Yikai Wang (University of Zurich)
3 February 2014 @ 12:00
“Will China Escape the Middle-income Trap? A Politico-economic Theory of Growth and State Capitalism”
Is China’s rapid growth sustainable if the labor and capital market distortions persist? Will democratization occur given that Chinese middle-class are supportive of the regime? To answer the above questions, this paper proposes a politico-economic theory, as follows. In oligarchy, a political elite extracts surplus from the state sector and taxes the private sector, but it also needs political support from sufficiently many citizens to maintain its power. “Divide-and-rule” strategy is implemented to guarantee such support: state workers receive high wages and become supporters of the elite, while wages of private workers are reduced due to the policy distortion. In the short-run, the low wages in the private sector lead to rapid growth of the private firms and total output. However, long-run growth is harmed by capital market distortions favoring the state firms. The theory suggests that the economy develops along a three-stage transition: “rapid growth”, “state capitalism”, and two cases in the third stage: “middle-income trap” or “sustained growth”, depending on whether democratization occurs endogenously. The theory is consistent with salient aspects of China’s recent development and gives predictions on China’s future development path.
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