China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [19]
It is a more tricky issue to decide to whom the regime should turn over the rents from these liberalized areas, if we assume partial reform and residual rents in these sectors, as is often the case. It is possible that, once liberalizing reforms are implemented fully, rents may disappear completely. As a result, rent reallocation is no longer an issue. But as residual rents are a common feature of transition economies, an authoritarian regime engaged in economic reform must decide which groups should have access to the residual rents. Again, based on the political logic of survival, authoritarian regimes tend to favor nonthreatening groups and groups that can be co-opted. Foreign investors, for example, can be a nonthreatening group because their primary motive is profit, not power. Domestic private entrepreneurs, however, may pose more direct long-term threats.
That is perhaps why, as of 2003, indigenous private Chinese firms still faced high, if not impossible, barriers to entering about thirty sectors, such as banking, insurance, securities, telecommunication services, petro-chemicals, automobiles, and other industries deemed critical by the government.49 In contrast, the Chinese government welcomed foreign firms to enter many of the same industrial sectors. China has favored foreign investors not solely because they can supply capital and technology, but also because of the CCP’s fear of domestic private capital. 50 Indeed, as Yasheng Huang’s groundbreaking research shows, foreign direct investment surged into China mainly thanks to the Chinese state’s discrimination against domestic private firms.51
The regime’s ability to protect and reallocate rents under gradualism allows the ruling elites to retain the resources to co-opt new social elites and groups that may threaten their authority. Under gradualism, market reforms tend to be incremental and create imperfect competition in the interim. Because of this, the government maintains significant residual control even in areas where liberalization has already taken place. The ruling elites can parcel out the residual rents in these areas to new groups targeted for co-optation. Politically, such co-optations can help shore up the social base of support for the regime even as it alienates its traditional allies. In the Chinese case, gradualism has apparently generated political dividends not only in growth-enhanced legitimacy, but also in the CCP’s success in co-opting emerging private entrepreneurs and a large segment of the new urban middle class, such as professionals and select members of the intelligentsia who have been recruited into the government.52
However, gradualism ultimately becomes untenable because of rent dissipation by insiders. At the aggregate level, an authoritarian regime that is successful in protecting the major sources of its rent should be able to extend its longevity. It can use the rent to maintain its base of support, provided that it keeps rent dissipation by insiders at a manageable level. But both theory and experience show that rent protection and dissipation go together. Few regimes are capable of protecting their rents for long, while preventing their insiders from dissipating the same rents. In a transitional environment marked by high uncertainty for the members of the ruling elites, weak enforcement of rules, and low accountability, rent dissipation by insiders is likely to increase because insiders have both the means (monopolistic political power) to appropriate the rent