While corruption is said to generate inefficiency and retard growth in a country (Ackerman, 1997), China manages to deliver astronomical economic growth amidst rampant corruption (Li, Peng, 2001). To explain China’s puzzle, the essay first focuses on the causes of corruption and why it has yet to be eradicated, and then analyzes its economic impact in the short and long run. The rise of corruption in China can be attributed to the structure of its economic institutions. Starting off with a unified system where resources are uniformly allocated by the central government, large-scale decentralization market reforms in the 1970s like the “fiscal-contracting system” endowed local officials with high control over the use of public goods (Zhou, 2010). This sudden gain in autonomy translates into opportunities for embezzlement and extortion of bribes from potential businessmen (Chow, 2005). These chances to earn extra income motivate officials more, since their pays are much lower than that of the private sector (McGregor, 2010).
Culture is also indispensable in causing corruption. Many Chinese are still guided by the Confucian notion of reciprocity, which advocates the cultivation of relationships, also known as “Guanxi” in the business context. As officials become more rent-seeking under weak institutions, “Guanxi” has degraded into a critical facilitator of informal exchange and gain-sharing such as bribery (Luo, 2007). Some argue that as the market becomes more competitive, “Guanxi” is no longer effective as bureaucrats are likely to consider projects based on its viability over personal connections (Guthrie, 1998). However, the post-reform era also entailed a shift towards individualistic material pursuits, which led to a new form of collective corruption to achieve a common goal of increasing wealth, where officials collude to calculate how to maximize personal benefits in accordance to situations without the need to form friendly relationships (Ting, 2002). A...
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