Regulation and corruption in transitional China

ABSTRACT

This paper addresses the relationship between institutional change, regulation, and corruption by examining two possible positive effects of government discretion on growth in transitional economies, such as China. Firstly, economic reform depends on the support of those who have economic power. Allowing government departments and officials to divert resources and to be involved in private businesses make them a driving force for reform by giving up some of their power to the market. Secondly, because there existed large amounts of inefficient or out-of-date regulations in transitional economies, certain types of government discretion can actually circumvent inefficient policies and regulations and thus support growth. They enable people to break the status quo when regulations are lagging behind the reform. Although China had many laws and regulations which did not particularly promote growth, positive effects of government discretionary behaviour may have offset the negative effects of these laws and regulations on growth.

KEYWORDS:

• Regulation
• corruption
• growth
• China

Acknowledgments

The author would like to thank participants of the Third Meeting of the Initiative for Policy Dialogue Task Force on China on Regulation especially Heping Cao, Zhiyuan Cui, James Galbraith, David Kennedy, Joseph Stiglitz, and Nick Weaver for comments and suggestions. The author also thanks the editors of this journal, Xiaolan Fu and Jinghai Zheng for their support. This paper is part of a systematic study of the evolution of institutions and transition of regulation by the author.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. A country or territory’s CPI Score indicates the degree of public sector corruption as perceived by business people and country analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).

2. In 2012, Chinese government initiated a very grand anti-corruption campaign which has significantly reduced corruption level.

3. Haggard (2018) provides a concise and comprehensive critical review of the development state literature, which emphasises the role of government intervention and industrial policy as well as the significance of strong states and particular social coalitions.

4. Lin and Wang (2017) argue that the role of state, political leaders and right ideas are very important in development.

5. Together with others, the author is developing analytical frameworks that provide micro-foundations for the dynamics of the evolution of institutions and its implication to development.

6. The word ‘corruption’ should be taken here in its broad sense. For example, many of the lobbying activities at the US federal government level are been seen by many as a kind of corruption. Certain types of discretionary government behaviour can also be labelled as corruption by some.

7. This paper refers to corruption to its broader definition. Corruption here refers to a form of activity undertaken by someone entrusted with a position of authority such as a local government official, to acquire illicit benefit in the forms of bribery, embezzlement. Corruption happens when a governmental employee acts in an official capacity for personal gain.

8. It should be noted that governments departments and the army were no longer allowed to have any business involvement since 2012.

9. Although central government and different government departments issued various laws and regulations to restrict business involvement by government officials and their relatives, there were conflicting messages as whether to prohibit or allow certain levels of officials and civil servants to sway in business or have part-time business activities.

10. Pritchett, Sen, and Werker,(Edit (2017) argue that some discretionary government behaviour such as cronyism can be very good for growth as a way to break the deadlock in economic development.

11. Wang., Ozanne, and Hao (2014) argue that development and governance are endogenously related and tend to reinforce each other; i.e. improvement in governance is a consequence as well as a cause of development.

12. Of course, it should be noted that corruption at the higher level may actually erode, rather than enhancing, government’s ability to improve regulations.

13. It should be noted that the situation described here is before the 2011 tax reform.

14. It should be noted that this kind of discretionary government decision may not be considered as corruption, as there is little private gain from it in exchange of public power. However, this is selectively enforcing regulations of the central government.

15. See Wang and Piesse (2010) for a detailed discussion of the tax and fees in China.

16. China has recently made great effort in executing court orders and there has been significant improvement in this regard.