Regulation and Corruption in Transitional China

Whilst China has, over the past thirty years, had a poor quality legal system and a high level of corruption it has also had high rate of economic growth. This is puzzling for those holding the conventional view that both poor institutions and corruption are bad for growth. This paper attempts to address this puzzle by studying the interaction between corruption and regulation by examining two positive effects of corruption on growth. First, economic reform depends on the support of those who have economic power. Polices that allow government departments and officials to divert resources from the planned track to the market track, and allow them to undertake private businesses make them part of the driving force for reform. This also creates an enormous potential for large amounts of institutionalized corruption, which it is impossible to curb without the regulations being changed. This kind of corruption can be viewed as providing compensation to these institutions and officials in exchange for them giving up some of their power to market. This first mechanism facilitates reform. Second, large amounts of bad regulations exist in transitional economies. Certain kinds of corruption can actually keep bad policies and regulations from being fully implemented and thus support growth. They enable people to break the status quo when institutions are bad. These kinds of corruption are not a hindrance to the economy, but can be seen to be convenient devices for overcoming regulatory hurdles that distort incentives and prevent business opportunities. Although China has many laws and regulations which are bad for growth, China also has high level of corruption, part of which offsets the bad effects of these laws and regulations and makes these bad laws less harmful for growth. The dynamics of the relationship between regulation and corruption is also discussed. We conclude with the argument that being tough on corruption at the early stage of development could stifle potential development. This argument runs counter to the conventional view of the importance of using anti-corruption measures as a part of a development strategy.