[MUSIC] While politics influences the economy of many developing societies, few societies or states have as, quote, political an economy as China. After 37 years of reform, bureaucrats, local and national leaders, new and old regulations. They all still have a remarkable influence over the allocation of goods and services in the economy. Ideology still influences economic policy. Clearly under Mao, and we'll talk a bit about this, it led to a degree of extremism. But in the reform era it still sets constraints on things like privatization or the level of global integration of the Chinese economy. On the other hand, because the CCP, the Chinese Communist Party's authority depends on growing the economy. On creating more jobs, on controlling inflation, and managing all kinds of economic challenges that may come shooting in from the outside world. Economics has an important, an enormously important influence on politics in China. Now before we get into the details of sort of the content of political economy, I just want to give you a broad overview of what I see as six components of China's political economy. Now the first component is that national leaders, their preferences for developmental strategies, sort of the way they want to see the society, the economy, the state develop. That really shapes China's policies, and much more I think than in many other societies. Second, and in all the lectures and talks that I've given and I will continue to talk about the important role of bureaucrats. From my perspective, reform involves economic deregulation. Sort of taking away regulations that have existed for a long time. And that this really threatens the power of the bureaucrats. So after decades of planning and regulations that really gave millions of bureaucrats from Beijing to the villages control over the allocation of wealth resources jobs and people's right, even to participate in the economy. After all that, we now see in the end as they do all these kinds of massive deregulations, the state must find a way to buy off the bureaucrats. Third point I would say is that leaders still generally favor state-owned enterprises, what we'll call SOEs, over the private sector. Now leaders even today, for example, the prime minister, they recognize that the private sector really creates jobs much more rapidly than the state sector. But it's really much easier to control the public sector, because you control the CEO's of these companies. And the communist party can control that, so they really feel good about that. And they are large scale enterprises, they can be involved in managing those more effectively. But even in China's going out policy, as I'll talk about at the end, documents have shown that the state still favors state-owned enterprises as the key force for China's economy to move overseas over the private sector. Fourth point, and here we're talking about the relationship between the global economy and China's internal economy. The state's power and state regulation still determine China's relationship to the global economy. Questions like, how tightly should the economic interactions be with the outside world? How strong should the regulations be? What balance should there be between imports, exports, and the domestic economy and particularly domestic consumption as a driving force for the economy? So do you want to have trade as the driving force of the economy? Or you want to have internal spending and citizens spending money and consuming products domestically? Which is better for the development of the economy? And the existing international rules, norms, what we call regimes, organizations, the trading structures, transportation network, pricing mechanisms. All of these can really constrain the leadership choices as China interacts with the global economy. A fifth component is that we will see this enormously complex and fascinating dynamic tension between the central and the local state. Part of reform has also involved the decentralization, so the passing down of authority to lower levels. And rather than it making the market so dominant, what it actually has done is it left a lot of power in the hands of local officials. And that decision making over the resource allocations has not in fact shifted as much to the market or as much as one might think. And that there still is a lot of influence for local officials over these resources. And so even though we see a booming private sector, when we look at the statistics, the data, we find that the central and local bureaucrats today control 33% of China's GDP. Number six is a close link between the private business and the local state. And here, what we see is that the private sector has always been willing to work with the local Communist Party and the local government. And part of that is because many of the entrepreneurs who run these firms actually came out of the Communist Party. They may have been managers or former officials, we'll talk more about this in the last class in this course. But the local leaders also depend on industrial output for promotion. If they want to get promoted, get ahead as we talked about this in the elites class, they need to have more industrial output. And so they actually will protect the local firms, and many of those local firms are private firms. And so there's this kind of symbiotic relationship, this close relationship between the local private sector and the local government. And third aspect of this really is that, when local governments set up joint ventures with foreign capital, that those foreign joint ventures, the local government actually owns half of the firm. And so this really can strengthen the local government's power and its authority.