Jun 22, 2014

China (institutional) puzzle of the day

Wikimedia Commons: Hydroelectric power station in Xiaojin County, Sichuan
Incentives to develop infrastructure projects are greater if bureaucrats in charge of implementation can benefit from the development personally. In the absence of other instruments that can be used to incentivise bureaucrats to exert costly effort in promoting infrastructure development, it is socially beneficial to allow the bureaucrats to reap some amount of corrupt payment as a bonus for their effort in fulfilling tasks. Two caveats apply, though. First, unrestrained corruption reduces social benefit and, thus, undermines the purpose of the development. Two, corruption incentives can lead to excessive investments.  
This model helps to explain the paradox behind China’s spectacular infrastructure development accompanied by endemic corruption. And it sheds light on Chinese officials’ obsession with big spending projects and has broad policy implications. In particular, it suggests that anti-corruption policy could play a key role in the country’s re-balancing strategy aiming at shifting from investment-driven growth towards a more sustainable consumption-driven growth.
The paper by Bingyong Zheng is titled "Bureaucratic Corruption and Economic Development." 

So, some corruption is good and a lot of corruption is bad. I find it difficult to believe. If that is true in the positive sense, in the normative sense it is problematic. How does a society strike that balance? Is some corruption necessary for development? Is it a result of economic development? 

To be sure, in the long term successful societies have minimised corruption.    

It is too soon to address the results of the huge infrastructure investment in China. Looking back, a few years in the future, we might actually think that some of that money should have been invested (or saved) differently, like on health, for example, given population ageing.

However, there is research by Carlos Ramirez (my professor of macro at GMU) that shows that China's corruption is not out of control, compared, for example, with the level of corruption that the US had at China's recent level of real income-per-capita. 

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