April 30, 2020

Competitive Rent-Seeking, Socioeconomic Infrastructures, and Post-Communist Transition in Central and Eastern Europe

By Ge Xin

This research article was co-authored by Jia Chen and Ge Xin


Abstract

The political and economic transformation of former Soviet Bloc Europe has been far-reaching in the last 30 years. Although most former socialist countries
in Central and Eastern Europe abandoned the Communist ancien regime, not all of them managed to fully integrate liberal democracy and market economy
into society. Some scholars explained this divergence in development through the dichotomous regime types. From the perspective of what propels the
retreat of political power from market and with the theory of competitive rentseeking, we demonstrate that the retreating logic is underlain by the competition between rent-seekers. A competitive rent-seeking regime dissipates the rent through distorting market mechanism and dampens both political authority and rent-seeker’s enthusiasm, providing a better prospect for economic liberalization. Through a comparative case study of transitional experiences of Hungary and Belarus, we find that countries with pre-existing socioeconomic infrastructures that facilitate the formation of competitive rent-seeking regime are more successful in economic liberalization. We suggest that the academic interest previously paid to dichotomous regime-type argument should be diverted into a deeper inquiry of the evolution of socioeconomic institutions that shape the state–market interaction.

1. Introduction

The political and economic transformation of former Soviet Bloc Europe following the collapse of Soviet Empire in the intersection of 1980s and 1990s has been one of the most far-reaching events that happened in the last 30 years. Although most former socialist countries in Central and Eastern Europe abandoned the Communist ancien regime and embraced a more decentralized system, not all of these transitions managed to fully integrate liberal democracy and market economy into society. While there are examples of quite successful cases of transition such as the Central European and Baltic countries, many member states of the Commonwealth of Independent States (CIS) have been mired in deadlock of rigid and still centralized politico-economic system.

The sharp contrast between successful and unsuccessful cases of postCommunist transition has attracted intense academic interest from scholars of political science and political economy. Studies on the post-Communist transitions have a special focus on the liberal transition of economy under different political systems. Some scholars, represented by Przeworski (1991), argued that democratic regime is not capable of sustaining comprehensive economic transition which incurs huge social cost on constituents. Autocratic regime in this sense has some advantages in implementing austere structural adjustment policies necessary for liberalization while maintaining political stability at the same time (Gerschewski, 2013). Other scholars such as Hellman (1998) and Åslund (2007) rejected the hypothesis that democratic political regime is less conducive to economic liberalization. They indicated that with a broad base of political participation, democracy facilitates the formation of universalistic regulation that decreases the possibility of political authority involved in rent-seeking activity. The consequence is that comprehensive economic liberalization is more likely to be realized in countries with democratic political regime.

While the regime type does play a role in policy reforms in transitioning countries, existing researches have been emphasizing much on a dichotomous classification of polity into democracy or non-democracy while ignoring the deeper politico-economic impetus that triggers policy shifts toward a liberal pattern. The key in understanding the issue of economic reform is what propels the retreat of government from distorting market mechanism. With the help of the theory of competitive rent-seeking, we will demonstrate in this paper that the logic of retreating political power from market is underlain by a process dissipating the economic rent as a
result of competition between rent-seekers. A competitive rent-seeking regime dissipates the rent through distorting market mechanisms and dampens both political authority and rent-seeker’s enthusiasm in collaborating with each other, providing a better prospect for the consolidation of economic liberalization. Existing socioeconomic institutional infrastructures, by this point, play a significant role in shaping the rent-seeking market toward a competitive or non-competitive fashion. Through a comparative case study of the transition experiences of Hungary and Belarus, we find that countries with pre-existing institutional infrastructures such as private property rights that facilitate the formation of competitive rent-seeking regime are more successful in implementing and consolidating economic liberalization. This conclusion should divert the academic interest previously been paid to dichotomous regime-type argument and urge more research efforts into deeper inquiry of the evolution of socioeconomic institutions that continually shape the manner of interaction between state and market mechanism. The rest of the paper is structured as follows: existing literature on political economy of post-Communist transition are reviewed and assessed in Sec. 2. We turn in Sec. 3 to a discussion on competitive rent-seeking theory which underpins the analysis of the role of socioeconomic infrastructures in providing the prospects of economic liberalization in post-Communist transition. In Sec. 4, a comparative study of the post-Communist transitions in Hungary and Belarus is presented as preliminary evidences of our argument. Section 5 concludes this paper by restating the findings and pointing out the remaining problems for this study.

2. Political Economy of Post-Communist Transition

Existing literature on the political economy of post-Communist transition is embedded in a broader field of studies of structural economic adjustment heading for neo-liberalism. A lot of academic endeavors have been devoted to the issue of political implications of economic liberalization. One of the most important characteristics of structural adjustment of economic policy from pervasive government intervention to liberal market mechanism is the transitional cost imposed by the structural adjustment on society (Izyumov, 2010). Under the socialist policy targeting price control and full employment, sheer shortage in commodity supply is a typical feature. A policy transformation toward deregulation of price control and labor market will result in hyperinflation and unemployment problem (Woo, 1994). Scholars argued that political regime is of special importance to the issue of implementing these austere structural adjustments which harms the interest of the public in the short run. Insulation of government from the influence of social groups bearing the transitional cost is necessary for comprehensive economic transition to market mechanism. Przeworski (1991) demonstrated the advantage of autocratic regime in fulfilling objectives of economic transition while maintaining the social and political stability through repression. This argument resonated with Huntington (1993) who argued that “authoritarian governments are better positioned than democratic governments to promote economic liberalization.”

Another strand of research of the political economy of liberal transition approaches the relationship between political regime and prospect of liberalization from a different angle. Being different from the studies represented by Przeworski which took the immediate cost of transition and its political implication as the key issue. Hellman (1998) questioned the significance of short-term transitional cost in affecting people’s preferences and the political consequences. Mass public, as he argued, is not as myopic as Przeworski posited. Social actors are more concerned about the return of the investment in liberalization in the long run. The immediate social cost of transition should not be expected to comprise democratic government’s ability and resolve to undertake structural adjustment. Along with Hellman, Åslund (2007) went further to argue that democratic regime is more advantageous than autocracy in fulfilling comprehensive economic reform due to its ability to prevent the economic transition from being abducted by early winners who become economically capable of buying off political authority and affecting government policy-making during the reform process. Autocratic regime, on the contrary, is more subject to rent-seeking activity because of its low level of mass political participation allowed under its polity.

Studies have also been done on political implication of economic transition apart from the dichotomous divide of democratic and non-democratic regimes. Bartlett (1997) demonstrated in his study of Hungary’s transition to democracy and market economy that the key problem, instead of being the regime type, is whether the social group negatively affected by liberalization can be isolated from the political scene. Hungary’s experience shows that its new democracy was pretty conducive to economic reform because those social actors most vulnerable to structural adjustment were excluded from being able to voice their political preferences. Weyland (2002) integrated prospect theory into his study of structural adjustment in Latin America and found that regardless of regime type, governments are more likely to initiate structural adjustment during ongoing crises. The prospect theory predicts that people become more risk-seeking when they
are facing the danger of losses while they are risk-averse in the domain of gains. This theory implies that people more tolerant to risky reforms enable democratic governments to implement draconian policy reforms. From studying the economic reform in Hungary, Cruz and Seleny (2002) and Seleny (1995) emphasized the importance of reform history in determining the viability of liberalization in post-Communist era. They argued that the establishment of property rights regime, for instance in Hungary, under Communism provided a critical micro-foundation on the basis of which liberal market mechanism can work in post-Communist era.

Previous works from the literature summarized above have contributed to our understanding of the political economy of transition but they are not perfect and infallible either logically or empirically. Przeworski and Hellman’s debates rely too much on a dichotomous classification of regime type and its connection with extensiveness of reform while neglecting the fact that political regime is endogenous in a broad social context characterized by fundamental institutional infrastructures. The connection between political regime and economic reform found by scholars may only reflect the intermediating role of political regime in channeling the influence of socioeconomic infrastructure on economic liberalization. Specifically, Przeworski’s pro-autocracy argument failed to explicate why autocratic government will be willing to spontaneously implement liberalization given the fact that maintaining a political and economic monopoly retains more chance of accumulating gains from rent-seeking. The socioeconomic context’s role in propelling an autocracy to liberalize the economy was overlooked. Although Hellman pointed out the inherent interest of political monopoly in autocracies, his emphasis on the merit of democracy is ambivalent over the ultimate locomotive that fuels the process of liberalization. And some empirical evidences cannot be accommodated in his argument. Examples from several Commonwealth of Independent States (CIS), specifically Belarus, showed that democratic government established in, using Myrdal’s (1968) phrases, “economically and politically immature nation” at the beginning of transition not only failed to bring about substantial marketization but even quickly recessed to autocracy and the old centralized economic regime. The experience of Belarus which is presented in greater detail in Section 4 consists of a compelling counterexample of the unconditioned justification of democracy as the panacea for curing the “under-reform trap”. Research done by Bartlett and Seleny (1998) touched upon something to do with socioeconomic infrastructure but they did not clarify the mechanism through which the socioeconomic institutional context shapes the connection between state and the market. The remaining part of this paper attempts to establish a theoretical claim that socioeconomic infrastructures shape the pattern in which state apparatus and market mechanism are connected, through determining the type of rentseeking regime.

3. Competitive Rent-Seeking

Rent-seeking has been considered as the most important source of economic inefficiency. In Krueger’s (1974) seminal work on the economic analysis of rent-seeking, the origin and logic of rent-seeking were vividly demonstrated. Rent-seekers utilize their economic resources to buy off political authority which is employed as an instrument for extraction of individual economic interest while harming the welfare of the society as a whole. This logic has been taken as a power weapon by liberalists in their attacks of economic interventionism (von Mises, 2011). This logic also underlies the legitimacy of economic transition that reduces the involvement of political authority in economy and emphasizes the efficiency of market mechanism. While rent-seekers and corrupt governments do cause many problems that compromise economic efficiency (see Lambsdorff (2002) and Guo and Hu (2003)), the basic logic of rent-seeking does not intrinsically guarantee an inefficient outcome. In the following we willshow how rent-seeking can be turned into innoxious activity which both guarantees economic efficiency and prevents the political authority from being abused. The reason why this is important is that such transformation of rent-seeking from providing the critical opportunity for states experiencing transitions to taming the state Leviathan is a key issue in liberal transition of political and economic institutions, similar to the transformation of the noxious “Grabbing Hand” referred by Shleifer and Vishny (1998) as a neutral “Invisible Hand”.

In the process of rent-seeking, the rent-seekers conspire with political authority which imposes regulations on the market that result in an equilibrium price that is higher than that under perfect competition. Rent-seekers extract economic rent or surplus from such a price and pay part of the surplus to political authority as return. Both the rent-seeker and authority benefit from the rent-seeking activity at the cost of social welfare losses due to the distortion of market mechanism. The economic rent generated by particularistic policy regulation is the material basis for the incentives of both rent-seeker and political authority to involve in rent-seeking collaboration (Krueger, 1974; Tullock, 2001). Since its first appearance in Krueger’s (1974) influential article, rent-seeking has been identified as a detriment to economic efficiency. However, the original idea of rent-seeking is based on the assumption that the market for rent-seekers is not competitive but restrictive. There are only a few rent-seekers engaging in collaboration with the government. If the market for rent-seekers becomes less restrictive and more competitive, the number of rent-seekers will increase and as a result the price of government bailout will rise due to intensified competition. Holding other conditions constant, higher price for government collaboration will squeeze the room for economic rent shared by rent-seekers which will substantially weaken potential rent-seeker’s enthusiasm for buying off government policy. Put more theoretically, the economic rent or surplus generated from making deals with the government, which is the critical material basis for rent-seeking, is dissipated as a consequence of more competitive state of rent-seeker market. If the rent-seeker’s market is close to a perfect competitive one, a complete dissipation of economic rent is there, which means being a rent-seeker or not does not make a difference because of the high price on rent-seeking market. More importantly, since the rent-seeker’s enthusiasm wanes, the government consequently has less opportunity to generate economic gains from distorting market mechanism. Since the state intervention in economy is no longer remunerative but still administratively costly, a retrenchment of government control over economy, or in other words economic policy reform altering the distortion of market mechanism, is likely to happen (Tullock, 2001; Murphy et al., 1993). The logic of competitive rent-seeking and its implications can also be succinctly outlined through a very simple trade protection model presented in the following.

Suppose there is a country A, in which commodity a is domestically produced and consumed. The domestic price of commodity a in an autarkic economy is pd which is higher than the world market price pw, pd > pw. Suppose initially there is no trade barrier set up by the government and the domestic price of a is identical to the world market price, p0 d ¼ pw. Assume the production cost of a for the domestic producer is c ¼ pw. Under the free-trade condition, the profit gained by domestic producers is p0 d c ¼ pw pw ¼ 0. Now, the domestic producer of a makes an offer to the government: if the government establishes a trade prohibition by comprehensively banning the import of commodity a from any foreign producer, the profit for domestic producer becomes pd pw which is greater than zero. In return, the domestic producer of a will pay a part of the surplus (pd pw) to the government. Specifically, the domestic producer is willing to make any offer in which the amount payable to the government falls in [0, pd pw) while the government accepts any offer within the range of (0, pd pw]. That is to say, any bargaining solution within the range of (0, pd pw) is acceptable for both players. What these numerous bargaining solutions within the range of (0, pd pw) imply is that the probability of making a deal is quite high and consequently the social welfare is at great risk of being harmed by rent-seeking activity But, if there are more than one domestic producers competing for trade protection, the conclusion we will reach is different. Suppose, a domestic producer of commodity b, which has exactly the same production cost, domestic price, and world price as commodity a, joins in the competition for trade protection. Assume commodities a and b are not substitutable and the government cannot divide the trade ban — only import of one of the two commodities can be banned. The competition for protection between domestic producers of a and b becomes essentially an auction. The number of bargaining solutions of the auction is no longer numerous. The competition mechanism underlying the auction sale will result in a single feasible bargaining solution similar to the equilibrium of Bertrand Competition in which either the producer of a or b pays the entire surplus, pd pw, to the government. Substantial decrease in the number of acceptable bargaining solutions means it gets more difficult for a collaboration to sustain. More importantly, for the rent-seekers this only possible bargaining solution does not make any difference compared with the situation under free trade because the entire surplus is grabbed by the government leaving zero for the producer in the protected industry. The incentive for engaging in rent-seeking is dampened as a result of dissipation of economic rent. What follow these are less opportunities in which the government can extract economic gains from involving in economic activities. A retrenchment of government control and meddling in economic activities which features liberal transformation of economic policy can be predicted. Along this line of depicting the mechanism of competitive rent-seeking, it is theoretically obvious that an evolution of the rent-seeker market toward more competitive feature dissipates the economic rent from rent-seeking and promotes a liberal transformation of economic policy.

How can the differences distinguishing non-competitive and competitive rent-seeking markets are conceptually characterized? And what implications about socioeconomic institutional infrastructures can be generated based on the characterization? The most obvious feature of a competitive rent-seeking market is a relatively even and dispersive distribution of rentgenerating capabilities. As we can see from the model, the key point when a competition of rent-seeking activity finally ended up getting nothing for potential rent-seekers is that neither competitor has significant relative advantage in generating higher economic rent than the others. The ability of potential rent-seekers to generate rent can be determined both economically and politically. From the pure economic perspective, perfect competition brings about equilibrium marginal revenue which grants every firm on the market exactly the same capability in generating economic rent.
Imperfect market competition such as oligopoly or monopoly, however, brings about differential capability of profiting and hence a different rentgenerating capability. Under this circumstance, the state of the market determines whether the prospect of rent-seeking regime will be competitive or not. Political factors also determine the distribution of rent-seeker’s rentgenerating capability. If a potential rent-seeker has other politico-economic linkages with the government which get a favorable policy for him (e.g., subsidy), an advantage on rent-generating capability over other competitors is established. Apart from their individual effect, we usually see economic and political factors intervening with each other in determining the distribution of rent-generating capability.

Influence from these politico-economic factors on rent-generating capability distribution is not fragmented but institutionalized in the socioeconomic infrastructures deeply imbedded in the society. The pivotal role of existing socioeconomic infrastructures in shaping the make-up of the rent-seeking market and hence affecting the prospect of economic liberalization is especially highlighted in post-Communist transitions which are characterized by radical change and replacement of political and economic regimes in a short period of time. The demise of old regime is accompanied by the collapse of bureaucrat–manager coalitions which previously dominated the linkages between state and market under Communist regime (Crawford, 1995; Fidrmuc, 2003). Following the fall of Communist state–market linkages is a temporal vacuum of space where interactions between political authority and market mechanism occurred. The state of a vacuum will only be transitory and new linkages between state and market will be quickly established. The fashion and pattern that new state–market linkages to be established follow, however, could be very different and will have decisive influence on the prospect of postCommunist transition. The new linkages could follow a pattern that balances the role of government and market mechanism, for example a competitive rent-seeking, but it can also follow a noxious fashion making political distortion of market mechanism pervasive. Formation of the new linkages to a great extent paralleled the formation of rent-seeking regime in which the preserved socioeconomic infrastructures, as have been discussed, play an important role. Important elements include protection of private property rights, social environment encouraging private entrepreneurship, industry structure of the economy, and other socioeconomic institutions retained from the old regime that affect the formation of pluralistic yet collectively organized economic interest (Hamm et al., 2012; Lane and Myant, 2007). From a more detailed comparison of the transition experiences of Hungary and Belarus in the next section, it is observable that socioeconomic infrastructures facilitating formation of competitive rent-seeking regime provide a brighter prospect of liberalization in the ensuing era.

4. Institutional Infrastructures and Post-Communist Transition: Cases of Hungary and Belarus

Making several comparisons of descriptive statistics presents us a straightforward image of economic liberalization in Hungary and Belarus. According to Transition Report 1995 (EBRD, 1995) released by the European Bank for Reconstruction and Development, Hungary was ranked the first along with Czech Republic on the levels of economic liberalization in the 22 Central Eastern European and formal Soviet Union states by the year 1995, while Belarus was ranked around 14th, way behind its neighbors — Poland, Lithuania, Russia, and Ukraine. Data from the same report showed that in 1995 private sector’s shares of GDP were 60% in Hungary and 15% in Belarus, respectively. The ratio was 14% in Hungary in 1991 and was 8% in Belarus in 1993. In most of the criteria in 1996 Economic Freedom Index, Belarus scored significantly lower than Hungary and this situation continued in the following decade. A basic fact is established from the comparison that although they shared similar structure of politico-economic regime under Communism, Hungary and Belarus significantly differed from each other in the extent of economic liberalization in the postCommunist era (Gill, 2003).

In explaining the differential levels of economic liberalization achieved in Hungary and Belarus, the make-up of institutional infrastructures of the two countries by the end of 1980s can shed some light on the origins of two different paths in the post-Communist transitions. Bringing in the logic of competitive rent-seeking and its implications for the prospect of economic liberalization, we can see that different socioeconomic infrastructures of the two countries which survived during the radical transformation after the demise of Communism shaped the new state–market linkages in the postCommunist era in different ways, which predicted different directions of policy evolution.

Four elements of institutional legacy from Communist Hungary contributed to the consolidation of economic liberalization. Hungary was one of the most progressive reformers of orthodox Communist regime in the Soviet Bloc since mid-1950s. The uprising in 1956, albeit being put down by Soviet intervention, caused considerable shock to the centralized politicoeconomic regime. After the uprising in 1956, Hungarian Socialist Workers’ Party began to introduce micro-market mechanism to the planned macroeconomy under the name of Market Socialist reform. A more systematic reform of the centralized economy, namely the New Economic Mechanism, was implemented in mid-1960s which observably transformed the make-up of the socioeconomic infrastructures (Bauer, 1983). Four aspects of the New Economic Mechanism reform programs following it consist the institutional legacy retained in the post-Communist era and contributed to the formation of competitive rent-seeking and the consolidation of economic liberalism. The first is the establishment of private property rights protection regime from late 1960s to early 1980s. By institutionalizing private property rights, private entrepreneurship was greatly encouraged. The second aspect is the legalization of “Second Economy” in early 1980s following the fast development of diversified private sectors encouraged by institutionalization of property rights (Balassa, 1983). The Second Economy primarily consisted of private and semi-private enterprises in retailing, merchandise, farming, and agricultural processing. Although the share of Second Economy in the social gross output remained small, its development had been characterized by considerable diversification (Cruz and Seleny, 2002). The third aspect is the establishment of particularistic bargaining regime between state and stateowned enterprise managers over output objectives and wages. As one of the most important elements of New Economic Mechanism, the particularistic bargaining enabled firm-specific bargaining of welfare and benefit with the state planning agency based on how well managers can fulfill the output objectives (Bartlett, 1997). What this particularistic pattern of bargaining introduced to the state-owned economy is quasi-market incentive in which consideration of efficiency reshaped Communist managers’ thinking. More importantly, it triggered the formation of interest groups, who actively engaged in bargaining with the state for the particularistic interest (Cruz and Seleny, 2002).

These four aspects of institutional legacy together formed part of the socioeconomic infrastructure retained after 1989 that contributed immensely to the formulation of new state–market linkages in a balanced manner. Long embedded property rights regime and nurtured private entrepreneurship which provided solid micro-foundations enabled fast development of private sectors (Seleny, 1995). Privatization of state enterprises took the form of auctions, which avoided both “spontaneous privatization” and re-concentration of corporate control in states like Russia where privatization was made though egalitarian distribution of vouchers to citizens. The economic structure proceeded on the track of substantial decentralization following the Communist demise. The result of the decentralization of economic control was the establishment of nondiscriminatory tax system and the freedom to enter market for private entrepreneurs in the early years of transition, which contributed significantly to a fair competition environment (Newbery, 1990) and hence competitive rent-seeking regime.

The experience of Belarus, on the contrary, told a story in which socioeconomic legacies from Communist time cursed the economic liberalization process in post-Communist transition. Such noxious socioeconomic infrastructures primarily consist of three elements, namely, poor private property protection, rigid state control of industrial development, and most importantly, monistic industrial structure. First, similar to most member states in previous USSR, private property was not protected in Belarus before its independence. Private sector was virtually non-existent before the fall from the power of Communists due to poor socioeconomic environment providing scarce institutional and financial support and protection for development of private entrepreneurship. And such a social infrastructure unfriendly to private entrepreneurship continued to dominate in the post-Communist era (Gill, 2003; Savchenko, 2009). Second, the development of Belarus industry had been conducted in a state-dominating manner. In the Soviet era, industry development within the border of Belarus was designed to form a base of production of diesel engines and heavy trucks, with huge investment from central planning agency which quickly transformed Belarus in a couple of decades from a “predominantly agricultural and rural to predominantly industrial and urban society” (Savchenko, 2009). Robust and close connection had been built between indigenous heavy industry and state apparatus. The consequence of the heavily state-conducted industrial development is a monistic industry structure dominated by heavy industry producing heavy machinery vehicles and automation equipment. The influence of the monistic industry on the socioeconomic make-up of Belarus is obvious. In 1993, the heavy industry in Belarus accommodated one third of the country’s labor and contributed to more than 50% of domestic products (Pastore and Verashchagina, 2006). The dominance of heavy industries and its consistent ability to generate profit concentrated the state power.

The three aspects of Belarusian Communist legacy imposed notable influences on the path of transition in post-Communist era. The weak property rights protection and other inferior socioeconomic infrastructures hampered the development of private sector in early stages of transition, leaving state-backed heavy industry maintaining the status of monopoly in Belarus’ political and economic issues. With scarce domestic political and economic market competition pressures, the coalition between heavy industry and the new democratic government was quickly established and consolidated. The monistic economic structure prevented emergence and development of competitors from other industry sectors which can help dissipate the rent generated from the oligarchic politico-economic coalition
between the state and heavy industry. With a consistently-concentrated economic rent, the government was enticed to maintain broader control of the economy from which the coalition can benefit, increasingly distorting the market mechanism and compromising the impetus of economic liberalization.

5. Conclusion

Economic policy-making, albeit is a political decision made by the government, fundamentally reflects an interaction between political authority and the market. Whether the government prefers liberal pattern or interventionist approach of economic governance is not determined solely by the government itself. The government always chooses an optimal strategy that enables maximization of its gains in the interplay with market mechanisms. And the pattern of the state–market interaction is shaped by the socioeconomic context. Economic liberalization undertook by the government, from rent-seeking perspective, basically reflects a set of socioeconomic infrastructures that facilitate a competitive rent-seeking regime shaping the state–market interaction in a neutral manner that minimizes the gain from political distortion of market mechanism. As the cases of Hungary and Belarus showed, pre-existing socioeconomic infrastructures formed the pattern of state–market interaction and predicted the viability of economic liberalization.

The theoretical claim made in this paper focusing on a competitive rentseeking regime and its institutional origins provides a perspective from which a traditional path dependency can be more specifically interpreted. Rent-seeking regime that represents the manner of state–market linkage is forged by the institutional legacy from previous periods which presents us a more tangible mechanism through which the path dependency happens. But ultimately this paper’s claim does not tell a contradicting story to incrementalism. What it does express as a disagreement is against the focus on political regime in determining the viability of economic liberalization of previous studies. Political regime is imbedded in the socioeconomic context. Arguing the role of regime type without studying the institutional factors that shape how political and economic institutions interact cannot generate meaningful propositions. The future research should be endogenizing the institutional choice of political regime by figuring out how the infrastructural context shapes the political regime.

Acknowledgments

The authors would like to thank the anonymous reviewers and the Editor for providing excellent comments and suggestions. Jia Chen acknowledges support from the National Social Science Fund of China (No. 7CGJ032). Ge Xin acknowledges support from the SUFE Research Startup Fund (No. 2016110818).

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