18 tackle these difficult problems across the economy, the government insulated these two sectors and provided targeted solutions, improving security and infrastructure around the main tourist areas and giving the _maquila_ sector special trade policy treatment (Hausmann, Rodrik, and Velasco 2006, p. 15).

Pilots or sector-specific experiments can be important catalysts for nationwide reform rather than enclaves, provided they are properly designed. Reformers need to design these initiatives from the outset to be replicable elsewhere. They also need to tackle institutional and other constraints to the expansion of reforms beyond the pilot areas. And they need to keep their attention focused on the pilot throughout the process—from design through implementation and monitoring—to learn the lessons offered for broader reforms. Most importantly, while pilot and sector-specific approaches help elicit information about what works, they also require willingness and clear criteria or mechanisms for cutting-off failures before they become too costly.

## **Box 2. Special economic zones as the laboratories for China’s land reforms**

In China special economic zones served as the laboratories for developing nationwide land reforms in the 1980s. The experiments with land started with the establishment of the Shenzhen special economic zone. When foreign firms started to invest in Shenzhen under China’s “open door” policy, demand for land grew rapidly. Because the existing legal framework did not allow the transfer of land, the local government tested transfers of land use rights by allowing the allocation of state-owned land to serve as local firms’ contributions to foreign joint ventures. Prompted by continued growth in demand and by learning from Hong Kong (China), the provincial government took the experiment further: in 1981 it issued regulations allowing the transfer of land use rights to investors and establishing fee standards for land use. By separating land use from land ownership rights, the new policy allowed foreign investors for the first time to lease land for a given period, with up-front fees for use rights. It also increased revenues for the provincial government and preserved its land ownership.

The experiment continued. In 1987 the provincial government declared the end of the old free land use policy and the Shenzhen municipality conducted the first sale of land use rights to a local public company. And in 1988 provincial ordinances officially recognized that land use rights could be transferred, assigned, or mortgaged. The successful experiment in Shenzhen led to a national constitutional amendment allowing transfers of land use rights (leases) “in accordance with the law”—the critical step that permitted land market reforms to spread to the rest of the country.

_<u>Source</u>_ <u>: FIAS case study of reform in Shenzhen, China, forthcoming.</u>

# **BUILDING COALITIONS TO SUPPORT REFORM**

Reform is most likely to succeed in a supportive political climate. Creating such a climate can be a central challenge of the reform process. It requires understanding the attitudes and influence of different stakeholder groups. It also requires the painstaking process of building coalitions for reform. And that requires strategies to leverage and mobilize