Equality, the Disinterested Government, and Economic Growth:
The Case of China[*]
Daxing He
Ph.D. student
Yang Yao
Professor
National School of Development
China Center for Economic Research
Peking University
Phone: 86-10-62753103
Fax: 86-10-62751474
January 28, 2010
Equality, the Disinterested Government, and Economic Growth: The Case of China
Abstract: We put forward a political economy explanation to China’s economic success in the last thirty years. This explanation is centered on the concept of disinterested governments, i.e., governments that do not have consistently differentiated interests among the segments of the society. In a repeated Stackelberg game of a government and two groups of citizens, we show that under reasonable constraints on the returns to revolutions, a disinterested government arises if and only if the two groups of citizens have relatively equal political powers that determine their capabilities to initiate successful revolutions. We also show that the social output is higher under a disinterested government than under a biased government. We provide historical evidenceto show that the Chinese government has been disinterested in the last thirty years and attribute it tothe absence of significant social inequality in China.
JEL classification: H11, O43, O57
Keywords: Equality, disinterested governments, authoritarian states
- Introduction
Between 1978 and 2008, China’s national GDP recorded an average growth rate of 9.7% per annum by its official statistics(NBS, 2009). Although more conservative estimations arrive at lower growth rates,[1] China is still one of the thirteen economies that managed an annual growth rate of 7% or higher for more than 25 consecutive years after World War II (The Growth Commission, 2008).
To a large extent, China’s economic success can be attributed to its almost relentless reform drive toward a market economy. Although the reform has takenan unconventional path, itsdestinations --- in both policies and institutions --- have been clearly converging to those recommended by mainstream economics. From this point of view, China’s high economic growth record has nothing miraculous to it (Perkins, 2004). However, this view leaves an important question unanswered: if the standard economic theories are so right, why have not most developing countries followed them? Or in other words, why has China been able to adopt the right growth recipes? This begs a political economy explanation.
Central to this paper’s argument is that China’s success lies in its disinterested government. Here the word “disinterested” is used in one of its three meanings in aesthetics, that is, a person is unbiased by personal interests when he makes judgment, inquiry, evaluation, and the like on objective existences.[2] Therefore, a disinterested government is defined as a government that takes a neutral stand when conflicts of interests among different social and political groups arise. In other words, it is a government that does not consistently represent --- and is not captured by --- any social or political groups in the society.This does not mean that such a government is devoid of self interests; quite to the contrary,it can not only have its own interests, but also be predatory toward society at large. The key is that its predation is “identity-blind” in the sense it does not care about the social and political statuses of its particular prey. For that, its policies are more likely to be selective but growth enhancing --- that is, allocating resources by the levels of productivity rather than by group identities --- than those of a government that consistently represents the interests of certain social or political groups.
The Chinese government has been disinterested in the last thirty years. A distinctive feature of the Chinese transition from economic planning to the market is that the transition has been a voluntary choice made by the ruling Chinese Communist Party (CCP)[3]while transitions in other former communist countries were largely forced upon them by political transformation(Boycko, Shleifer and Vishny, 1996). The reform, however, has been a process of transferring power from the CCPelites to ordinary citizens. The party has avoided being trapped by elite dominance. In the meantime, government policies have been selective based on the premise of economic growth, not the political or social influences of different groups. The Special Economic Zones (SEZs), export-oriented growth model, accession to the World Trade Organization (WTO), and the privatization of state-owned enterprises (SOEs) are but a few examples. In addition, the government is willing to correct the policies that imply a mismatch between the treatment and productivity of a certain group. The abandonment of the dual-track price system and fairer treatment for migrant workers are two examples.
Being a disinterested government is a strategic choice by the CCP for its own benefits. We identify social equality as the most important condition for the Chinese government to opt for a disinterested position. Although economic inequality is not uncommon, China has a flat social structure with no significant elite groups, thanks to a series of revolutions in the first half of the twentieth century and the egalitarian rules implemented in its planning era. Compared with a socially unequal society, a socially equal society is more likely to produce a disinterested government. A difference between economic inequality and social inequality is that the latter is related to identity while the former is not. Identity facilitates the formation and consolidation of enduring special interest groups because identity is exclusive. A socially unequal society, then, is often divided into two significant segments, a smaller group of elites and a larger group of ordinary citizens. Often, the elites have overwhelming economic and political advantages over ordinary citizens. In such a society, the government is more likely to become biased, i.e., to form an alliance with the elites and take advantages of ordinary citizens. In contrast, in a socially equal society no group has overwhelming advantages over the others, so revolutions by the disfavored groups become credible threats to the government if it does favor some groups of the society. That is, it does not pay for the government to form an alliance with any group in the society. Then a sensible choice for the government is to treat social groups equally and adopts group-blind policies.
We formalize the above idea in a repeated Stackelberg game of a government and two groups of citizens. Our model builds on three key premises:
(1)The government is autonomous in the sense that it is free to choose its allies.
(2)The government in an autocracy does not enjoy absolute power but faces challenges from social groups.
(3)The government can differentiate social groups in its policies.
The key to understanding the first premise is to realize that the government in our model is itself an independent group and needs to choose an ally from the two social/political groups. In the case of China, this is equivalent to treating the top CCP leadership as a coherent group. To be sure, there are fights within the top leadership, but they are not sufficiently serious to lead to a collapse. The second premise holds for most non-democratic governments including the current Chinese government. By definition, non-democratic governments do not obtain their legitimacy from popularly consented selection rules. Military might does not guarantee power in the long run. Indeed, the buildup of military forces is often elicited by the potential of upheavals in the country. In China, the CCP might not have faced serious challenges in the initial years after it took power; but by the mid-1970s, its legitimacy began to falter because of its failures in the first twenty years of rule. In 1976 and 1989, two major democratic movements broke out. In today’s China, numerous protests and even upheavals happen each year against the government’s infringements on individual rights although political movements are at a relatively low ebb. The third premise holds in both democracies and autocracies and is commonly found in the literature on government behavior. For example, most of the papers to be reviewed later in this section are built on this premise. In China, social groups are more commonly defined by regions, urban-rural divide, and sectors. It is easy for the government to differentiate its policies along these lines.
In our model, the two groups of citizens are distinguished by the amount of assets and the size of political power that each group can rely on to wage a revolt against the government when it is not the ally of the government or to retain power when it is the ally of the government and faces the revolt of the other group. Here political power is the indicator for social inequality. The government taxes both groups and uses the taxes for its own consumption and the provision of club goods to the two groups. It is called a disinterested government if its policies (tax rates and the provision of club goods) do not depend on the two groups’ political power. Adopting the pure stationary Markov perfect equilibrium (MPE) as the solution concept for the game, we find that a necessary and sufficient condition for the government to be disinterested is that the two groups of people have relatively equal political powers. This is so because otherwise it pays for the government to form an alliance with the group with greater political power and charge a higher tax rate on, and provide a lower level of club goods to the other group without the danger of being subject to a successful revolution.
The social output is higher under a disinterested government than under a biased government. This is shown intuitively by noticing first that the best stage utility a group can obtain with a successful revolution, i.e., a revolution that eliminates the current government and the other group, is its autarkic utility --- that is, utility it can obtain when the government ceases to exist --- because the new government installed after the revolution can survive by just giving the victorious group that level of utility. When the two groups have relatively equal political powers, both would start a revolution if they obtained a level of utility lower than their autarkic level. As a result, the government gives each group its autarkic utility and the sum of outputs is the autarkic social output. In all other cases, each group has a chance to initiate a successful revolution and the final reward of the revolution (the autarkic output) is shared by them with their probabilities of a successful revolution as the weights, albeit discounted by their impatience. As a result, the sum of their outputs falls short of a convex composition of their autarkic outputs. This result also implies that there exists an optimal social structure with a relatively equal distribution of political powers under which the social output is the highest.
There is a rich theoretical literature relating retarded economic growth to inequality through negative government policies. Most of it, however, studies democracies. For instance, Alesina and Rodrik (1994), Benabou (2000), and Hassler, Rodriguez-Mora,Storeletien, and Zilibotti (2003) study the relationship between the inequality of wealth and government’s redistributive policies; Esteban and Ray (2006) demonstrate how inequality of wealth may distort government allocation through asymmetric lobbying; Renzo (2007) focuses on how asymmetric political powers may lead to short-sighted government policies; and Galor, Moav, and Vollrath (2009) show how equal land distribution is conducive to growth by promoting human capital accumulation.
Esteban and Ray (2006)’s work has direct bearing on our paper. They treat lobbying as a signal sent by private agents to the government showing their productive worthiness for preferential treatments. However, high wealth enables agents to launch louder lobbies. Because the distribution of productivity does not match the distribution of wealth, inequality distorts government allocation of resources even if it seeks to maximize economic efficiency. In a sense, our model provides a parallel theory on autocracies. In Esteban and Ray’s model, economic equality reduces the strength of lobbying serving as a signal for productivity, while social/political equality reduces the strength of revolutions that forces the government to take biased policies in ours. In both cases, equality makes the government more likely to allocate resources to match the productivity of social groups. One of the differences, however, lies in the fact that their model is built on the premise that productivity is private information to individual agents and equality reduces the distortion caused by the government’s inability to obtain accurate information, while our model assumes perfect information but shows that equality improves efficiency by freeing the government from the fear of losing power. Another difference is that we do not assume efficiency-maximizing government. The social output generated under a disinterested government, therefore, is only the second best. Of course, the subjects of study --- democracies in their study and autocracies in ours --- naturally make the two models different in many other aspects.
Our model also shares the spirit of Galor, Moav, and Vollrath (2009)’s in that both ascribe underdevelopment to unequal social structure. However, we stress the role played by the competition among different social groups whereas they stress the role of a specific group, the landed class, which is associated with a sector (agriculture) with a low demand for modern inputs like human capital.
There is a small but growing literature on the performance of autocracies. While most studies focus on the persistence of autocracies (e.g., Acemoglu, Ticchi, Vindigni, 2007; Padro-I-Miquel, 2007; and Acemoglu and Robinson, 2008), two recent papers have studied why some autocracies have obtained better records of economic growth than others. Gehlbach and Keefer (2008) observe that autocracies performed better in terms of economic growth when the ruling party had a longer history. They interpret this finding as evidence for the positive role of party institutionalization. Specifically, their theoretical model takes within-party information sharing as the most distinctive feature of party institutionalization. Party members are informed of the behavior of the leader and can punish the latter by obstruction. As a result, the leader becomes less predatory on party members who then become more likely to invest in the economy. Besley and Kudamatsu (2007) further provide a detailed documentation of the economic performance of autocracies after World War II and put forward an explanation for successful economic records. In their model, a selectorate comprised of a group of insiders selects the leader. In an agency model, they show that when the selectorate’s power does not depend on the leader’s being in office, its threat of replacing the leader becomes credible and the leader chooses strategically to adopt growth-friendly policies. In a sense, this story is one of party institutionalization, as proposed by Gehlbach and Keefer (2008).
However, Besley and Kudamatsu (2007), together with Padro-I-Miquel (2007), have a close link with our paper in terms of modeling. Padro-I-Miquel (2007) studies why some failing autocracies could last for a long time. His explanation is one of “rule by fear”. In his model, people in the ruling group have to deliberate between replacing a bad ruler and the repression of the competing group if the internal struggle leads to the loss of power of the ruling group. One of his key assumptions is that the probability of losing power is high when people in the ruling group replace their ruler. In a sense, this is equivalent to the assumption that the two groups of citizens have equal political power. In contrast, Besley and Kudamatsu (2007) are at the other extreme. Their condition for a better autocracy, i.e., that the survival of the ruling group does not depend on whom its leader is, is equivalent to the assumption that the ruling group has superior power over the competing group. Put together, these two papers suggest that equality between groups is actually bad for the society.
Our model differs from these two papers by treating the government as a third group and focusing on between-group, instead of within-group, dynamics. Treating the government as an autonomous group is consistent with the roles of the rulers in several autocracies (like South Korea under Park Chae-Chi) as well as CCP’s role in China. Our result that between-group equality helps growth differs from the results of Besley and Kudamatsu (2007) and Padro-I-Miquel (2007). Those two papers treat between-group dynamics as the background of their models and thus ignore some of their important implications. For example, Besley and Kudamatsu fail to explain why the ruling group does not become excessively predatory on other groups if it has absolute advantage over them. On the other hand, Padro-I-Miquel does not address why the other group cannot force the ruler (and the ruling group) to behave better if it can take any available opportunity to replace the ruling group. The reason that between-group equality does not lead to a better government (ruler) in his model is that the competing group cannot directly influence the behavior of the leader of the ruling group; instead, it undermines the ability of the ruling group members to supervise their leader. While our model is not aimed at replacing the arguments of those two papers, we do bridge the above gaps left by them.[4]