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Limiting Government Predation Through Anonymous Banking: A Theory with Evidence from China

Chong-En Bai, David D. Li, Yingyi Qian and Yijiang Wang

No 275, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: China's economic performance of the past two decades presents a puzzle for the economics of transition and development: Enormous private business incentives were unleashed that have fueled rapid economic growth despite the fact that China has had very weak "conventional institutions" (such as the rule of law and separation of powers) to constrain the government from arbitrary intrusion into economic activities. We argue that one mechanism that has limited the government's ability for predation and harassment is commitment through information decentralization, where the key institutiton is "anonymous banking," that is, a combination of the use of cash for transactions and the use of anonymous savings deposits. The government's incentive for such a mechanism comes form the increased quasi-fiscal revenues collected from the state banking system through "financial repression," a combination of controls on international capital flows with restrictions on domestic interest rates. The major features of China's economy concerning its fiscal decline, financial deepening, and the sectoral dual-track can be better understood using this analytical framework.

Pages: pages
Date: 1999-07-01
New Economics Papers: this item is included in nep-ifn, nep-sea and nep-tra
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