TABLE OF CONTENTS

OVERVIEW:

Is there an upper bound to liberalization in authoritarian regimes? Why has China turned back to a state-led development model? In this book, I explain China’s puzzling shift to an increasingly state-led economy, reversing the trajectory of several preceding decades of market-oriented reforms. Applying the analytical insights of open economy politics in shifting domestic preferences, I develop a theory explaining when and how economic openness and interdependence can create political risks for authoritarian regime survival – risks that then filter through domestic politics to limit the very progress of economic liberalization that created these risks. In this way, economic openness can, counter-intuitively, strengthen anti-reform coalitions and create the conditions for its own demise – "limits to liberalization".

This book charts the process of economic liberalization and the renaissance of statist policy in a larger theoretical framework which identifies the tenuous political balance created by economic interdependence. Authoritarian regimes face distributional conflicts and battles over the role of the state in governing the market, but generally lack institutionalized means for resolving these conflicts. Economic interdependence thus presents a double-edged sword for authoritarian regimes. Openness facilitates the economic growth necessary for maintaining popular and elite support. At the same time, that uneven subnational integration into global markets can pose both localized and national-level risks to authoritarian stability. These localized risks include labor market shocks due to concentrated production, while national-level risks include social unrest and intergovernmental tensions arising from inter-regional inequality.

I develop a theoretical framework to explain how authoritarian regimes manage globalization and deepening economic interdependence, in both normal times and in times of crisis. First, I examine the regime's pre-crisis redistributive strategies in the face of globalization and trade openness. Drawing on fieldwork and panel data, I show that as China became more interdependent with the global economy, the state responded to spatially uneven development with a strategy of decentralized redistribution. Targeted variation in government spending and social policy has provided partial solutions to the localized risks from economic interdependence, enabling the Chinese regime to pursue its model of export-oriented economic growth and favor pro-market forces. 

However, an external economic shock, such as an international financial crisis, makes the severity of political risks far more acute and provides autocrats with new information about the risks of economic liberalization. In the face of an external crisis, authoritarian regimes turn to statist interventions that facilitate spatial redistribution and industrial reallocation, mitigating exposure to localized and national-level risks. This in turn leads to domestic political realignments. Statist, anti-reform actors are empowered at the expense of pro-liberalization actors, resulting in a slowing and even a reversal of trends in economic reform. Global crises can thus catalyze ideational and coalitional shifts that may address political risks, but also create a new state-led political economy equilibrium.

In this book, I examine China's response to the 2008-2009 global financial crisis, which posed a major trade shock to the Chinese economy. The Chinese government responded with large-scale statist intervention, including a massive stimulus package that facilitated spatial redistribution and industrial rebalancing. To isolate the causal effects of trade shocks on China's policy responses, I create an original measure of subnational exposure to export shocks brought on by the global financial crisis, using county-level data on the location and industrial classification of all Chinese firms, combined with product-level data on changes in U.S. imports following the financial crisis. I show that 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 (sub-provincial administrative areas) where the shock was less severe.

Drawing on evidence from Chinese policy documents and secondary sources, I examine how the CCP's statist response to the financial crisis was driven by concerns about alleviating localized and national-level political risks from uneven development. Geographical redistribution shifted investment and infrastructure development to less globally exposed regions, while the state took on a heightened role in industrial reallocation and promoting key strategic industries. Additionally, I unpack how the 2008 crisis (and the chosen strategy of statist intervention) empowered statist ideas and anti-reform coalitions. This has served to entrench the role of the state in the Chinese economy, contributing to problems of excess industrial capacity and unsustainable local government debt.

My findings have important long-run implications for the trajectory of China's trade and industrial policies, as well as its behavior on the international stage. The premium placed on regime stability has impeded broader market-based shifts and imposed limits to liberalization in authoritarian regimes. Since the global financial crisis, the CCP has accelerated heavy state involvement in its trade, technology, and industrial policies today, such as Made in China 2025, putting China on a crash course with the U.S. and other trading partners in the global political economy.