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

Remark

That [rho] is far less than the percentage of high-level administrators required by a free market is in accordance with China's situation. One reason is that the CCP restricts the selection to those high-ranked party cadres or their successors, and a second reason is that the CGP wants to have a firm control over the high-level economic decision making.

The proof of Proposition 2 can be found in the Appendix.

To give a numerical comparison of these results with what we obtained in the previous section, let us assume that a = 0.2, b = 0.5, c = 10, [alpha] 0.1 and that k = 0.9, (1 - [rho])/[rho] = 20. (1) We then have p = 0.3134, [U.sup.*] = 0.10262 U' = 0.49724, U'(B) = 0.086116 (5)

where [U.sup.*] is the equilibrium utility in a free market economy, as was obtained in the last section, U' is the equilibrium utility of every privileged group member and U'(B) is the equilibrium utility for every ordinary individual. We thus see in our numerical example that with the presence of privilege, the utility of ordinary people declines by 20 percent, while the utility of any privileged group member increases 390 percent. This unfairness in wealth distribution among ex ante identical individuals is directly created by the political system that grants and protects privileges. As mentioned in Section II, we refer to it as an implicit corruption problem of the socialist market economy.

We can also compare the consumption of any individual in the free market economy as described in Section III with that in the socialist market economy as described in this section. From the Appendix, it is easy to verify that in the free market economy as described in the previous section, any consumer good producer consumes 0.33767 units of his or her production and 0.30390 units of the other consumer good, and any administrator consumes 0.32034 units of each of the two consumer goods. In the socialist market economy as described in this section, we can also compute that any consumer good producer consumes 0.30933 units of his or her production and 0.27840 units of the other consumer good, and any individual in the privileged group consumes 0.70515 unit of each of the two consumer goods.

VI

Connection, Collusion, Two-Part Tariff and Explicit Corruption

WE NOW CONTINUE the discussion of our story of China's socialist market economy. Although such an economy is usually not efficient and leads to an unfair wealth distribution, it would not have been too bad if every individual in the privileged group acted independently as a price taker in a Walrasian market. As in our analysis in Section V, the price of the administrative service could be not too high because of the competition among the privileged group members themselves. Unfortunately, the real situation in China is much worse. These privileged group members in Chinese society, because of their similar political backgrounds, have steadily built up political and economic connections between themselves since the CCP came into power, especially after Mao's death and after the open-door policy had been introduced by Deng. As a result, when playing any political or economic games, they can actually collude with each other. If their nationwide collusion is not solid enough, at least the collusion of any small gr oup in their regional area is nearly complete. Thus, in the socialist market economy, these individuals are no longer price takers; instead they act more like monopolists.