Corruption in Transition
Countries making the transition to a market economy often experience an increase in corruption along with an increase in growth. This observation is puzzling in the context of current models, which emphasize the destructive nature of corruption. We present a model of corruption and reform which shows that under some circumstances, a particular gradualist reform strategy consisting of temporarily relaxing control of corruption provides a windfall to existing bureaucrats, thereby gaining their support for a reform effort that will ultimately reduce the distortions stemming from bureaucratic power. Thus, in the context of reform, a one-time surge of corruption can be a prelude to a permanently reduced level of corruption in the future, which provides the incentive for high current growth. We illustrate our point with examples from the recent Chinese reform.
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