Crime Law Soc Change (2012) 58:93-109 DOI 10.1007/s10611-012-9379-9 Filling the gap of formal institutions: the effects of Guanxi network on corruption in reform-era China Jing Vivian Zhan Published online: 15 May 2012 # Springer Science+Business Media B.V. 2012 Abstract Corruption exists around the world and throughout the human history, but societies undergoing rapid modernization and institutional transition tend to be more susceptible to this problem. This article analyzes the corruptionfacilitating roles of guanxi network under transition. It argues that when deficient political and economic institutions hamper the effective flow of information and resources and when fast structural changes generate uncertainty, people can resort to guanxi network, an informal institution, to overcome these difficulties and advance their private interests. Using empirical evidence from reform-era China, this article demonstrates how the communication, exchange, and normative functions of guanxi network enhance the opportunities, means, and incentives for public officials to engage in corruption, especially transactional corruption through particularistic ties. Introduction Corruption, rather than a sporadic phenomenon resulted from occasional dysfunction of the political and economic system or human morality, has been omnipresent in almost all kinds of regimes and societies and throughout the human history. Scholars from multiple disciplines, including history, economics, sociology, anthropology, organizational and administrative theory, and development studies, have all explored the causes of corruption from different perspectives ([20], p. 1). As the vast literature on corruption suggests, political and economic institutions, such as the level of economic development, regime type (federal state vs. unitary state), legal system (common law vs. civil law), market development, and openness to trade (especially international trade), can significantly influence the likelihood of corruption (e.g. [34, J. V. Zhan (*) Department of Government & Public Administration, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong e-mail: zhan@cuhk.edu.hk 94 J.V. Zhan 36, 41]). At the same time, informal institutions, such as culture, religion, social norms and networks, are also found to influence the strength of a regime and people's tendency for corruption [1, 3, 11, 23, 26]. However, as Huntington [15] points out, societies during intense phases of modernization are particularly susceptible to corruption. Studies on post-communist regimes in East Europe and Russia also suggest that dramatic institutional changes such as decentralization and privatization are often accompanied by a surge of corruption [2, 7, 17, 33, 36]. Indeed, rapid transformation of formal institutions, such as constitutions, laws, and economic systems, create enormous structural opportunities for corruption. But formal institutions are not the only factors at work. The changes in formal institutions can well affect the operation and efficacy of informal institutions, which consequently may breed or deter corruption. For instance, the Communist regime and accompanied shortage economy in Soviet Russia are believed to give rise to blat, the favor exchange practices within exclusive friendship circles, and hence contribute to corruption [19]. Similarly, China under the post-Mao reform has seen widespread corruption through guanxi network, an interpersonal social network featured with favoritism, as a way for people to survive and get ahead in the deficient political and economic system [8, 12]. Therefore, it is interesting and necessary to explore how the existence and operation of certain informal institutions affect the propensity of corruption, especially with the structural opportunities for corruption provided by the transformation of formal institutions. Taking reform-era China as an empirical case, this article focuses on guanxi network, an informal institution prevalent in China and other East and Southeast Asian societies, and analyzes its effects on corruption in the context of drastic economic and political changes. Although guanxi network is widely believed to have fueled the rampant corruption in reform-era China, few studies have been done, with the notable exception of Li [21], to parse the mechanisms through which guanxi breeds corruption. In this article, I argue that when the transition from a highly centralized command economy controlled by the Communist party-state to a decentralized while incomplete market economy creates enormous structural opportunities for corruption, people resort to guanxi network to bridge the gaps in the formal institutions to obtain crucial information and valuable resources. By tilting people's exchanges and communications and shaping their norms in favor of closely related persons over the general public, guanxi network enhances the opportunities, means, and incentives for public officials to engage in corruption, especially transactional corruption through particularistic ties within relatively exclusive networks. The rest of the paper is organized as follows. The rise of corruption under transition section briefly reviews how corruption has proliferated under the structural changes in reform-era China. The Transactional corruption: a typology section suggests a typology of corruption and pinpoints the type of corruption on which guanxi network has the most impacts. The Guanxi network: contents and functions section discusses the concept of guanxi network and its basic functions, based on which The effects of guanxi network on corruption section analyzes in detail how guanxi network facilitates or encourages corruption with the support of empirical evidence. The Conclusion section offers some concluding remarks. 94 J.V. Zhan 36, 41]). At the same time, informal institutions, such as culture, religion, social norms and networks, are also found to influence the strength of a regime and people's tendency for corruption [1, 3, 11, 23, 26]. However, as Huntington [15] points out, societies during intense phases of modernization are particularly susceptible to corruption. Studies on post-communist regimes in East Europe and Russia also suggest that dramatic institutional changes such as decentralization and privatization are often accompanied by a surge of corruption [2, 7, 17, 33, 36]. Indeed, rapid transformation of formal institutions, such as constitutions, laws, and economic systems, create enormous structural opportunities for corruption. But formal institutions are not the only factors at work. The changes in formal institutions can well affect the operation and efficacy of informal institutions, which consequently may breed or deter corruption. For instance, the Communist regime and accompanied shortage economy in Soviet Russia are believed to give rise to blat, the favor exchange practices within exclusive friendship circles, and hence contribute to corruption [19]. Similarly, China under the post-Mao reform has seen widespread corruption through guanxi network, an interpersonal social network featured with favoritism, as a way for people to survive and get ahead in the deficient political and economic system [8, 12]. Therefore, it is interesting and necessary to explore how the existence and operation of certain informal institutions affect the propensity of corruption, especially with the structural opportunities for corruption provided by the transformation of formal institutions. Taking reform-era China as an empirical case, this article focuses on guanxi network, an informal institution prevalent in China and other East and Southeast Asian societies, and analyzes its effects on corruption in the context of drastic economic and political changes. Although guanxi network is widely believed to have fueled the rampant corruption in reform-era China, few studies have been done, with the notable exception of Li [21], to parse the mechanisms through which guanxi breeds corruption. In this article, I argue that when the transition from a highly centralized command economy controlled by the Communist party-state to a decentralized while incomplete market economy creates enormous structural opportunities for corruption, people resort to guanxi network to bridge the gaps in the formal institutions to obtain crucial information and valuable resources. By tilting people's exchanges and communications and shaping their norms in favor of closely related persons over the general public, guanxi network enhances the opportunities, means, and incentives for public officials to engage in corruption, especially transactional corruption through particularistic ties within relatively exclusive networks. The rest of the paper is organized as follows. The rise of corruption under transition section briefly reviews how corruption has proliferated under the structural changes in reform-era China. The Transactional corruption: a typology section suggests a typology of corruption and pinpoints the type of corruption on which guanxi network has the most impacts. The Guanxi network: contents and functions section discusses the concept of guanxi network and its basic functions, based on which The effects of guanxi network on corruption section analyzes in detail how guanxi network facilitates or encourages corruption with the support of empirical evidence. The Conclusion section offers some concluding remarks. The effects of guanxi on corruption under transition 95 The rise of corruption under transition The discussion of corruption cannot proceed without a clear definition of the concept. This paper adopts the widely accepted definition of corruption as the behavior that deviates from the formal duties of a public role because of private-regarding (personal, close family, or private clique) gains [29]. This definition is largely consistent with the legal definition of corruption in reform-era China. As documented in Chinese official sources, the most common types of corruption since 1998 include embezzlement (tanwu), bribery (huilu), misappropriation (nuoyong gongkuan), collective embezzlement (jiti sifen), holding huge property with unidentified sources (ju'e caichan laiyuan buming), abuse of public position (lanyong zhiquan), dereliction of duty (wanhu zhishou), and fraud (xunsi wubi),1 with embezzlement, bribery, and misappropriation as by far the largest three categories [39]. As one can see, all these offences involve the abuse of public position for private gains, although the private gains can take different forms and are not limited to pecuniary benefits. Since the post-Mao reform started in the late 1970s, China has experienced a surge of corruption [18, 38, 43]. Throughout the past three decades, several major waves of corruption with notable patterns have been observed, each corresponding to some structural deficiencies of the Chinese economic and political system [6]. The first wave of corruption lasted from the end of the 1970s till the late 1980s, accompanying the implementation of a dual-track system, which allowed the coexistence of state-controlled and (oftentimes much higher) market-determined prices for the same types of products. The significant price differentials generated enormous opportunities for government officials to seek rent for the resources they controlled on the one hand, and for businesses and individuals to bribe officials to obtain consumer goods and industrial inputs at below-market prices on the other [44]. Into the early 1990s, the dual-track system gradually phased out as the marketoriented reform continued and the price differentials in most goods reduced substantially. However, the development of financial institutions such as banks (which are mostly state-controlled) created new opportunities for government officials to seek rent with their power to appoint bank executives and influence credit allocation. The establishment of the stock market in 1990 without effective supervisory mechanism to control illegal trading activities also allowed executives of financial institutions to trade inside information for financial returns. Thus China saw a second wave of corruption involving financial institutions into the 1990s [6]. Although the Chinese central government somewhat strengthened its control on the financial institutions around 1999 [25], corruption cases in the financial sector have continued to make news headlines. As the market-oriented reform continued into the late 1990s and especially after China entered the World Trade Organization (WTO) in 2001, the opportunities for rent-seeking based on commodities and import quotas were substantially cramped. However, the land tenure system still operated on dual tracks: as the exclusive owner of nonagricultural land in China, the government can administratively allocate land 1 Historically corruption in China also included other offences such as illegal profiteering (touji daoba), negligence (duzhi), squandering (huihuo langfei), privilege seeking (yiquan mousi), smuggling (zousi), and moral degeneration (daode duoluo) [38, pp. 26-33]. 96 J.V. Zhan use right to private parties at no or low cost. Meanwhile, the allocated land use rights can be transacted on the market, particularly after citizens were allowed to buy their own houses in 1998. As real estate boomed in the following decade, such dual-track land tenure system created enormous space for land-related corruption [5, 50]. China's increasing investment in infrastructural construction such as roads, railways, and airports, especially under the 4 trillion yuan stimulus package after the 2008 financial tsunami, created added channels of corruption. On the one hand, the state monopolized the planning and funding of transportation projects; on the other hand, it relied on market-based contractors for the actual construction. However, without effective supervisory institutions on the fund allocation, contractor selection, project management and quality control, officials in charge of transportation projects could easily abuse their power in pursuit of private gains, such as accepting or extorting bribes from construction companies or suppliers of construction materials seeking lucrative contracts. The transportation sector has thus become a hotbed for major corruption cases that involve large sums of money and many high-level officials [48]. Transactional corruption: a typology The brief review above does not exhaust all types of corruption that arose in reformera China, but it suggests that China's halfway transition from a centralized command economy towards a market economy and the lack of well-established market institutions created enormous opportunities for public officials to abuse their power for private gains, often through corrupt exchanges with those in pursuit of the valuable resources controlled by the officials. Therefore, transactional corruption, especially the collusion between the government and the private sector [9], has become a major problem in China and aroused strong resentment among Chinese citizens. To better understand the nature of transactional corruption, a typology of corruption may help us situate it among the varieties of corruption and appreciate its key features. First of all, corruption can be categorized according to its gains. Many abuses of pubic roles generate pecuniary benefits for the participants. The fact that embezzlement, bribery and misappropriation composed by far the largest categories of corruption in reform-era China suggests the prominence of economic interests for corrupt behaviors. However, it is worth noting that corruption can also generate nonmonetary gains, such as political support, advance of official position, social status, and privileges such as exemption from legal punishment for offenses, prioritized access to scarce resources, personal leisure, and sexual favors, to name just a few examples. Although such privileges may be turned into or calculated in terms of monetary gains, these types of corruption are non-economic in nature. On a different dimension, corruption can be dichotomized according to whether it involves transaction between two or more parties [30, 38]. Some corruption is unilateral action and involves a one-sided flow of resources from the government or other public domain (such as collective assets) to individuals or private groups. Embezzlement, misappropriation, and squandering of public assets fall into this category. On the other hand, corruption can take the form of transaction of corrupt benefits between officials and citizens or officials at different ranks, with the typical example of bribery. The effects of guanxi on corruption under transition 97 For transactional corruption, there are different ways through which the transaction is conducted. It can be done through impersonal market mechanism, under which there is competition and whoever offers the highest price receives the deal. An example is the selling of public offices [28, 49]. In such an illegal market, there is no particularistic relationship between the seller and the buyer, and it is the price rather than social relations that determines the parties of the transaction. Alternatively, transaction can be done through particularistic ties, where the corrupt benefits are distributed according to the interpersonal relationship between the holders and receivers of the benefits rather than through price competition. In such cases, the particularistic relations should be established before the transaction, and the people involved in the relationship should have invested in building up and maintaining the ascriptive relationship beforehand. Corruption through particularistic relationships can be further divided into two subtypes according to how the stakes of corrupt exchange are distributed [16]. Some routine stakes can be distributed through patronage networks and machines on a regular, continuing basis, and such patronage networks can integrate as many people as possible. On the other hand, corruption through cronyism and nepotism can distribute stakes among a small group of people who are closely connected to each other, and such networks are normally exclusive. The discussion above suggests a typology of corruption according to the economic or noneconomic stakes involved and the transactional or non-transactional nature. Transactional corruption can be done through market mechanism or particularistic relationship. And particularistic relationship can be further divided into integrative and exclusive networks (see Table 1). This article will mostly focus on transactional corruption through particularistic relationship within relatively small, exclusive networks, because this is where guanxi network, centering on primary interpersonal Table 1 Typology of corruption Economic stakes Non-economic stakes Non-transactional One-way flow of economic benefits. E.g. embezzlement One-way flow of non-economic benefits. E.g. dereliction of duty Transactional Market mechanism Distribution of non-economic Distribution of economic corrupt benefits through corrupt benefits through price competition. E.g. price competition. E.g. offering lucrative contracts selling offices to bribers to bribers offering the highest offering the highest price price Particularistic Integrative Distribution of economic relationship network corrupt benefits through extended, integrative network. E.g. illegal pork barrel spending Exclusive network Exchange involving economic corrupt benefits within small, exclusive group. E.g. nepotism in allocating contracts Distribution of non-economic corrupt benefits through extended, integrative network. E.g. political clientelism Exchange involving noneconomic corrupt benefits within small, exclusive group. E.g. cronyism in official appointment 98 J.V. Zhan relationships, is most relevant and powerful, although, as we shall discuss later, guanxi network can affect the occurrence of non-transactional corruption as well. Guanxi network: contents and functions Although social networks widely exist in almost all cultures, students of the East and Southeast Asian societies, especially those heavily influenced by the Confucian culture, are often struck by the intensiveness of social networks and their heavy influence on people's behaviors. A particular form of social network in the Chinese culture is guanxi network. Like many social networks in other contexts, guanxi network is essentially an expression of particularism the felt obligation to help and to give resources to closely related persons, such as the family, friends and membership groups [1]. Guanxi shares considerable similarities with the social networks prevalent in other cultures, such as the familism in Italy [1] and blat in Russia [19]. But guanxi network is somewhat broader and more inclusive than social networks based exclusively on familial ties or enclosed friendship circles. On the other hand, guanxi network also differs from and is more restrictive than social networks based on secondary relations such as professional and religious ties. Compared to such networks, guanxi network involves a strong sense of personalism and hinges heavily on interpersonal connections based on familial ties or friendships instead of just professional ties or shared identify in some social groups. In other words, guanxi network is like a private club whose membership is extendable, but not without restrictions. An outsider who wants to join the private club may take the initiate and construct affective connections to its owner by appearing genuinely friendly or helpful, or more likely, enlisting the referral of some insider. With the insider serving as a reference and guarantor, the outsider can more effectively build up trust and consolidate the tie with the owner of the private club. Beneath the affective interpersonal connections and central to the establishment and maintenance of guanxi network, however, is a stable reciprocal tie [46]. The reciprocal tie normally builds upon a series of exchanges of gifts or favors and may take a long time to consolidate. Each transaction is a step to deepen the relationship. But different from market transactions, which are isolated and discrete interactions where both parties exchange items of equivalent value, transactions in guanxi practice are not instantly paid off but would keep the relationship of obligation ongoing [37]. Because of this centrality of reciprocal ties, guanxi network can be constructed for purely instrumental purposes, although the instrumentality is always camouflaged by interpersonal sentiments. The links in social network contain three major contents and consequently enable the network certain related functions [27]. Guanxi network is no exception. The first is communication content, i.e., information. Through the interpersonal links, information of some kind can be passed from one person to another. One example is the diffusion of rumor or gossip through a community. Based on this communication content, social network actually functions as a transmitter of information and allows people to share certain information by words of mouth, and often in secrecy. This function is particularly important in the situations where free information is not accessible to the public, such as under a nontransparent The effects of guanxi on corruption under transition 99 political system that blocks the free flow of information. If certain crucial information regarding business opportunities or political promotion is only available to \"insiders,\" the people who include such insiders in their networks can benefit from accessing such information. A different but equally important content of social network is exchange. Individuals are related to each other by sets of transactions which have implications for the actors wider than the simple act of exchange itself. The transactions bind the actors to one another in a series of expectations and obligations and build up the reciprocal ties [27]. A good example is the behavior of gift giving. In the flow of gifts, what is important is not gifts themselves, but the relationship created or reinforced between the giver and the receiver of the gifts. The affiliation as well as the principle of reciprocity will bond the two sides in a long-term and relatively stable relationship and facilitate their future transactions. The function of exchange is particularly important when the free exchange of goods through public channels such as the market is hampered by deficient political and/or economic institutions. The social network can then provide a private channel for people to get what they need with the help of other people in their network. The third, normative content of social network derives from the communication and exchange contents. It refers to the relationship between two individuals in terms of their expectations of each other because of some social characteristic or attribute the other may possess. In this sense, social network exists as frameworks for evaluating the behavior of people in appropriate situations [27]. Due to this attribute, social network shapes people's perceptions of each other and their shared set of beliefs, values and ideas, and consequently influences people's behaviors. For example, a person embedded in an intensive social network may feel obliged to favor the people in her network over those outsiders, and to favor those closer to her over the others farther away in her network. And people, as actors assuming multiple roles in the society, may put their roles in social networks in priority to their other roles, such as the public roles. Besides, the principle of reciprocity is another important norm that regulates people's exchanges within the network, the violation of which will likely damage one's reputation and invite sanctions from other people in the network. It is such norm that makes transactions within guanxi networks relatively stable, reliable and with lower risks. The effects of Guanxi network on corruption As the review earlier suggests, the transitions of political and economic institutions and their deficiencies in reform-era China have created enormous opportunities for corruption, especially transactional types. However, structural opportunities do not necessarily translate into actual actions. For transactional corruption to materialize, the officials need to identify partners for corrupt exchanges, which, unlike legal market transactions under the daylight, are normally kept in secrecy and involve high risks. Meanwhile, ideological or normative constraints may erect further hurdles for the officials to engage in corrupt behaviors. Under such circumstances, guanxi network, through its communication, exchange, and normative 100 J.V. Zhan functions, helps break down these practical and psychological hurdles and facilitates corruption, especially transactional corruption through particularistic relationships within relatively exclusive networks. I will illustrate my arguments with empirical evidence from reform-era China. Information As the transmitter of information, guanxi network facilitates transactional corruption in at least three ways. First of all, it helps identify the partners for the transaction. Corrupt exchange, unlike market transaction, cannot be publicly advertised and is often conducted in secrecy. The secrete nature poses some difficulty for the holders and seekers of corrupt benefits to convene. However, guanxi network can serve as a name list that provides potential candidates for the transaction and thus greatly lower the transaction cost. So both parties of the transaction can resort to their connections to find the seller or buyer of corrupt benefits without resorting to public channels and hence decrease the chance of being detected. Besides, guanxi network can lower the risks of corrupt transaction. Through guanxi network, both parties involved in a corrupt transaction know each other personally, and they both care about their reputation within the shared network, so it is much easier for them to build mutual trust than with strangers. Trust is important for corrupt transaction for at least two reasons. First, it significantly lowers the risk of nonperformance of either side after the other side has made the payment. For example, as it sometimes happens, the bribed official may not dispense the corrupt benefits to the briber after receiving the bribe. However, as words of dishonest behaviors may spread out within the network, the consideration for reputation and fear for sanctions from other members within the network in the future decreases the temptation of defection. Second, mutual trust can also lower the risk of disclosure of the corrupt exchange by either side to outsiders or the authority. Normally the bribed officials bear higher risk because the Chinese legal system punishes them more severely than the bribers. Thus they tend to be more careful when deciding whether to accept a bribe. A survey of some bribe-taking officials reveals the importance of trust: 80 % of the respondents would accept bribes selectively depending on who the bribers were, and some 47 % chose to accept from people who look loyal and trust-worthy [14]. Furthermore, guanxi network can be very useful when the stakes of corrupt exchange involve secrete information. Through the private channels of communication in guanxi network, the holder of secrete information can conveniently transmit the information to the receiver without being detected by the general public. Under China's nontransparent political system, substantial part of the policymaking process is conducted behind closed doors, and political elites and public employees grasp a lot of crucial information that can translate into lucrative opportunities or financial losses in the market. This puts the officials possessing crucial information in very powerful positions, as they can decide whether and to whom to release the information. If there is no formal rule that requires the information to be publicly accessible or no legitimate commercial channel to distribute the information in exchange for payment, the officials would have little incentive to release the information to the public, because it is costly to pass the information as well as to bear the burden of The effects of guanxi on corruption under transition 101 accountability. Under such circumstances, guanxi network provides a convenient private channel of dissemination. The cadres can disclose the relevant information to those in their network, arguably preferring those closer to them (like family members) to those farther away. Doing so is not only cost efficient, but can also generate rewards, pecuniary or otherwise, from receivers of the information. Thus valuable information grasped in the hands of officials, blocked by formal institutions but flowing through guanxi network in secrecy composes an important type of corrupt stake. The high-profile Rio Tinto commercial espionage case breaking out in 2009 clearly showcases how guanxi network can facilitate corrupt transaction involving secret information. In this case, four employees of the Australian mining group operating in Shanghai invested years and huge sums of money in building connections with the executives of their Chinese business partners (who were also government officials due to the state-owned nature of the Chinese steel companies). Rio Tinto went to great lengths to warm up with these Chinese executives, including hiring with extraordinary salaries some former officials and \"experts\" in the state-controlled iron and steel industry who had amassed valuable connections (renmai) [35]. In return, Rio Tinto was able to acquire crucial information that allowed them to gain an upper hand in their negotiations with these Chinese firms and led to huge financial losses on the part of China. The informational function of guanxi network is especially useful when rapid structural changes generate high degree of uncertainty and for those economic sectors on which unpredictable policy changes can generate huge business opportunities or losses. China's financial sector provides a good case in point. Since the stock market was established in 1990, it has been very sensitive to the state's economic and financial policies. Thus investors and stakeholders on the financial market are keen to grasp any clues from the insiders of the financial institutions. Such information gap created enormous room for rent-seeking. There are reportedly market prices for government officials in the financial sector to attend banquets or seminars, during which they could effortlessly earn handsome income for just sharing some \"personal views\" regarding the macroeconomic conditions [4]. Under such circumstances, the line between legal exchange of opinions and illegal disclosure of information is easily blurred. In recent years, a series of financial corruption cases were revealed that involved the sale of inside information to business people by high-level officials, including former vice president of the China Development Bank and top officials of the China Securities Regulatory Commission [42]. According to a large-scale survey study conducted by the People's Bank of China, the financial sector, particularly the securities-related businesses, is perceived as one of the most corrupt sectors in China [45]. And the findings led the investigators to lament that: \"The reforms brought down the traditional planned economy and introduced market transactions, but they also created a 'midway interest group' (zhongjian liyi jituan): They do not like the traditional planned economy because it did not give them any opportunity for rent seeking; but they do not like the genuine market economy either, because it deprives them of the power for rent seeking. They do not welcome transparency, because corruption can hardly take place in the daylight. Therefore, they prefer the situation in between, prefer a long period of transition, prefer the socalled 'Chinese characteristics', and prefer the mysterious state financial 'secrets' that 102 J.V. Zhan deny the bank depositors' and tax payers' rights to information and that cover up their own private interests\" ([45], p. 3).2 Exchange The second and perhaps the most direct corruption-facilitating effect of guanxi network is through its exchange function. Transactional corruption by nature is the exchange of corrupt benefits between their holders and receivers. Guanxi network can facilitate such exchange by setting up a non-public distribution channel of benefits between the pubic officials in control of valuable resources and private individuals and businesses who desire the resources. Unlike market transactions, which are open to everybody, exchanges through guanxi network are exclusive to people within the network and are featured with favoritism. For the dispenser of corrupt benefits, rather than distributing according to merits or price competition (if there is an open market for the benefits), there is a preference ordering, with those closer to them enjoying higher priorities in receiving the corrupt benefits than those farther away. This feature of guanxi network makes the dispenser of corrupt benefits lean towards people with whom they share stronger particularistic ties. Meanwhile, the exclusiveness allows exchanges through the network to stay in secrecy and face less risk of being detected and punished by the legal system. Unlike market transaction, which is conducted with explicit and instant (or with clearly specified timeframe such as for futures) exchange of goods and payment according to terms mutually agreed upon, exchange within guanxi network is neither explicit nor instant. A gift or favor to someone connected in a network is not supposed to be instantly paid off, which is often considered impolite or offensive, but is expected to be returned in the future [37]. Such implicitness and relatively long time horizon are significant for the discussion of corruption for at least two reasons. First of all, the relatively long time span makes the corrupt exchange more difficult to detect and convict. As bribes are not instantly paid off, but are returned in the future in some seemingly unrelated way, it creates considerable difficulties for outsiders to realize the connection of the two activities and for prosecutors to collect evidence to convict the criminals. Meanwhile, the implicit return of favor guided by the principle of reciprocity extends the meaning of private gains, a key element in the definition of corruption, from personal gain for public officials to the gain of any individuals or groups connected with the officials. For instance, bribes do not have to be presented to the intended officials always, but can be addressed to their family members, relatives, mistresses or close friends who are more likely to accept them. Although the officials do not receive direct payment from the bribers, they can well collect their rewards from the actual receivers of bribes, who can be regarded as the middlemen of the corrupt transactions, in form of affective, monetary, sexual, or other types of payments. Such indirect, nuanced transactions through third parties essentially create extra difficulties for the corruption to be detected and convicted. An anonymous referee suggests that this phenomenon of 'midway interest group' is perhaps not merely a transitional phenomenon but has deeper roots in the Chinese history and culture. If so, it would be of more significance than the analysis here suggests. This is an interesting idea worth exploring in another project. 2 The effects of guanxi on corruption under transition 103 Corrupt exchanges in reform-era China are innumerable and the stakes of corruption can take various forms. Economically, the partial transition towards a market economy allows the state to control valuable resources for the emerging market, such as consumer goods, industrial materials, foreign trade quotas, bank loans, land use rights, and infrastructural project contracts. As pivotal figures mediating between hungry investors and scarce resources, officials have ample chances to maneuver their power for private gains [9]. Politically, the party-state's monopoly over opportunities for career mobility and material reward makes officials, especially the Communist Party secretaries at each administrative level and in each government unit, a vehicle for distributing benefits and favors [32]. As the political and legal system fails to clearly specify criteria for the distribution and to strictly enforce the criteria, the existence of guanxi network encourages local officials to distribute promotions and opportunities to those closer to them in the network, while individuals (lesser cadres and ordinary citizens) would try hard to cultivate relationships with those in power. Plenty of empirical studies have demonstrated how prevalent the practice of establishing connections (la guanxi) and the tendency of nepotism in personnel appointments have been within the Chinese political system [24]. For dispensing these corrupt benefits through guanxi network, public officials receive commensurate payments in different forms. The most direct and commonly seen form is of course cash payment. But as officials become more sophisticated and more cautious under China's increasingly stringent anti-corruption measures, a stack of cash may appear too venal and risky to accept, especially at the initial stage of guanxi practice when the trust between the parties of corrupt transaction is not strong yet [21]. According to a survey among some Chinese people who were prosecuted for bribe-giving, 94.2 % said they would warm up the relationship first before bribing with money [14]. Therefore, gifts are often preferred over pure money. The gifts are normally expensive or priceless, such as luxury goods, antiques, artworks, golf club memberships, and at the least shopping cards of big malls or supermarkets [21]. Besides direct payment of cash or gift, various kinds of disguised payments to corrupt benefits have been invented and employed. For example, bribes can be presented to some middlemen first and then transmitted to the officials. An oft-used form of such indirect payment is to offer gifts, including lucrative job positions, to officials' family members and relatives [47]. Grand gifts such as luxury cars and apartments to officials' mistresses have also been frequently reported [31]. Another revealed strategy is \"donations\" to the official's work unit (gongzuo danwei) or some charity projects, which can either be channeled to the official secretly or stay in the receiver's account but help boost the official's public image and advance his/her political career [47]. In a word, as the Chinese government keeps implementing new policies to prevent and punish corruption, more obscure, innovative payment methods to corrupt benefits are being devised. But no matter what kind of payment, it inevitably works through guanxi network, either directly between the partners of corrupt exchanges or involving a middleman, and follows the principle of reciprocity. Norms Guanxi network could also influence people's tendency of corruption through its \"normative\" function, although this effect is indirect and may work through the other 104 J.V. Zhan two functions discussed above. People's behaviors are not only circumscribed by general social norms and legal institutions, but are also subject to the influence of the behaviors and expectations of other people embedded in their social networks. In this sense, the interpersonal network, as an informal institution, shapes people's values and can pressure them into conforming to its norms and expectations. If the particularistic norms in an official's guanxi network prevail over legal norms, s/he may feel obliged to deviate from his or her formal duties of the public role and engage in corruption. As Rose-Ackerman [33] concurs, societies based on strong interpersonal relations may care little about market and public sector efficiency and have little notion of or respect to formal rules in the political and economic systems. Several normative elements of guanxi network have demonstrated corruptionencouraging effects. The foremost is the principle of reciprocity, a key norm that sustains exchanges in guanxi network by generating the expectation and obligation of return to favors and gifts. A public official is at the same time a private person embedded in a guanxi network, no matter how large or small it is. Through social interactions, it is almost inevitable for officials to receive certain types of favors from other people in their network, especially if they intentionally seek to do so. Such favors thus cultivate a sense of obligation on the part of the officials, who have to find ways to return the favors and maintain the balance of the relationship; otherwise it would damage their reputation and even bring disgrace to their families and/or close associates. In this sense, the principle of reciprocity lowers the risks of nonperformance in corrupt transactions. Although corrupt transactions are not protected by the law and participants cannot resort to the judicial system when the other party fails to honor the deal, the fear for sanctions from other members of the network can significantly discourage dishonesty and defection. Therefore, one party of the exchange can well make payments in advance, with a fair amount of confidence that they will be paid back later. This kind of mentality and practice are well documented in empirical cases. As some convicted corrupt officials confessed, some seekers of corrupt benefits intentionally befriended them by sending gifts during festive occasions, arranging jobs for their family members, or painstakingly running errands for them etc. When such favors accumulated over time, the officials were trapped into the obligation to use their power to help these people through granting them lucrative contracts or valuable resources such as land at low prices [13, 47]. Moreover, the principle of reciprocity not only ensures favors are returned, but normally with greater munificence [46]. This makes corrupt exchanges through guanxi network attractive, as bribers can obtain with a lower price what they want, be it commodities, contracts, or political status. As cases studies of bribery in China shows, in well-established guanxi network, the returns bribers receive usually exceed the value of the bribes, although the bribes should be carefully selected and artfully presented [21]. In this sense, corrupt transaction through guanxi network is more cost-efficient than through pure market mechanism where price for corrupt benefits can be driven high when there are a large number of competitors. For instance, a study of office selling in Northeast China shows that the prices for offices are differentiated according to the personal relations between the seller of offices (the superior in the government) and the buyers (the subordinates). The subordinate who has constructed closer ties with the superior by showing loyalty and support can earn promotion cheaply, whereas the other competitors without such ties have to pay the The effects of guanxi on corruption under transition 105 much higher \"market\" price [49]. Unsurprisingly, such magnifying effect of the principle of reciprocity strongly encourages the practice of building connections in China, because by tactically investing certain amount of money and efforts, one may reap much greater benefits in the future. Besides the principle of reciprocity, the norm of gift giving in guanxi network, as Li [21] shrewdly observes, helps bring down a major barrier for corrupt behaviors, the moral repugnance and censure towards corruption. Seekers of corrupt benefits can use interpersonal affection to disguise the venal nature of bribery and present bribes as genuine, thoughtful gifts filled with love and care. For example, they can look for things that the targeted officials and their family desire but can hardly get, such as some rare medicine, antiques or artworks. When they have made all the efforts to present the gifts, the officials will feel obliged to accept them because it would be inconsiderate and inappropriate to refuse such hearty gifts. Once the \"gifts\" are accepted, it opens the door to corrupt benefits in the future. Moreover, traditional Chinese holidays such as the Spring Festival and important family functions such as weddings and funerals provide added justifications for gift giving. As family, friends and other connected people would normally present gift or gift money during these special days, these common practices tend to legitimize bribery to a certain degree [21]. When laws regulating the gift exchange of officials are absent or barely enforced, as is the case in China, bribery in form of gift giving is practically difficult for officials to resist. Last but not least, guanxi network can distort norms by falsely presenting certain illicit behaviors as standard and normatively acceptable practices. This is especially true during the transition period. As rules are in constant flux and political morality based on the Communist (or more specifically the Maoist) ideologies quickly erodes, considerable confusion arises on the part of cadres as to what are morally justifiable behaviors. If an official is embedded in a guanxi network with many other officials who engage in corrupt activities but behave as if their activities were legitimate and justified, this official over time may lose his/her own judgment and accept their practices as normal. Jiancha Ribao (Procuratorial Daily) once ran a series of repentances by officials who were caught for corruption. A common theme of the repentances is that these convicted officials started off very clean when first entering a new working environment; but after repeatedly witnessing the corrupt activities of their colleagues and friends, they eventually succumbed to the corrupt environment and went down the same path, partly because if they did not do so, they would face enormous difficulty in earning the trust and cooperation of the peers and carrying out their own work [10, 13, 22]. Therefore, peer pressure is a strong reason why corruption can become epidemic in a work unit and collective corruption (wo'an) is nothing rare in reform-era China. It is worth noting that such norm-distorting effect of guanxi network encourages not only transactional corruption, but also nontransactional corruption such as embezzlement and misappropriation of public assets. Conclusion Corruption is a complex phenomenon with multiple causes. Various explanations for the occurrence and prevalence of corruption have been ventured from different 106 J.V. Zhan perspectives. Well established political-legal institutions and market mechanisms are generally thought to be crucial for the prevention of corruption. Ideally, opportunities for corruption can be minimized under a transparent and democratic regime with strong rule of law and an open and faire market free from state intervention and distortion. However, even the most advanced economies and political systems cannot achieve such ideal status, although they do much better than those underdeveloped and nontransparent regimes with weak rule of law. Transition systems are particularly problematic, because when the old political and economic systems are torn down but the new ones are yet to be established, tremendous gaps exist in the formal institutions and can be exploited for rent seeking. This study explores how guanxi network, an informal institution based on primary interpersonal relations, fills the gaps in and even overrides the norms of formal institutions. Using empirical evidence from reform-era China, it demonstrates how guanxi network creates both means and incentives for officials to exploit the structural opportunities under transition and engage in corruption, especially transactional corruption through particularistic ties within relatively small, exclusive networks. The corruption-facilitating effects of guanxi network are realized through its communication, exchange and normative functions. First, when the nontransparent system blocks the free flow of valuable information, guanxi network provides secret, exclusive, and safe channels of communication for officials to disclose crucial information in exchange of economic or noneconomic benefits. Second, when state intervention and underdeveloped market prevent open and fair distribution and exchange of resources, guanxi network enables corrupt exchange between those haves and have-nots. Third, guanxi network can distort officials' norms and induce them to particularistic behaviors. When such norms override the legal norms, officials will feel obliged and justified to engage in corrupt activities. This study focuses on corruption-facilitating roles of guanxi network in time of rapid structural changes. An underlying message is that such roles are transitional and may be diminishing as political and legal systems get improved and market mechanisms established. Indeed, personal rules and patrimonialism persist in human societies, and even the well-established democracies are not free of private influence on public positions [40]. Meanwhile, social networks may continue to be useful in advanced economies as the development and innovation of the economic system (such as the financial market) creates new risks and challenges. However, if the formal political, legal and economic institutions can be sufficiently improved such that the duties and limits of all public roles are unequivocally defined and that the punitive consequences of violating public rules are clearly specified and strictly enforced, it can significantly limit the corruption-facilitating effects of guanxi network, which works by blurring the boundary between public and private roles. In addition to strengthening the political-legal system and perfecting market mechanisms, the promotion of professionalism among citizens and public officials through education may be another way to insulate public offices from private influence. It is worth noting that by stressing transactional corruption through particularistic ties, this analysis somehow amplifies the corruption-facilitating effects of guanxi network. While guanxi network facilitates corrupt exchanges between people connected in relatively exclusive networks based on mutual trust and reciprocity, it also raises the threshold for people to enter such corrupt exchanges, because the The effects of guanxi on corruption under transition 107 construction of a guanxi network requires the investment of time, money and energy. As discussed earlier, seekers of corrupt benefits often have to make extraordinary efforts to befriend the officials and earn their trust. Such initial investment thus limits the access to corrupt exchanges to only those who can afford it. Moreover, the preference for corrupt exchanges through particularistic ties in the Chinese culture cramps the room for corruption through market mechanisms. Officials usually prefer doing business with people they personally know and trust, partly for reason of their own security, instead of distributing corrupt benefits to some stranger who offers the highest price. In this way, guanxi network reduces the chance of corrupt exchanges between random partners, which may be more unpredictable and disruptive. To be sure, guanxi network is only one type of social network that can affect the occurrence and prevalence of corruption. There are different forms of social networks that do not necessarily build on primary interpersonal relations but on secondary relations such as professional and religious ties. 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