Corruption and China's Economic Reform in the Early 21st Century

ABSTRACT Past economic reform of the state sector in China consisted mainly of privatization, of agriculture and of small and medium-size state enterprises, leaving large state enterprises in the control of the state. Current reform consists of making state-owned enterprises and banks more efficient and functioning like private enterprises, gradual privatization of some large state enterprises and setting up government programs for rural development, poverty reduction and social welfare. Bureaucrats managing state assets, the sales of these assets and the social development programs take advantage of such power to benefit themselves, including embezzlement of public funds, taking bribes from citizens needing their help and the abuse of power in carrying out rural development programs, as can be found in state enterprises, state-owned commercial banks and in various government social and development programs. Reducing the size of the government sector is a basic solution to the corruption problem in China while attention should be paid in the privatization process which can involve corruption and in the promotion of private initiative for social and rural development. JEL Classification: K10, L5, P3 Keywords: China; Corruption; Public ownership; Economic reform I. INTRODCUTION Reform of China's economic institutions since 1978 has been a gradual process. A major theme of this paper is that corruption, while not a major hindrance to economic reform in the past, has become a major hindrance to further reform at the beginning of the 21st century. The subject of this paper is the role of corruption in further economic reform in China, and not the economics of corruption per se. Svensson (2005) is a recent paper dealing with the subject of corruption and includes a number of references but the current paper is self-contained in discussing our own topic. I begin by reviewing China's economic reform and growth since 1978 and pointing out the main characteristics of reform, the fundamental factors accounting for rapid growth and the current shortcomings of China's economic institutions (section 2). With this survey as the background I go on to examine the problems facing further reform of different institutions, including the state-owned enterprises (section 3), the banking and financial system (section 4), the disparity among regions (section 5), the legal system (section 6). I then offer a theoretical explanation of one importance hindrance to further reform, namely bureaucratic behavior and corruption on the part of government officials and managers and staff of state-owned economic institutions (section 7). A recommendation to reduce bureaucratic behavior is offered in section 8. This paper is an institutional analysis of corruption. It will offer three reasons why corruption is now a more serious problem than before. First, the nature of early economic reform towards a market economy consisted mainly of privatization of farming and industrial production while current reform consists of changing the performance of the remaining large state-owned institutions that are controlled and operated by bureaucrats who could profit from their economic power through corruption. Second, as the economy has become more developed and per capita income has increased very rapidly especially in the coastal provinces government attention has shifted to the development of the relatively poor rural areas and the reduction of poverty. This requires the cooperation of the bureaucrats and provides them with more economic power. Third, as more money became available to pay for corruption in doing business beginning in the 1980s, corruption has become a culture in China and it is difficult for the central government and the Chinese Communist Party leadership to stop it (some members even engaged in it themselves). My view is that corruption will remain a serious problem in China for some time. …