Is Market Liberalization Pathological? Debating the Causes of Corruption in Chinese Banking

Neoclassical economists posit that the freeing of market forces will lead, ceteris paribus, to a reduction in levels of corruption. There are several mechanisms through which this hypothesized effect is channeled, the most important of which is competition pressure brought by the entry of foreign firms into the domestic market. The empirical leverage of this approach has been strongly challenged by events of recent years. In China and Russia, market liberalization has not had the expected effects: corruption has exploded alongside market opening. Why? The view among many economists is that the benefits of market opening were stymied by the political logic governing the process of reforms (e.g. cronyism in privatization, trade policy protection of inefficient domestic firms et cetera). The Polanyi-inspired counter-claim is that reform-era corruption is itself an effect of the disembedding of the political economy. My research on corruption in the Chinese banking industry lends empirical insight to the debate. Because the Chinese market is variegated, with some firms being much more exposed to competition than others, there is the opportunity to test these explanatory variables against corruption levels in different segments of the market. On the basis of original fieldwork conducted in China, this paper suggests that the neoclassical economists faith in market opening as an anticorruption mechanism is unwarranted. ..PAT.-Unpublished Manuscript