Why Nations Fail: The Origins of Power, Prosperity, and Poverty

sustained economic development.
T HE I RRESISTIBLE C HARM OF A UTHORITARIAN G ROWTH
    Dai Guofang recognized the coming urban boom in China early on. New highways, business centers, residences, and skyscrapers were sprawling everywhere around China in the 1990s, and Dai thought this growth would only pick up speed in the next decade. He reasoned that his company, Jingsu Tieben Iron and Steel, could capture a large market as a low-cost producer, especially compared with the inefficient state-owned steel factories. Dai planned to build a true steel giant, and with support from the local party bosses in Changzhou, he started building in 2003. By March 2004, however, the project had been stopped by order of the Chinese Communist Party in Beijing, and Dai was arrested for reasons never clearly articulated. The authorities may have presumed that they would find some incriminating evidence in Dai’s accounts. In the event, he spent the next five years in jail and home detention, and was found guilty on a minor charge in 2009. His real crime was to start a large project thatwould compete with state-sponsored companies and do so without the approval of the higher-ups in the Communist Party. This was certainly the lesson that others drew from the case.
    The Communist Party’s reaction to entrepreneurs such as Dai should not be a surprise. Chen Yun, one of Deng Xiaoping’s closest associates and arguably the major architect behind the early market reforms, summarized the views of most party cadres with a “bird in a cage” analogy for the economy: China’s economy was the bird; the party’s control, the cage, had to be enlarged to make the bird healthier and more dynamic, but it could not be unlocked or removed, lest the bird fly away. Jiang Zemin, shortly after becoming general secretary of the Communist Party in 1989, the most powerful position in China, went even further and summarized the party’s suspicion of entrepreneurs by characterizing them as “self-employed traders and peddlers [who] cheat, embezzle, bribe and evade taxation.” Throughout the 1990s, even as foreign investment was pouring into China and state-owned enterprises were encouraged to expand, private entrepreneurship was greeted with suspicion, and many entrepreneurs were expropriated or even jailed. Jiang Zemin’s view of entrepreneurs, though in relative decline, is still widespread in China. In the words of a Chinese economist, “Big state companies can get involved in huge projects. But when private companies do so, especially in competition with the state, then trouble comes from every corners [
sic
].”
    While scores of private companies are now profitably operating in China, many elements of the economy are still under the party’s command and protection. Journalist Richard McGregor reports that on the desk of the head of each of the biggest state companies in China stands a red phone. When it rings, it is the party calling with orders on what the company should do, where it should invest, and what its targets will be. These giant companies are still under the command of the party, a fact we are reminded of when the party decides to shuffle their chief executives, fire them, or promote them, with little explanation.
    These stories of course do not deny that China has made great strides toward inclusive economic institutions, strides that underpinits spectacular growth rates over the past thirty years. Most entrepreneurs have some security, not least because they cultivate the support of local cadres and Communist Party elites in Beijing. Most state-owned enterprises seek profits and compete in international markets. This is a radical change from the China of Mao. As we saw in the previous chapter, China was first able to grow because under Deng Xiaoping there were radical reforms away from the most extractive economic institutions and toward inclusive economic institutions. Growth has continued as Chinese economic institutions have been on a path toward greater inclusiveness, albeit at a slow pace. China is also greatly benefiting from its large supply of cheap labor and its access to foreign markets, capital, and technologies.
    Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing