The Rising of De Facto Power: China Evidence

Abstract

Using the anti-corruption campaign launched in China in 2012, we examine how the rise of the economic presence of the private sector impacts economic activities and outcome. Although the economic activities may be temporarily inversely impacted by the campaign because some government officials are less motivated to make economic decisions to avoid any chance of making “mistakes”, industries located in provinces with higher presence of the private sector may be impacted less. We conjecture that the private sector has possessed greater de facto power through the economic resources accumulation during the rapid economic growth and therefore may have pushed for changes in economic/political policies in favor of its interest. Thus, as the role of the political institution in making economic decisions become suddenly weakened because of anti-corruption campaign, the economic activities of these provinces with higher de facto power are less impacted. Controlling for province, industry, and year fixed effects, we find that while the growth of the industry gross output value reduces after the campaign, the businesses located in provinces with higher de facto power are less impacted. We further conjecture that not all economic presence necessarily leads to the rising of de facto power in the private sector. In highly regulated industries where the government desires to retain the controlling influence, the private sector has little chance of pushing for policies in favor of its interest. We find that the mitigation effect of the de facto power on economic slowdown is particularly driven by the non-regulated industries.