organizations have found it rather difficult first to define and then to capture data, the World Bank is probably the best. All the signs are that they are contributing any increasing proportion of GDP, the number of zones is increasing, and the imagination of the program is becoming more significant. My expectation is that zones will continue to increase. And I hope they will affect the national economy policy too, so what I would really like to see is the transfer of policies in the zones into the national governments. Then we will have another problem of measuring if it’s once a zone’s policy that becomes a national policy.
Yin Xiangshuo: I think your organization will have more roles to play rather than a simply meeting place.
Graham Mather: In Dubai, a new organization has been established called the “World Free Zone Organization” which is designed to be a membership lobby which can have a permanent secretariat and can engage with the international agencies more systematically, and make the case for free zones and promote them. I hope it succeeds; if it does it could be another valuable player around the world’s stage which is promoting the lessons of zones.
Yin Xiangshuo: Could you say a few words for the Shanghai Forum?
Graham Mather: It’s been a great pleasure to come to the Shanghai Forum, the keynote sessions are far reaching, original, imaginative with really distinguished economists and significant colleagues. I believe it brings together thoughtful people in a medium-long term perspective and in a very open-minded way. There has been no equivocation, people have said what they feel, and they have been quite bold in their ideas which I think is a quite tribute to the forum.
