Privilege and corruption: The problems of China's socialist market economy - New Perspectives on Transition Economics: Asia

American Journal of Economics and Sociology, The, Jan, 2002 by Shuntian Yao

V

A Market Economy with the Presence of Privilege

IN THE LATE 1980s, the head of a large joint venture company in Shenzhen who was a princeling and former high-ranked Communist Party official of Guangdong Province, told me that in doing business he could take advantage of both of China's socialist political system and the capitalist market mechanism. I totally agreed with him. It was China's socialist political system that granted him the privilege of choosing his occupation as head of a joint venture company in the SEZ, and it was the capitalist market mechanism that enabled him to earn a huge amount of money through domestic and foreign business.

As is well known, in China it is not the case that every citizen is able to freely choose his or her occupation. Whether or not one is qualified for a desirable job does not generally depend on one's intelligence or capability. In particular, the occupation of high-level administrator is the privilege granted by CCP to a tiny group of people who are either high-ranked Chinese Communist Party cadres or the princelings. According to the Chinese leaders, an economy with the power to make high-level decisions firmly controlled by a tiny group of high-ranked CCP officials is referred to as a socialist market economy.

To model such an economy, let us assume that a small portion [rho of individuals are chosen by the CCP leaders to be permitted to work as high-level administrators. Of course they are also allowed to choose other professions if they wish, and as a result, each one of them has the same set of feasible decision plans as described in the last section. However, as we can see below, if [rho] is sufficiently small, every one of them will be happy to enjoy his or her privilege and will choose the profession of high-level administrative service. On the other hand, all the other individuals are only allowed to produce consumer goods. Hence in their decision plans ([l.sup.i.sub.1], [l.sup.i.sub.2], [l.sup.i.sub.3], [x.sup.i.sub.1], [x.sup.i.sub.2], [x.sup.i.sub.3], [y.sup.i.sub.1], [y.sup.i.sub.2], [y.sup.i.sub.3]) an additional constraint is added, namely [l.sup.i.sub.3] = 0. The definition of a Walrasian equilibrium is thus revised accordingly. With this change, even at equilibrium we can no longer guarantee utility equalization across the whole population. Because any individual not allowed to choose the profession of an administrator is subject to one more constraints, his or her equilibrium utility must be always less than or at most equal to that of those having the privilege.

Proposition 2. If only a subset of individuals in the population are allowed to choose any profession freely, then any member in this subset will always achieve a utility level larger or equal to those not in the subset. In particular, if only a very tiny percentage of individuals are allowed to choose the profession of high-level administrative service, at the Walrasian equilibrium, each member of this privileged group could achieve a much higher utility than any individual lacking this privilege.