International Economic Review
The China model is increasingly viewed by developing countries as a viable alternative to democracy. China's allegedly merit-based promotion system is lauded as a secret ingredient of the China model. However, once being promoted to the top, Chinese leaders are as unconstrained as other autocrats. If there are fundamental reasons why other autocrats cannot commit to such a promotion system, why are Chinese leaders any different? We provide a unified theory that accommodates both China and other autocracies by postulating that they coordinate on different equilibria. Both the presence and the absence of political career concerns can arise in equilibrium.
We show that, independent of entry/exit a la Hopenhayn and market size expansion, trade
with firm heterogeneity always crowds out less productive firms when countries are symmetric.
When countries are asymmetric, however, trade can crowd in less productive firms and less
productive firms almost always specialize in trade. We analyze how a country’s standing in
the world determines whether and how these phenomena will arise. Our paper helps reconcile
empirical findings that are contradictory to the existing theoretical literature, and highlights
the importance of country heterogeneity in understanding trade with firm heterogeneity.
In its recent anti-corruption campaign, China removed the criminal immunity originally enjoyed by its leaders. Absent fundamental changes in the political institution—in which incumbent leaders, instead of citizens at large, select the next leaders—such a partial reform pays off only if (i) it takes place at the “right” time, (ii) it goes easy on corrupt low-rank officials, and (iii) the government is reasonably centralized. Failing any of these, such a partial reform would lead to rampant corruption throughout the government hierarchy—an outcome far worse than retaining leader immunity.