Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition

We develop a theory for a transition economy under which an unbalanced development strategy that favors special economic zones emerges as a response to two critical problems: (1) political pressure to satisfy certain social expenditure requirements, and (2) the lack of institutions to constrain the state from expropriation. By promoting the concentration of resources in some areas, a low equilibrium trap can be avoided, while important spillover effects may be generated elsewhere. The experience of China with special economic zones and coastal open areas is interpreted in this light. Some problems in the Russian economy are also discussed in the context of this theory.