An Institutional Analysis of Market Transition and Political Capital
Abstract: In his 1989 seminal paper, Victor Nee developed the market transition theory (MTT), which argues that reforming socialist economies shift power from a redistributive government to direct producers. One of the most contentious predictions of the theory is that market expansion will induce a relative decline in the value of political capital. However, China’s transition to a socialist-market economy has progressed at different levels, varying across industries and sectors, due to partial reform measures. This paper argues that deficiencies in its institutional environment such as a weak property rights system, credit inaccessibility and bureaucratic inefficiencies, have led particular industries to continue to put a premium on political capital despite market coordination. This paper analyzes the partial reform environment in China and the market structure of its key industries, as shaped by the events of its transition and liberalization. Using the World Bank Investment Climate Survey for China in 2003 dataset, regressions are performed to test the MTT and evaluate the valuation of political capital in 14 different industries.
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