Measuring Corruption under China’s Dual-Track System

In this paper, I present strong statistical evidence of the pervasiveness of official diversion in China’s industrial planning bureaucracy under the dual-track system. The underpricing of in-plan goods and the ensuing shortage in the plan led to gains from trade between officials who controlled the allocation of in-plan goods and customers willing to pay more than the plan prices. By diverting goods from the plan and reselling them at higher market prices, this corruption creates leaks in the plan. Using data from a survey of state-owned manufacturers supplemented by aggregate input-output data, I find that the leakage in the plan, which measures the size of official diversion, became statistically detectable after the introduction of the dual-track system in 1985 and increased sharply in the late 1980’s. Estimates show that approximately one-third of all in-plan industrial output was diverted between 1987 and 1989.