116chow - Corruption and Chinas Economic Reform in the...

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Corruption and China’s Economic Reform in the Early 21st Century by Gregory C. Chow, Princeton University CEPS Working Paper No. 116 October 2005 Acknowledgement: I would like to thank Steven Kou of Columbia University and Yan Shen of Peking University for helpful comments and the Center for Economic Policy Studies at Princeton University for financial support in the preparation of this paper.
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1 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, and gradual privatization of some large state enterprises. Bureaucrats managing state assets and the selling of assets take advantage of such power to benefit themselves, including embezzlement of public funds and taking bribes from citizens needing their help, as can be found in state enterprises, state-owned commercial banks and in government projects. 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. Outline 1. Introduction 2. Review of Past Reform Measures and Current Problems 3. Enterprise Reform Hindered by Bureaucratic Behavior 4. Reform of Banking and Financial System Hindered by Corruption 5. East-West Income Inequality and Western Development Hindered by Corruption 6. Reform of the Legal System 7. A Theory to Explain Bureaucratic Behavior and Corruption 8. Policy Recommendation 1. Introduction 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 21 st 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.
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