41 Pages Posted: 7 Apr 2016

Date Written: February 6, 2016

Abstract

We examine empirically the effect of state capacity on economic development under two distinct economic systems. In 1978, China began its transition from a planned economy to a market economy. Focusing on the rural Sichuan province, we investigate if local communist party strength mattered to developmental out- comes in 1957-78 (Maoist period) and in 1978-85 (reform period). To tease out causal effects, we use the route of the Long March, a military retreat undertaken by the Red Army in 1934-35, as an instrument. We find that counties with more communist members recorded faster output growth and registered lower mortality rates during the reform period, but not before 1978. In fact, party membership numbers were positively associated with mortality rate during the Maoist period. Our findings suggest that state capacity could indeed accelerate development, but the effect is substantial and unambiguous only when the state seeks to complement the market instead of substituting it.