Corruption: Obstacle or Lubricant for China’s Growth?

Recently, the anti-corruption campaign of the new Chinese leadership and the corruption trails revealed in the campaign have attracted worldwide attention. How do corruption and economic growth interact in China? What is the impact of the anti-corruption campaign so far?

By He Chong, PhD Candidate, Department of Management, CUHK Business School

While China has been experiencing remarkable economic growth, the country is also considered to “suffer from widespread corruption,” said Prof. Andrew Wedeman, a political science professor at Georgia State University, during a lecture titled “Double Paradox: Rising Corruption and Rapid Growth in China,” at Chinese University of Hong Kong (CUHK) Business School.

An expert in China’s political economy and corruption, Prof. Wedeman said corruption has been a very serious issue in China. “In 1995, Transparency International ranked China the 2nd most corrupt country in the world. In the late 1990s, we saw high-level scandals, one after another… Her (China’s) reputation had been extremely low,” he said.

By integrating the corruption index, the number of the indicted senior officials and GDP per capita into one figure, Prof. Wedeman revealed the paradox that rising corruption was accompanied by rapid growth in China.

“Economists basically argue the two (corruption and economic growth) are negatively correlated. So if China is experiencing rising corruption, it should not have rapid growth,” he said. “How is that possible?”

Prof. Wedeman pointed out that some of the Asian economies that have grown rapidly in the past few decades, such as South Korea, Taiwan and Japan, “all of them had very high levels of structural corruption.”

Prof. Wedeman categorized this kind of corruption as developmental corruption, which results from the workings of “machine politics” under which money, interest and opportunities were used by corporations to ally politicians and to get their cooperation to support high-speed growth.

As such, he said, “We have corruption plus growth. Basically, we have corruption forming the political foundations for growth.”

He then presented another kind of corruption — degenerative corruption, which involves having a government that exists for the purpose of generating wealth and power for certain individuals and their families at the expense of the population at large. Kleptocracy, such as the kind found in the Equatorial Guinea government, belongs to this kind of corruption. Prof. Wedeman explained that these countries in which corruption and growth are negatively correlated are the classical examples cited by economists.

Which kind of corruption does China have?

“China does not need machine politics in order to forge political unity on which the leadership implements appropriate policy issues. It has, in these days, an 85-million member political machine (the Chinese Communist Party) that binds the country together,” Prof. Wedeman said. “So besides the first paradox of corruption and growth, there is the second paradox of the accomplished degenerative corruption and economic growth.”

He further explained the second paradox from three aspects — timing, nature of reform and anti-corruption. He said that before China entered its reform period, corruption was relatively minor. It was after Deng Xiaoping’s Southern Tour Talks in 1992 that a series of liberalization reforms suddenly emerged. This transformed the centrally planned economy to a market economy and corruption greatly intensified during this period.

“When we look at this, it is not corruption that created economic growth, but rather economic growth that created corruption,” he argued. The economic reforms led to the “transfer of value,” “windfall of profits” for officials, and “commodification of power.” The last phenomenon is the target of the Communist Party’s anti-corruption efforts.

“Unlike most countries, the Party responded very early on anti-corruption,” he said. For example, China has had several “wars on corruption” since 1982. Although the anti-corruption efforts were not successful, he thought that the officials involved in corruption cases are kept in the risk zone. He added that corruption in China is “controlled corruption,” so it has not had any destructive impacts on the economy.

Prof. Wedeman then discussed the anti-corruption campaign initiated in 2012 by the current Chinese leadership team. For the business community, he pointed out, “this campaign is interesting in which we have a major flank attack going on.”

“When we think about corruption we tend to focus on officials accepting money,” he explained. “However, bribery is a two-party crime: officials take the bribe and someone pays the bribe.”

“Basically, corruption is a kind of distortion,” he continued. The bribing parties may not be innocent. “Corruption can be done for profit.” He pointed out that business people may generate profits through paying a bribe, and “the average return for the cases (prosecuted by the U.S. Department of Justice) in which they have reported the amount of frauds and the amount of illegal profits is seven to one. “It’s a good return,” he said.

He said that in around 2006, the Chinese government started prosecuting people retroactively by dating back the cases to the 1990s. “They started to prosecute the supply side of corruption. Officials are the demand side of corruption,” he said.

In 2008, China started to go after commercial corruption, or the “supply side of corruption. “In 2012 and 2013, this major push was extended to foreign bribers such as GlaxoSmithKline,” he said. “Some in the West believe that this was a result of an inflated kind of Chinese nationalism. However, the thing is that the U.S. Department of Justice could step in with these types of prosecution, too.”

“Prosecuting bribers makes sense”, he said, adding that he believes that the Chinese government had been doing its job in cracking down corruptions. However, he doubts that the current campaign will dramatically reduce corruption in China.