In recent years, the concept of state capacity has garnered significant attention among social scientists as a critical factor in analyzing disparities in economic development between countries. In the 1980s, the academic community rediscovered the importance of the state in socio-economic transformation. Sociologists and political scientists introduced the concept of “state capacity,” which emphasizes the dominant role of the state in society, in an attempt to reverse the analytical tradition that places excessive emphasis on social autonomy in state-society interaction.

Considering the interaction between politics and economics, state capacity has at least two fundamental connotations. First, as the state constitutes the institutional foundation for efficient functioning of the modern market economy, its economic functions are inherent in the construction of institutions such as strong protection of property rights, fulfilment of market contracts, and provision of public goods. Second, it is necessary to analyze the actual effects of various combinations of state capacity and state functions on economic development by taking into consideration the historical conditions and development stages of different countries. Moreover, the optimal combination varies depending on actual circumstances.

Constructing the institutional foundation for effective exercise of state capacity is the first step in establishing the correlation between state capacity and modern economic growth. The key lies in examining how state capacity facilitates development policies aimed at overall economic growth. The new political economy that emerged in the 1950s-60s provided valuable insights into this issue by establishing a theoretical framework with a highly consistent logical structure. In this framework, state capacity is a key element that underpins the intervention of political power in the economy.

Firstly, the market economy cannot function if it is completely “disembedded” from political and social relations. Changes in the political power structure of the state ultimately affect the efficiency of the market mechanism. Secondly, incorporating state capacity into the market economy should not be understood as advocating for complete state control over the economy. Rational use of institutionalized state capacity is more conducive to achieving sustained economic prosperity.

The second step in establishing the correlation between state capacity and modern economic growth involves clarifying in a more specific manner the theoretical mechanism by which state capacity supports economic development and identifying the channels through which state capacity affects economic performance of a country or a region.

Firstly, studies of state capacity in less developed countries experiencing economic catch-up and transformation initially focused on the importance of state-promoted policies in economic development. However, industrial policies formulated and implemented by the state are not necessarily successful. There is much debate about whether and in what way state capacity should intervene in industrial policies when it is necessary to create an environment favorable to innovation.

Secondly, research on the role of state capacity in economic development tends to center around public infrastructure, legal services, education, and others public goods that necessitate government provision and cannot rely entirely on the market.

Thirdly, the government is the actual executor of state capacity, and the efficiency of the bureaucracy determines the performance of the state in taxation, contract enforcement, industrial regulation, infrastructure construction, and public services. Therefore, a large number of studies revolve around the relationship between bureaucracy and development to explore how state capacity drives the economy.

During China’s planned economy period, state policies and directives were implemented in a top-down fashion, yet there was no institutionalized mechanism for exercising state power. While China has gradually established and improved its market economy system since the reform and opening-up, the state has never been absent from economic development and transformation. State capacity and market capacity have co-evolved to empower economic development. The evolution of China’s economic system reveals the critical role of state capacity in contemporary economic development. At the same time, it is essential to discover distinctive facts that challenge existing theoretical frameworks by considering China’s practices, which can lead to theoretical advancement.

First, the capitalist market economy serves as the frame of reference for existing studies of state capacity, which requires enhancing the understanding of the role of the Communist Party of China in economic development. Second, as China enters an era of high-quality economic development, it becomes imperative to further explore how state capacity influences corporate innovation. Third, methodologically, more applicable and measurable empirical implications can be extracted by placing state capacity in historical contexts and within specific scenarios. Fourth, theoretically, constructive dialogue between the Marxist theory of the state and theories of state capacity within new institutional economics or the new political economy contributes to integrating issues of economic growth experienced by countries in different development stages into a unified analytical framework.

Li Kang is an associate professor in the School of Economics at Fujian Normal University.