Political Hierarchy and Finance: The Politics of China's Financial Development
East Asian Capitalism, edited by Andrew Walter and Xiaoke Zhang, Oxford University Press, 2012.
34 Pages Posted: 22 Oct 2012 Last revised: 23 Oct 2012
Date Written: June 1, 2011
This chapter presents a political explanation for China’s financial development since it initiated market reforms in 1978. The argument focuses on the implications that arise from party officials’ incentive to meet specific economic growth targets for their jurisdiction (village, town, city, provincial, or national) in order to be promoted. This promotion incentive leads political officials to exploit the financial system to generate higher growth for their specific jurisdiction while diffusely spreading the costs onto the broader Chinese society. As the jurisdiction of a Chinese Communist Party leader increases from the local to the national level, the ease of achieving economic growth by passing costs off onto others diminishes. In other words, distributive welfare calculations give way to aggregate welfare calculations. Thus, when total costs generated by local political incentives reach crisis levels, national leaders must act before a genuine economic crisis ensues, creating the possibility for dramatic financial reforms which tend to occur in conjunction with leadership transitions.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Outward Foreign Direct Investment as Escape Response to Home Country Institutional Constraints
By Michael A. Witt and Arie Y. Lewin
Changing Japanese Capitalism: Societal Coordination and Institutional Adjustment
Culture, Meaning, and Institutions: Executive Rationale in Germany and Japan
By Michael A. Witt and Gordon Redding