Crony Capitalism with Chinese Characteristics

We propose three key features of Chinese capitalism over the last two decades. First, power is held by about 3000 local governments (instead of the central government). Second, local governments have substantial capacity to provide public goods and face little accountability. Third, local governments have implicit arrangements with successful private firms that provide private firms with incentives to grow. These characteristics of local governments explain the presence of local "crony capitalists" in each locality, the bias in the provision of public goods towards goods that benefit local businesses instead of households, high profit rates and high growth rates among the favored firms, and a bias towards exports.