How does China’s private sector manage to thrive under incomplete property rights? This puzzle is of great importance to deciphering China’s growth formula, in which the private sector has played a pivotal role in fueling the economy. Earlier research has provided two answers. One is unbundling: since property rights consist of a bundle of rights (e.g., the rights to possess, use, exclude, and transfer), the state can provide economic agents with some rights but retain others. The other is substituting: to secure property rights, private entrepreneurs leverage political connections and informal interactions with government officials as substitutes for formal institutional support. As such, partial property rights can also foster growth, at least to a certain degree.
Yue Hou’s elegantly written book, The Private Sector in Public Office, provides an alternative, insightful answer to this question. She argues that China’s formal institutions, in particular the legislative system, provide a system of selective and predictable property rights through which private entrepreneurs can advance their interests. Hou first challenges the conventional wisdom by arguing that property holders do not necessarily demand universal property rights, because universal protection benefits all parties equally. Asset holders instead may prefer selective and predictable property rights, which benefit themselves but disadvantage their competitors, even to the extent that they drive the competitors out of the market (pp. 18–19). Hou further contends that China’s legislative system, although often regarded as ineffective, helps build such a system of selective property rights for entrepreneurs. By securing seats in the local legislatures, private entrepreneurs can deter local officials from expropriating their assets. Importantly, this system of selective property rights can provide a “first-best” institution for both entrepreneurs and autocrats, with the former enjoying exclusive property protection and the latter ensuring rents. As noted by Hou, “if this group (under selective protection) happens to be the most productive sector of the economy, this selective property rights system could be relatively efficient as a whole” (p. 19).
The theory of selective property rights generates three observable implications, which Hou tests using cutting-edge empirical strategies and an impressive set of anecdotal, observational, and experimental data. Chapter 4 establishes that private entrepreneurs seek legislative seats mainly to secure property rights. Hou draws on interview data to show that expropriation, which is a prevalent problem in China, motivates entrepreneurs to join politics. Chapter 5 further demonstrates that holding a legislative seat indeed helps private entrepreneurs protect their property. Exploiting evidence from a national survey, Hou finds that entrepreneurs who serve in the local legislatures on average make fewer informal payments to local governments than those who do not.
Chapter 6 then examines the mechanism for why holding a legislative seat helps protect private property. The key is the ability to signal political capital: joining the legislature credibly signals the entrepreneur’s strong political connectedness, which deters low-level officials from demanding bribery. The mechanism is tested by two original audit experiments. These experiments send information requests to a local mayor’s online mailbox, randomly altering the identity of the request sender. They find that local officials are more responsive to information requests from entrepreneurs with legislative connections than those without them. One may question, however, whether these experiments are realistic: connected entrepreneurs usually have superior channels to contact local governments, including formal channels only for legislators, and informal connections with officials. It seems less likely that an entrepreneur-legislator would use a local mayor’s mailbox, a public website overwhelmed by requests from ordinary citizens. Another caveat is that these experiments do not directly test officials’ selective protection for private property, but rather selective provision of information to entrepreneurs. But to Hou’s credit, the book openly acknowledges the limitations of the experiments (p. 146). It is also worth noting that, because of the tremendous difficulty in conducting field experiments in China, scholars often have to compromise research design. Despite some imperfections, the audit experiments do demonstrate a core hypothesis of Hou’s theory: there is a “selective treatment” in the state–business relationship.
This book makes several fantastic contributions. Theoretically, the book situates itself in a central inquiry of political economy research: the nexus between institutions and growth. It joins a decades-long effort among scholars to address a startling anomaly: If institutions are crucial for growth, why have some countries grown so fast under weak rule of law? Many studies on private sector development focus on how formal institutions constrain private businesses. Hou instead shows that formal institutions, even if weak, can be used as resources to enable growth. This theoretical insight enriches our understandings about authoritarian institutions in China and other countries. Beyond that theoretical contribution, the book features a rich variety of methods and an impressive collection of data. Rigorous large-N analysis is interwoven with vivid anecdotes and examples, which never bore the reader. The book is also pioneering in introducing audit studies into the analysis of Chinese politics. These studies open up opportunities for investigating various sources of discrimination in China’s political and economic systems.
The Private Sector in Public Office raises interesting questions for further thought. For example, what are the boundary conditions under which the theory of selective property rights applies? As the book implies, “small enterprises are not the main focus” (p. 74). Entrepreneurs who are capable of securing legislative seats generally have businesses that are relatively large and competitive. Small businesspeople, on the contrary, do not have the resources to run for public office and are vulnerable to expropriation.
This boundary condition raises concerns about the overall efficiency of the system of selective property rights. Given that large businesses can secure property rights whereas small ones cannot, the system of selective property rights is likely to favor incumbents, enhance market concentration, stifle competition, and hurt long-term growth. These drawbacks will be even more pronounced as the Chinese economy becomes increasingly reliant on small and medium-size enterprises, which lack property protection. Even for those who now gain from this system—the large, connected businesses—the system did not always benefit them. These businesses probably had suffered much expropriation before they become sufficiently large to eventually leverage public office to deter expropriation. In this sense, selective property rights do not seem to be more efficient than universal rights. Therefore, it might be too early for Hou to suggest that the system of selective property rights is a “first-best” institution. The system is in place not because of its superior economic efficiency but because of political feasibility (i.e., closer to what Dani Rodrik calls the “second-best” institution). After all, granting universal property rights requires a full-fledged judicial system that China does not have. This logic of trading off efficiency for political expediency is at the heart of many institutional arrangements in China, so it is not surprising to see it in the case of selective property rights.
