Crony Capitalism with Chinese Characteristics Chong-En Baiy Chang-Tai Hsiehz Zheng (Michael) Songx This version: May 2014 EXTREMELY PRELIMINARY AND INCOMPLETE Abstract We propose three key features of Chinese capitalism as the institutional foundation of the fast- growing economy of China over the last two decades. First, local governments, instead of the central government, utilize political and economic powers to support the businesses connected to them (i.e., cronies) regardless of ownership. Second, there are implicit arrangements that political leaders will benefit personally from the success of their cronies. Third, thousands of local governments are doing the same practice and competing with each other. These characteristics explain the presence of local “crony capitalists”in each locality, the bias in the provision of public goods towards those benefiting local businesses instead of households, high profit rates and high growth rates among the favored firms, and a biased concentration towards exports. JEL Classification: Keywords: China, Crony Capitalism, Institutions, Growth We thank seminar and conference participants at many places for helpful comments. yTsinghua University, School of Economics and Management. Email:
[email protected]. zUniversity of Chicago, Booth School of Business. Email:
[email protected]. xUniversity of Chicago, Booth School of Business. Email:
[email protected]. “You let me take care of the politics, money and land; you just focus on getting some cars built here.” (from a conversation between a vice party secretary of the city of Wuhu and the CEO of Chery, a local automobile manufacturer) 1 Introduction The fast-growing economy of China over the last three decades is one of the most remarkable events in world economic history.