The People's Republic of China, 1949-2012: A Political Economy Perspective

Mark Li

Major Professor: Charles K. Rowley, Department of Economics

Committee Members: Walter E. Williams, John Paden

Enterprise Hall, #318
October 01, 2012, 02:00 PM to 11:00 AM

Abstract:

This dissertation explores the evolution of China from a socialist economy to an authoritarian market economy from a political economy perspective. I present here findings and insights from analytical history, theories, empirical analysis, and case studies.

Chapter 1 presents an analytical history of China from the Xia Dynasty to the Early Chinese Republic (2070 BC – 1949). I trace the history back to the beginning of Chinese civilization, and evaluate its progression over a span of more than 4,000 years in terms of social, political, economic, and philosophical developments. This chapter serves as a framework which is useful in understanding and analyzing the political economy of modern China.

Chapter 2 introduces a public choice evaluation of two key dictators, Mao Zedong and Deng Xiaoping, who shaped modern China. The first stage of the evaluation analyzes the ideologies of these two dictators and their initial choice of economic institutions. I find that the ideological formations of both dictators are path dependent due to the unique Chinese culture stretched over a span of more than 4,000 years. I also find that the initial economic institutions utilized by both leaders are influenced by their upbringing. The second stage of the evaluation uses a model of dictatorship developed by Ronald Wintrobe (1998) to analyze Mao and Deng as dictators. I find that their behavioral differences fit into Wintrobe’s model of power-maximizing dictators, and more importantly, that Wintrobe’s model is compatible with the unique Chinese culture which shaped Mao’s and Deng’s behavior as dictators.

Chapter 3 provides a timeline of China’s political and economic transition between 1949 and 2012. Starting with Mao, his failed socialist economy ended in the chaos of the Cultural Revolution. After Mao, Deng established a blueprint for China’s market oriented growth model, which created the incentive for local government officials and self-interested individuals to engage in profit-seeking exchanges. After Deng, Jiang followed Deng’s footstep by promoting economic privatization which transformed China into an authoritarian market economy. After Jiang, Hu slowed down China’s market process by focusing on strengthening the existing state-owned enterprises, and increasing media censorship and repression. Xi will be the next leader of China, based on what is known of him, Xi’s pro-Mao political ideology is unlikely to be compatible with greater economic freedom in China.

Chapter 4 applies empirical analysis to case studies on the evaluation of economic freedom in China, from 1978 to 2000. First, using the Tiananmen Square protests of 1989 as a tipping point to the advancement of economic freedom in China, I empirically test economic factors driving Chinese citizens’ increased awareness of freedom, which led to these protests. Using statistical data at the provincial level and the number of protestors at major cities, I find that domestic investment of the collective and the private sectors, FDI, and the level of education at the provincial level are highly correlated with the number of protestors in major cities. Second, I empirically test the impact of major reforms of state-owned enterprises (SOEs) on the productivity increase of SOEs. I find that the corporatization reform had a greater impact on the productivity increase of SOEs than incentive based reforms. This finding conforms to the agency theory that increased ownership diversification reduces the principal-agent problem in a firm.

Chapter 5 develops case studies on the impact of China’s WTO accession to China’s sustained economic growth, from 2001 to 2012. First, I empirically test the effect of government size at the provincial level to foreign investment inflow, and then repeat the process to test the impact of foreign investment inflow in promoting the growth of non-state enterprises. After filtering out the effect of geographic and economic advantages, I find that smaller provincial government size, as measured by provincial government expenditure, attracted greater foreign investment, while foreign investment inflow are highly correlated with provincial economic growth driven by non-state enterprises. Second, I analyze the impact of China’s rapid economic growth, driven by both domestic market-oriented reforms and foreign investment, on the demand for rural migrant workers in the urban areas. I find that even though the demand for rural migrant workers has increased significantly in the 2000s, yet it has had little or no impact on the institutions of hukou or the household registration system.

Chapter 6 tests the theory of political survival developed by Bruce Beuno De Mesquita and Alastair Smith (2011) on China’s dictatorship. This theory predicts that the behavior of dictators depends on the relative size of the minimum winning coalition and the selectorate. Consistent with the theory, a smaller minimum winning coalition leads to greater private goods and less public goods in China. In addition to their theory, I find that the relative size of the different factions within the winning coalition matters just as much if not more in shaping the behavior of China’s dictators. Then, I use Xi’s presidential transition and Bo Xilai’s political downfall as a case study. I find that although the size of the minimum winning coalition most likely will decrease from 9 to 7 after Xi’s succession, there will be an increase in factional competition within the larger Politburo committee of 25 from a “bipartisan” system to a “multi-partisan” system. Finally, I evaluate China’s four alternative shifts from the status quo over the coming decade and the conditions that will determine which of them will most likely take place.

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