Declining Significance of Political Capital in China’s Market Economy

• In Event: 3134 - Economic Sociology Regular Session: Finance, Markets, and the State

Abstract

We examine the proposition that over time market-oriented economic reforms give rise to evolutionary change causing decline in the significance of political capital in economic action. In the 40 years of departure from a classic state socialist central planning, a hybrid mixed economy has evolved in China. Although state structures and economic organizations are subject to the regulatory authority of the Communist Party, decentralized market institutions coordinate an increasing range of economic life in China. Political connections persist as a core element of social structure, and political capital remains fungible in economic life, providing a mechanism of advantage for economic actors; however, such advantages have a declining significance on outcomes for firms. Our results from panel data analysis confirm fungibility of political capital in enabling a firm’s market expansion, but this positive effect has declined over time. We confirm market transition theory’s predictions that investments in political capital are fungible in institutional domains of the market economy where the state continues to control or restrict access to scarce resources; however, this advantage has also declined over time. Further, our results show that political capital does not contribute to a firm’s economic performance in competitive markets. Overall, results from panel data analysis are consistent with the prediction of a decline in the significance of political capital as economic reforms deepen the penetration of decentralized markets in exchanges between producers and consumers. Our study of political capital focuses on the Yangtze River Delta region of China, drawing on a 11-year study (2006-2016) of private manufacturing firms in metropolitan areas.

Authors

• Lisha Liu

• Victor Nee, Cornell University