Unchecked and Unbalanced Watch

Whenever these proposals come up, I always wonder what institutional structures are supposed to prevent these "free zones" from just being taken over in the name of suppressing tax evasion (a suppression that is deeply popular with wider society).

Libertarians tend to see government action as universally intrusive first but it is worth remembering that libertarians are a very small minority, and conservatives and liberals tend to have well-practiced skills at constructing sympathetic arguments for intervention.

And major participants and investors of any such economic zone would of course have enormous incentives to invite nearby governments in to protect the prevailing order the moment some kind of "recalculation" seems imminent, so you can't rely on them to rush to the defense either.

I don't know whether I'm agreeing or disagreeing with david, but I think Hong Kong is a fairly representative example. Economic freedom from the free zone influences the broader society towards economic freedom, while having little to no effect on political freedom. China has gotten more capitalist, but not more democratic.

Hence while I am a fan of free zones as a way of offering jobs for the poor and spreading economic freedom, I am skeptical that they will lead to serious political experimentation. That said, there does seem to be a connection between a growing middle class and democracy, a lot of the countries where free zones occur have government that are worse than democracy. By nourishing the middle-class, they may lead to democracy, which is an improvement in government.

The question of institutional methods to maintain the political autonomy of a free zone is a difficult one. But in this Ostrom Nobel year, perhaps we can have hope that bottom-up innovation will find ways to solve such problems?

@ Patri Friedman

Hong Kong is in fact shedding political freedom (e.g.) under the pro-Beijing Tsang government.

In the meanwhile, it is also succumbing to local populist pressure (e.g.). This isn't really surprising.

I think we agree that competition on a political front seems unlikely. But I venture that competition on economic policy doesn't happen either. Neither the people inside nor the governments outside will play along.

Bob Haywood, former director of the World Economic Processing Zones Association, makes the case that free zones led to increased economic liberalization in Taiwan, South Korea, China, Mauritius, Mexico, Ireland, and perhaps other nations as well. Taiwan and South Korea began their economic miracle with export processing zones 40 years ago, and they are now far more economically liberal than they were then. The empirical track record of zones is both positive and longer lasting than David would have us believe.

Haywood makes the case this empirical record on behalf of increased economic freedom exists because zones allow a way around North's problem of the "Natural State." Instead of simply elites seeking rents, zones allow for a subset of elites to make more money by means of the zones than they could make directly by conventional rent seeking. As other elites see this, they then become a constitutency for economic liberalization, either through expanded zones or through liberalization in a market sector in which they have an advantage.

Taiwan, etc., are hardly libertarian paradises, but they are striking cases of economic freedom moving in the right direction. Can we harnass the incentive possibilities of zones and improve upon the extent to which they act as catalysts for economic liberalization? Seems like a direction well worth exploring to me.