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Political institutions, entrenchments, and the sustainability of economic development – A lesson from rural finance

Author

Listed:
  • Qian, Meijun
  • Huang, Yasheng
Abstract
This paper provides insights on the sustainability of economic development from a historical and political economy perspective. We demonstrate that China's rural financial policy in the 1980s was quite liberal in employing market mechanisms, supporting entrepreneurship, and encouraging competition. These policies were abandoned in the early 1990s and replaced by ubiquitous government interferences that shifted resource and policy priorities to benefit political incumbents. A large panel of survey data confirms that rural household access to finance decreased dramatically in the 1990s and that the statistical significance of economic entrepreneurial factors in determining credit allocation also fell. Further empirical analyses show that market economic conditions are not sufficient to explain these changes and the evidence is consistent with a political entrenchment motive during the political regime after the turmoil in the year 1989. Given the connection between entrenchment and underdevelopment, our findings raise the concern that China's political institutions' insufficient limits on the government could be a challenge for China to sustain its economic success.

Suggested Citation

  • Qian, Meijun & Huang, Yasheng, 2016. "Political institutions, entrenchments, and the sustainability of economic development – A lesson from rural finance," China Economic Review, Elsevier, vol. 40(C), pages 152-178.
    • Handle: RePEc:eee:chieco:v:40:y:2016:i:c:p:152-178
    DOI: 10.1016/j.chieco.2016.06.005
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    References listed on IDEAS

    as
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    9. Huang,Yasheng, 2008. "Capitalism with Chinese Characteristics," Cambridge Books, Cambridge University Press, number 9780521898102, September.
    10. Edward M. Graham & Erika Wada, 2001. "Foreign Direct Investment in China: Effects on Growth and Economic Performance," Working Paper Series WP01-3, Peterson Institute for International Economics.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Cull, Robert & Gan, Li & Gao, Nan & Xu, Lixin Colin, 2022. "Social capital, finance, and consumption: Evidence from a representative sample of Chinese households," Journal of Banking & Finance, Elsevier, vol. 145(C).
    2. Allen, Franklin & Qian, Jun & Qian, Meijun, 2018. "A Review of China’s Institutions," CEPR Discussion Papers 13269, C.E.P.R. Discussion Papers.
    3. Allen, Franklin & Qian, Meijun & Xie, Jing, 2019. "Understanding informal financing," Journal of Financial Intermediation, Elsevier, vol. 39(C), pages 19-33.
    4. Niu, Geng & Yu, Li & Fan, Gang-Zhi & Zhang, Donghao, 2019. "Corporate fraud, risk avoidance, and housing investment in China," Emerging Markets Review, Elsevier, vol. 39(C), pages 18-33.
    5. Han, Yang & Liu, Zehao & Ma, Jun, 2020. "Growth cycles and business cycles of the Chinese economy through the lens of the unobserved components model," China Economic Review, Elsevier, vol. 63(C).
    6. Xinhua Zhu & Yigang Wei & Yani Lai & Yan Li & Sujuan Zhong & Chun Dai, 2019. "Empirical Analysis of the Driving Factors of China’s ‘Land Finance’ Mechanism Using Soft Budget Constraint Theory and the PLS-SEM Model," Sustainability, MDPI, vol. 11(3), pages 1-21, January.
    7. Zhang, Shengling & Dou, Wei & Wu, Zihao & Hao, Yu, 2023. "Does the financial support to rural areas help to reduce carbon emissions? Evidence from China," Energy Economics, Elsevier, vol. 127(PA).
    8. Guangyue Xu & Juanjuan Li & Peter M. Schwarz & Hualiu Yang & Huiying Chang, 2022. "Rural financial development and achieving an agricultural carbon emissions peak: an empirical analysis of Henan Province, China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(11), pages 12936-12962, November.
    9. Lu Han & Haijun Bao & Yi Peng, 2017. "Which Factors Affect Landless Peasants’ Intention for Entrepreneurship? A Case Study in the South of the Yangtze River Delta, China," Sustainability, MDPI, vol. 9(7), pages 1-18, July.
    10. Jiali Zhou & Xiangbo Fan & Chenggang Li & Guofei Shang, 2022. "Factors Influencing the Coupling of the Development of Rural Urbanization and Rural Finance: Evidence from Rural China," Land, MDPI, vol. 11(6), pages 1-21, June.

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    More about this item

    Keywords

    Liberalization; Political events; Entrenchment; Financing; Private sector;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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