What Role Does Political Environment Play in Economic Development? - A Case Study of China

The uncertainty induced by the political environment affects the investment risk, and thus affects the investment decision which has a close relationship with the economic development. This paper investigates the economic cost of political environment, using the intension of cross-strait relation in China as a study case by synthetic control method. The intense situation of the cross-strait relation has great influence on the economic development of Fujian which is the closest province near Taiwan and also possesses the greatest preferential policies for Taiwan direct investment. The empirical result reveals that because of the intense situation, the loss of GDP per capita in Fujian has accumulated to 5460.35 yuan since 2001, which means that GDP per capita in Fujian declines about 12.1 percentage points annually relative to a synthetic control region without change of political environment