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Title: Limiting government predation through anonymous banking: a theory with evidence from China
Authors: Bai, Chong-En
Li, David D.
Qian, Yingyi
Wong, Yijiang
Keywords: China
Anonymous banking
Information decentralization
Financial repression
government predation
Issue Date: Dec-1999
Series/Report no.: Centre for economic policy research working paper
CEPR Working Paper no. 2221
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 institution 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 from 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.
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