Abstract
The Chinese economy has undergone three decades of rapid economic growth, while at the same time experiencing a dramatic increase in the incidence and intensity of corruption. It is argued that these developments have been closely related and follow a fundamental logic of institutional arbitrage thriving in the context of a hybrid economy located somewhere between plan and market. Analysing various manifestations of corruption, it is shown that under certain background conditions corruption can be instrumental to economic development and drive a market-oriented transformation process. However, with the formal institutional framework crossing a threshold line of market coordination capacity, the potential of corruption to bridge institutional deficiencies in the formal system erodes and corrupt activities become increasingly ‘dys-functional’, impeding economic development and growth. In the course of the discussion Chinese guanxi networks are shown to provide a highly effective ordering mechanism for corrupt transactions, thereby facilitating the proliferation of corruption in China.
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