China's experience with graft: The good and the bad

Decades of corruption have not slowed China's growth. In fact, "good corruption" might have catalysed the economy at some stages.
By John Wong, Published The Straits Times, 30 Aug 2014

CHINESE President Xi Jinping's new leadership has appeared radically different from his predecessors'.

Nowhere is it so markedly distinctive as in his determination to fight China's widespread corruption. Mr Xi's war against corruption, first launched in December 2012 to catch both "flies" (low-level offenders) and "tigers" (high-level corrupt officials), is still going on unabated. It has netted more than 40 high-profile "tigers" or officials and executives of state-owned enterprises equivalent to ministerial and provincial-governor rank.

They included one former Politburo Standing Committee member, Zhou Yongkang, and one senior general, Xu Caihou. As for the "flies", some 180,000 Communist Party members were punished last year. In the first half of this year, another 84,000 officials were disciplined.

The tenacity and ferocity of Mr Xi's anti-graft drive have totally surprised many observers at home and abroad who initially thought he would just use it against his potential political opponents so as to consolidate his power, much as his predecessors had routinely done. Others thought that he was doing this to facilitate the implementation of his reforms.

Life-and-death struggle

BUT this campaign is really different. All signs show that Mr Xi is dead serious about his mission. He is convinced that corruption has been so wide-ranging and has so corroded the state and the party that he must wage a "life- and-death" struggle against it.

Former leaders Hu Jintao and Wen Jiabao had also warned how corruption could bring down the party, but they never mustered enough courage to confront this problem. Sadly, Mr Wen himself was even implicated in the last year of his premiership for supposedly enriching his family members.

In contrast, Mr Xi upholds high moral standards and is strongly opposed to corruption. He apparently believes that without cleaning up the system, the Chinese nation cannot achieve its resurgence to realise his "Chinese dream".

Mr Xi's battle against corruption still rages on relentlessly. But several burning questions have arisen.

First, how would he wind up his campaign? Corruption in China, as in many developing countries, is basically endemic in the system. "Flies" are everywhere, and Mr Xi cannot keep swatting them without disrupting or eventually damaging the system. His relentless pursuit of high-level culprits or "tigers" could also rock the basic power structure by upsetting its existing factional balance and undermining the unity of the party. It would therefore stand to reason that Mr Xi is expected to find an opportunity to climb down from the campaign through some tacit amnesty.

Second, Mr Xi's crackdown on corrupt officials is by itself an indirect official admission that the party and all its related apparatus had all along been extensively corrupt. Such a revelation only undermines the image of the party and the credibility of the government.

So far, most Chinese netizens and the social media have been solidly behind his anti-corruption drive. But eventually, the fact of rampant corruption would slowly sink in, in the minds of the common people. Mr Xi has yet to count the impending political costs of his anti-corruption campaign, be it rising public cynicism or declining prestige and authority of the party.

Third, on the practical side of things, the economic costs of the campaign have started to mount.

Many of the government's anti-corruption and anti-extravagance measures, as contained in its "Eight-point Regulations" covering official travel, official dinners and other perks for officials, have reduced domestic consumption.

Corruption investigations at various levels of government by the party's Central Commission for Discipline Inspection have created a kind of "witch-hunt" fear in the bureaucracy, leading to inaction of government officials and a political paralysis that has, in turn, stalled the implementation of projects and even resulted in cutbacks on domestic investment, particularly at the local government level. All these have put a rising toll on the economy, which is already slowing down in growth.

Such is the short-term economic cost of this sustained campaign.

The long-term impact of an anti-corruption drive is supposed to be beneficial for all. It is simply self-evident that getting rid of corruption would inevitably improve governance and promote greater transparency and accountability. All these would lower transaction costs and ultimately raise economic efficiency. For China, however, there is one intriguing issue.

Corruption as an ethical issue is unequivocally bad for any society or country. It is politically harmful because it corrodes the whole political structure and its bureaucracy. It is also socially harmful because it aggravates inequality of income and wealth.

Paradoxical example

HOWEVER, the economist's case against corruption is not so clear-cut, particularly for its short-term impact on economic growth.

There are examples of so-called "good corruption" in a developing country: how a little corruption could grease the wheels of commerce and facilitate trade and investment. Corruption in this sense is just an additional transaction cost that will subsequently generate more economic activities and higher GDP.

China seems to be such a paradoxical example.

In the developing world, China stands out uniquely as the single example of having achieved successful economic growth amid widespread corruption.

In 1995, when the Transparency International agency started to compile the Corruption Perception Index (CPI), China was ranked the second most corrupt country on the list. In 2003, however, China's CPI moved it to 80th place out of 177 countries, well below (or less corrupt than) countries like Indonesia, Vietnam, Thailand, the Philippines and India.

During this period, China's economy has chalked up double-digit rates of growth, out-performing all the countries, including all those that are less corrupt than China. Such a paradox seems to suggest that China's corruption is an exception.

How is one to explain this?

China under Mao Zedong was virtually corruption-free because of controlled income and controlled consumption, along with the abolition of private property ownership.

But corruption started to surface once Deng Xiaoping started economic reform in 1979. When a centrally planned economy starts to marketise - the so-called "transitional economy" becomes a hotbed for corruption due to its "dual-tracked" price system, with some commodities under price controls set by the state while others are left to market forces. This is a golden opportunity for someone or some enterprise with political connections to profiteer enormously. Similarly, the privatisation of state assets in former socialist economies has also enriched certain privileged groups.

Strictly speaking, such misbehaviour is not really considered "open corruption" in the sense of an official "squeezing" some vulnerable members of the public. Economists call this "rent-seeking", which, simply defined, refers to how a person takes advantage of his political power to enrich himself or his family through the market, usually with no direct victims. In China, such rent-seeking activities (called guan dao) were widespread in the late 1980s, contributing to the outbreak of the Tiananmen event in June 1989.

In the post-Tiananmen years, as Deng introduced more thorough-going market reforms, China's economy began its double-digit growth with massive domestic investment and foreign capital inflow. Open corruption and rent-seeking activities thrived again. This explains why China received such a bad corruption rating by Transparency International in 1995.

When the upright premier Zhu Rongji formally took office in 1997, he publicly declared that he had prepared "100 coffins, 99 for the corrupt officials and one for himself".

Much like Mr Xi today, Mr Zhu considered the fight against corruption as a "life-death struggle". It would be fair to say that Mr Zhu succeeded only in stemming the rising tide of corruption, but not in cleaning up the government.

Many studies show that corruption in China through most of the 2000s had improved, due to better governance and rising incomes and benefits for public servants. The number of cases involving government officials went down.

It was premier Wen's huge stimulus package of four trillion yuan (S$813 billion) to shore up economic growth during the global financial crisis in 2008 that really opened the floodgates to massive corruption and rent-seeking activities. Many gigantic infrastructure projects were hastily launched, and many local governments went into uneconomical ventures in collusion with property developers. In some localities, it was an economic "Wild West".

Since China was already a huge economy of US$9 trillion (S$11.2 trillion), most investment projects were financially large, often running into billions. Accordingly, illicit payoffs from corruption and rent-seeking activities to officials also ran into tens of millions.

The negative social impact of corruption soon surfaced. With rapid accumulation of easy money and wealth, many corrupt officials indulged in conspicuous consumption and extravagant lifestyles.

What is sufficiently clear is that corruption in China had not caused a decline in either domestic or foreign investment, and hence no resulting reduction in GDP growth.

China's corruption was mostly in rent-seeking activities involving property development, which did not directly affect industrial production and exports in the real economy.

For instance, a former railway minister was jailed for massive corruption, but that did not impede China's development of an efficient high-speed railway. And despite the corruption of some People's Liberation Army generals, China's military modernisation continued unabated.

During the global financial crisis, the opposite seemed to be true. One might even argue that corruption helped catalyse economic recovery and high GDP growth. This might sound like an exaggeration, but consider the argument that the government's massive stimulus programme allowed rent-seeking officials to give soft loans to state agencies and divert funds to property development. This kept the economy buzzing, without too adversely slowing industrial production and exports in the real economy.

Even if corruption in China did not harm economic growth in the short run, the fact is that it still exerts an economic cost, such as in leakage of funds and loss of revenue to the government. Corruption also leads to distortions and inefficiencies. Above all, the Chinese financial institutions today are facing an enormous task of cleaning up previous bad debts.

Hence, Mr Xi's vigorous crackdown on corruption is good for China, politically, socially as well as economically. But strong political will is not enough. He needs to build new institutions and put in place a more effective legal framework.

The writer is a professorial fellow at the East Asian Institute, National University of Singapore.