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,
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Estimated direct economic loss because of corruption is 13% of its GDP, due to tax evasions, land grabs and the decline in value of the government output due to inefficient allocation to unprofitable companies (Wolf, Yeh, Zycher, Eberstadt, Lee, 2003). Corruption also leads to socio-political problems such as the increasing income gap of the society(Wu, Zhu, 2011) and the resultant loss of confidence towards the ruling party manifesting as physical unrest that harms China’s economy indirectly (Pei, 2006). Now, foreigners are increasingly deterred by the unreasonable amount of extra payments needed to invest in China (Lu, 2010) and thus have a growing preference to invest in places with higher anti-corruption efforts (Cole, Robert, 2008). This phenomenon threatens the sustainability of the Chinese economy that is highly leveraged on FDI. In all, unless the Chinese government is prepared to face a downward spiral of China’s economy, they should engage in more concerted efforts to weed out corruption from its roots.
1) Ackerman, Susan-rose. “The Political Economy of Corruption” Institute of International Economics. Pg 42- 43 Retrieved from http://www.iie.com/publications/chapters_preview/12/2iie2334.pdf. 2) Campos J. Edgardo, Lien Donald, Pradhan Sanjay (2001). “Corruption and its Implications for Investment”. In. Campos, J. Edgardo (Eds) “Corruption: The Boom and Bust of East Asia”. Philippines: Ateneo De Manila University Press. Pg