Asymmetric Mutual Dependence between the State and Capitalists in China

• Date: 01 June 2019
• Author: Changdong Zhang
• DOI: 10.1177/0032329219833282
• Published date: 01 June 2019
• Subject Matter: Articles

https://doi.org/10.1177/0032329219833282

Politics & Society

2019, Vol. 47(2) 149 –176

© The Author(s) 2019

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DOI: 10.1177/0032329219833282

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Article

Asymmetric Mutual

Dependence between the

State and Capitalists in China

Changdong Zhang

Peking University

Abstract

China has for almost four decades been experiencing a market transition and an

associated tax state transition, leading to the emergence of capitalists who increasingly

control economic resources and serve as important sources of tax revenue. Some

theories suggest that these changes should give capitalists political power. From the

perspective of the taxation institution, using a mechanism-based case study, this

article investigates whether China’s emerging capitalists have gained bargaining power

with the party-state. Findings suggest that hidden bargaining, patron-clientelism,

legislature co-optation, and legal repression constrain their bargaining power. The

underinstitutionalized taxation system has co-opted the capitalists through patronage

and, more important, deterrence, thereby building an asymmetric mutual dependence

between the local state and capital owners.

Keywords

co-optation via deterrence, mutual dependence, taxation, tax state transition

Corresponding Author:

Changdong Zhang, Leo KoGuan Building, Peking University, Beijing 100871, China.

Email: zhangchd@pku.edu.cn

833282PASXXX10.1177/0032329219833282Politics & SocietyZhang

research-article2019

150 Politics & Society 47(2)

Modern capitalism and the modern state are mutually dependent. On the one hand, the

state depends on the owners of capital, who make economic decisions about whether

and where to invest. Those decisions in turn affect the tax revenue the state collects,

the public goods provided, economic growth, and employment, all of which affect vot-

ers’ election choices in democracies or support for the regime in authoritarian sys-

tems.1 On the other hand, the owners of capital depend on the state for a legal

framework and for enforcement;2 in many late-developing countries, capital depends

heavily on the state, whether developmental or patrimonial. Private sector profitability

is subject to discretionary state support for reasons of “collaborative profitability.” The

state’s support on which capital owners depend, as Eva Bellin argues, is typically

“delivered in the form of subsidized inputs, protected market position, close collabora-

tion in the definition of economic policy, and state containment of labor and the capital

poor.”3 In addition, capitalists’ fear of redistribution and social unrest leads them to

depend on the state for protection.4 In this mutual dependence between the state and

capitalists, the power balance may be asymmetric to various degrees in different coun-

tries, or in different periods in the same country, or in different companies at the same

time and in the same country. That imbalance is an important research topic.5

The Chinese economic system differs from other models of modern capitalism in

many ways;6 since 1992 leaders of the Chinese Communist Party (CCP) have called it

“a socialist market economy with Chinese characteristics.” Nevertheless, the mutual

dependence of capital and state is clearly reflected in President Xi Jinping’s high-

profile speech of November 1, 2018, delivered to dozens of private entrepreneurs in

the People’s Hall to restore confidence in the face of an economic slowdown and a

trade war with the United States. “Over the past 40 years, the private sector of the

economy has become an indispensable force behind China’s development,”7 Xi

declared, calling it the main contributor to job creation and technological innovation

and an important source of tax revenue. The private sector, Xi said, played an impor-

tant role in developing the socialist market economy, transforming government func-

tions, transferring surplus rural labor, and exploring the international market. He

demanded the implementation of policies and measures in six areas to create a better

environment for the development of private enterprises and address their difficulties.

That 2018 speech clearly reflects a structural mutual dependence between the party-

state and capitalists in China; this article will go a step further to reveal the asymmetric

power balance at the local level.

Since 1978, a market transition in China, or more accurately a transition from state

socialism to state capitalism,8 has led to rapid economic growth and the emergence of

many owners of capital—private entrepreneurs or capitalists. That market transition is

associated with a tax state transition (which will be defined in the next section); and

the dual transitions threaten to change the distribution of power between the state and

social actors, especially capitalists.9 In their study of human history, North, Wallis, and

Weingast argue that transitions such as China has experienced have led in the past to

the collapse of the state and provided opportunities for regime change as “the rise of a

new source of wealth from commerce and trade caused a series of political problems,

including new sources of economic and political power.”10 Emerging capitalists,