China & the World Economy 3: China as a Developmental State Flashcards
(18 cards)
What is a developmental state and how does it relate to China’s growth?
A developmental state prioritizes economic growth above all else.
It uses institutions and incentive structures to facilitate rapid industrialization.
Originally applied to East Asia (e.g. Japan, South Korea, Taiwan).
China fits this model due to:
Sustained ~10% growth since 1978.
Strong state-led growth promotion.
Shift from political to economic priorities post-1976.
Origins of China’s developmental state
Economic stagnation and political upheaval (e.g. Cultural Revolution) led to a loss of legitimacy.
White (1993): Reforms aimed to re-establish CCP authority through economic success.
Western prosperity and East Asian neighbors’ success influenced reform.
Cultural Revolution chaos weakened central planning capacity.
(Your note): Mao had eliminated potential successors, causing a leadership crisis after his death.
Transition to developmental state
Concentrated power enabled gradual reform.
Reforms included:
Modernizing leadership (qualifications, cadre training).
Linking promotions to meeting state objectives.
Bureaucrats and SOE managers were reshaped to serve growth goals.
(Your note): China had been “bumping around at 0% growth” until post-1976 reforms.
Evolution of reform strategy
Obstacles: weak leadership, bureaucratic inertia, vested interests.
Reforms had to be:
Efficiency-enhancing
Interest group compatible
Rural reforms began as local experiments, then scaled up.
Gradualism allowed policymakers to learn and adapt.
Political phases of reform
1978–1993: Fragmented power, many veto players → “reform without losers”.
Post-1993: Revolutionary elders died, reformers consolidated power.
Mid-1990s SOE crisis pushed bolder reforms.
(Your note): Children of revolutionary elders had higher status.
Comprehensive reform and feedback loops
Reforms in SOEs, housing, trade, social security, etc., were interdependent.
Success in one area generated revenue to fund and support others.
Growth was the central objective.
Incentives were built into governance to sustain reform momentum.
Incentives in the developmental state
Three key incentives:
1. State appointments (career advancement tied to growth).
2. Local fiscal powers (revenue retention).
3. Patronage (job allocation to allies).
(Your note):
Officials were incentivized to raise taxes by keeping a portion.
Patronage = giving jobs to friends.
Principal-agent problem in China
Xu (2011): China is a “regionally decentralized authoritarianism”.
Political control is centralized; economic management is decentralized.
Each level of government controls the one below.
Target responsibility contracts:
Growth (especially FDI) is the main metric.
Rankings published; top performers promoted, bottom punished.
Rotation of officials spreads best practices.
(Your note): “FDI” = foreign direct investment.
Evidence for incentive effectiveness
Maskin et al. (2000): Leaders from top-performing provinces more likely to become national leaders.
Li & Zhou (2005): Promotions tied to relative provincial growth.
Li (2011): County upgrades to cities based on growth.
Caldeira (2012): Spatial spillovers—leaders influenced by neighboring provinces.
General consensus: personnel policies incentivize growth.
Limitations of incentive system
Jin et al. (2005): Connections matter—positions can be bought.
Landry (2008): Good performance rewarded, but poor performance not punished.
Risk of corruption, rent-seeking, and inefficient investments.
Patronage can distort resource allocation (e.g. state vs. private investment).
How did fiscal decentralization contribute to China’s growth?
Local governments allowed to retain extra-budgetary revenue.
Boosted growth by incentivizing local officials.
Liu (2000): GDP per capita rose with higher marginal tax retention.
1994: Recentralization to protect central finances.
Post-1992: Local control over land sales and enterprise taxes.
Post-2002: Central gov took 50% of local enterprise profits → more land sales and urbanization.
What role did patronage play in China’s developmental state?
Naughton (2008): Patronage emerged from decentralization.
Officials gained loyalty via advantageous contracts.
State-owned bank loans used to build political networks.
Private firms needed good relations with officials.
(Your note): “Powers of patronage” = giving jobs to friends.
What were the key outcomes and structural reforms of China’s developmental state?
Sustained 10% annual growth.
Key drivers:
Capital accumulation (40%+ of GDP)
Labour shift from agriculture
Trade expansion
Privatisation
TFP growth due to labour reforms and capital stock.
Entrepreneurial expectations reinforced investment.
What are the limitations of China’s growth model under the developmental state?
Hard to isolate incentives in growth equations.
Risk of diminishing returns from high investment.
Nee (2007): Local policy intervention hurt listed firms.
Other issues:
Environmental degradation
Inequality
Procedural injustice
How did rising GDP affect subjective well-being and political legitimacy?
Easterlin et al. (2012): Well-being in 2010 = 1990 despite 5x GDP per capita.
Causes:
Economic insecurity
Hukou system seen as unfair
Land sales without compensation
Mid-2000s: New objectives added beyond growth.
What challenges threaten the sustainability of China’s developmental state?
Risks:
Labour scarcity
Financial collapse
Social instability (rising “mass incidents”)
Instability → loss of investor confidence → asset bubbles → banking stress → more instability.
What are the key conclusions about China as a developmental state?
Developmental state requires:
Growth as top priority
Incentivized governance
China succeeded due to:
Favourable initial conditions
Solving the principal-agent problem
Turning bureaucrats into entrepreneurial reformers
But future legitimacy will require more than growth.
