Mary E. Gallagher, 2002; Reform and Openness: Why China's Economic Reforms Have Delayed Democracy

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The relationship between economic growth and democracy has been discussed a lot in the literature of both economics and politics. The Lipset Hypothesis proposed in 1959, and aftermath modernization theories, put forward a causal relation between them, because economic growth will promote education, mobilization and communication in a country. Indeed, development examples supporting this hypothesis are easily found, in East Asia and East Europe. The recent decades of China's experience, however, seems to have broken away from this rule. Even with persistent high-rate economic growth, the authoritarian regime of China is still in dominant power. So how to explain this Chinese exceptionalism?

This paper published 12 years ago gives us an answer--the timing and sequencing of FDI liberalization. And this FDI explanation can be decomposed into two variables, the pattern of ownership diversification and its integration into the global economy.

Before detailed analysis, the author firstly argues against two other explanations. One is the gradual nature of China's reforms. It's incomplete because this is not unique to China. The other is China's ability to implement reforms without losers. It's wrong because losers did exist; they are just fragmented by the unique sequencing of China's reforms.

Why FDI liberalization can delay political liberalization?
1) the foreign-invested enterprises acted as a capitalism laboratory, which alleviated the failure of SOE reforms.
2) the participation of foreign capital created competition among regions and firms.
3) FDI successfully shifted the debate over public versus private industry, towards national versus foreign interests.

In comparative perspective:
1) USSR failed in socialism reforms while China succeeded. USSR's problem is exclusively relying on the reform of SOE, whose failure thus couldn't be resolved by other reforms like TOEs and FDI in China.
2) Hungary's privatization reform finally transformed its political system while China did not. Because the success of private economy strengthened the power of private enterprises, which led to stronger demand for liberalization. China's private sectors, however, were greatly restrained and substituted by foreign-invested sectors, so the power was fragmented.
3) The deviation to democracy of Korea and Taiwan is basically the same case of Hungary. Development of chaebols in Korea and ethnic Taiwanese enterprises finally resulted in the cleavage of business elites and authoritarian leadership.

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reform and openness_why china's economy reforms have delayed democracy.pdf
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