Saving an Authoritarian Regime by Privatization

Abstract

China is ruled by the Communist Party of China (CPC). The market oriented reform launched by the Party since 1978 has shifted the legitimacy of the Party’s ruling position to economic development. However, the anti-capitalistic constitutions of the Party and the state make private ownership of the firm illegal before 2002. Yet, de facto private sector took off in the late 1990s and became a major driving force of China’s growth. This inconsistency between the constitution and the reality became a major challenge to the Party since most entrepreneurs were not Party members and most private firms did not have Party branches. In responding to the challenge, in 2002 and 2004, the constitutions of the party and the state were amended respectively that legitimates capitalism and protects private property rights. Are these constitutional amendments effective in saving the regime? If the answer is yes, then what are the mechanisms which make these legal changes effective? What do these constitutional amendments do to the Party, to the private sector, and to the protection of private property rights in general? This paper addresses the above questions based on nationwide firm level survey datasets and provincial level party-membership datasets covering the period over 15 years. Identification problems are addressed.