Economic Interdependence, Political Risks, and the Limits to Liberalization

Abstract

Is there an upper bound to economic interdependence for authoritarian regimes? Why has China turned back to a state-led development model? This book charts the process of economic liberalization in a larger theoretical framework that identifies the tenuous political balance authoritarian regimes face under conditions of economic interdependence. Applying the analytical insights of open economy politics, I develop a theory explaining when and how economic interdependence – which bolsters regime legitimacy – can also create political risks for authoritarian regime survival. These risks, particularly when exacerbated by external economic shocks, can cause ideational and coalitional shifts that empower statist actors. This results in a slowing and even a reversal of trends in economic reform, and the formation of a new state-led political economy equilibrium. In this way, economic openness can, counter-intuitively, strengthen anti-reform coalitions and statist ideas, creating the conditions for its own demise – “limits to liberalization”.

Drawing on a quasi-experimental research design, panel data, primary source documents, and fieldwork evidence, I examine the case of China’s economic liberalization and its puzzling shift to a state-led economy after the 2008 global financial crisis, reversing several decades of market-oriented reforms. To isolate the causal effects of trade shocks on China's policy responses, I use an identification strategy that is the reverse of the ‘China Shock’ approach, along with an original measure of subnational exposure to export shocks brought on by the financial crisis. I show that, counter-intuitively, the Chinese government responded to this threatening trade shock not by fiscally propping up those areas most affected by the shock, but instead by investing in prefectures where the shock was less severe. Additionally, I use qualitative primary and secondary sources to trace how concerns over political risks drove the regime’s response, and how this entrenched statist coalitions in China’s political economy. This has altered the trajectory of China’s trade, industrial, and overseas investment policies, increasing conflict with the United States and the global political economy. This theoretical framework and empirical findings advance understanding of the politics of economic interdependence and of trade and economic policy in authoritarian regimes.