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Corruption in China 1. 2. 3. 4. 5. 6. 7. What is corruption? What is the connection between corruption and economic growth? Corruption and guanxi? How hard does the Chinese government attempt to stop corruption? Corruption in China and illegal immigration enforcement in US? What seems to coincide with anti-corruption campaigns in China? Does the penalty for corruption usually include criminal charges? Party discipline? 8. What does trust have to do with whether corruption helps or hurts economic growth? Shaomin Li and Judy Jun Wu Why China Thrives Despite Corruption Why is corruption bad for economic growth? Is it possible for corruption to be efficiency enhancing? How can this be distinguished from predatory corruption? IN a society with high levels of public trust – trust between strangers – corruption does not damage economic growth and may even enhance efficiency. This is because in a high trust society, a relatively free market for corruption emerges where the favor is sold to high bidder who presumably can put the favor to good economic use. Each party trusts the other to deliver on the illegal contract and so the favor giver will be able to accept bribes from all buyers. The corrupt transaction facilitates economic activity. The sources of public trust comes from extensive and deep sets of networked relationships – such as guanxi. In a very low trust society, corruption becomes a form of extortion thereby distorting the transaction away from economically efficiency and toward a predatory exchange. The corruption exchange is restricted to those who are known the the favor giver – friends and relatives – and the chance of enhancing economic activity is much lower. Compare China and Philippines in public trust How do their economies compare? What is the role of guanxi in Chinese society? Facilitate and protect economic transactions? Does corruption facilitate economy activity or is it a dead weight without any reciprocal benefit? Guanxi plus high public trust = economic enhancement via corruption Futures market in corruption? Is guanxi and corruption linked to the smooth relationship of state and economy? Does this explain why the state is able and ready to enhance competition and not give out monopoly rents? Does this explain state entrepreneurialism? The Logic of Anticorruption Enforcement Campaigns in Contemporary China ELIZABETH A. QUADE* a distinction is drawn between the economic crimes of ‘corruption’ and ‘bribery’: ‘The former involves officials taking advantage of their positions to directly embezzle or take illegal possession of public property under their care . . . The latter involves their taking advantage of their positions to seek gain for others in return for payment of some kind’. In order to establish a working definition, both of the aforementioned sub-categories— ‘corruption’ and ‘bribery’—are encompassed within the operational definition of ‘politico-bureaucratic corruption’. ‘Political-bureaucratic corruption’ can be defined narrowly as ‘the abuse of public office for private gains’ including ‘bribery extortion, fraud, trafficking, embezzlement, nepotism, and cronyism’. both the emergence of corruption and the periodic, concerted attempts to slow its growth are by-products of economic policy decisions. This article provides an analysis of the link between corruption, inflation, and economic growth. In so doing, three questions are addressed. First, is there a relationship between campaign-style anticorruption enforcement and economic austerity rounds, and if so, what is the logic? Second, what can anticorruption enforcement campaigns tell us about the nature of central – local relations in contemporary China? And lastly, what theoretical model of China’s political economy best accounts for my empirical findings? Inflation is another phenomenon affecting regime legitimacy. Like corruption, the CCP has been dealing with bouts of inflation since it assumed power. However, unlike corruption, during the reform period, the CCP’s policy responses to inflation were direct and swift. Controlling inflation appears to have been consistently treated as a top priority, while anticorruption enforcement was comparatively less important. anticorruption enforcement campaigns are a special policy choice distinct from routine anticorruption enforcement.8 Campaigns are characterized by ‘short periods of intensified enforcement during which corrupt officials can no longer count on the routine substitution of party disciplinary action for criminal punishment’ a marked shift in rhetoric from a single-minded focus on economic growth to a serious interest in anticorruption enforcement. Conversely, when announcing the conclusion of an anticorruption enforcement campaign, top leaders espouse a rhetoric which is more balanced, thus de-emphasizing the party’s struggle against economic crime. increase in State media publicity of corruption control topics. Attempts are made, usually very early in the campaign, to encourage corrupt officials to offer confessions. From the early 1980s up until 1995, anticorruption enforcement was carried out via campaign-style mass mobilizations.23 In 1995, the party shifted its focus, placing a new emphasis on institutional methods and less on campaign-style mass mobilizations. two permanent agencies, the Party Discipline Inspection Committees and the procuratorates, for anticorruption enforcement. The overwhelming majority of cases handled by the party’s supervisory system resulted in administrative, and not criminal, punishment. Party Discipline Inspection Committees ‘exercise leader- ship over both party and government anticorruption agencies through the nomenklatura system’, which, in effect, grants party committees authority over party and government officials one level down plausible link between changes in macroeconomic policy and the intensification of anticorruption enforcement. About the time when macroeconomic austerity policies are introduced to combat inflation, the Party’s anticorruption enforcement efforts are stepped up From 1979 to 1998, the Chinese government imposed five rounds of economic austerity—in 1981, 1983, 1986 – 1987, 1989 – 1991, 1993 – 1998—to combat inflation and cool the overheated economy. Each round differed in severity and approach but all followed a similar logic of recentralizing investment authority and then reducing aggregate demand by cutting the rate of local-level (provincial) investment growth. China’s central bank, the People’s Bank of China (hereafter PBOC), is nominally independent. However, in practice from 1984, when the PBOC became the official central bank, through until the late 1990s, the PBOC was ‘so beholden to local interests that it was often hardly acting like a central bank at all’. At that time, the PBOC was subject to dual leadership from both provincial and local governments because the bank itself was geographically and fiscally decentralized, with major branches located in provincial capitals and larger cities. While corruption did not directly cause the bouts of inflation, evidence suggests that it was intertwined with several of the factors that did, including excessive credit supply of the banking sector. The number of economic crime cases (filed and investigated) tends to peak at just about the same time as inflation is beginning to be brought under control. ‘when the central government really means business and holds coherent policy preferences, local officials comply, sometimes at a huge cost to their own interests’. During center instigated economic austerity rounds, some local officials comply, others do not. Anticorruption enforcement campaigns are used as a mechanism to rein in the non- complying local officials. despite fiscal and economic decentralization, the center was never at risk of losing control of the reform program, precisely because it never relinquished control over personal policy or the nomenklatura system. During anticorruption enforcement campaigns, local officials, especially judges and prosecutors, carry out central directives because their political and professional futures will be determined by the center through personal policy and the nomenklatura system. Interestingly, there exists a telling example of an economic austerity round which failed to achieve its objective. At the tail-end of 1987 and throughout 1988, the center attempted, unsuccessfully, to cool China’s economy and rein-in inflation.63 This attempted economic contraction was not accompanied by an anticorruption enforcement campaign. Without a complementary anticorruption policy, industry grew, unrestrained, at a rate of 20.8% For Jiang Zemin and Zhu Rongji the task was to bring regional governments and the financial system into line by imposing national macroeconomic controls.67 At this time, Jiang began planning a new campaign against official corruption: ‘The reasoning, on which Jiang and Zhu concurred, was that there was a close interrelationship between the runaway economy and abuses of power in many localities’.68 Unchecked regional power was closely related to the unrestrained financial system. Just prior to the 1993 campaign, Jiang Zemin remarked, ‘If we want to overcome financial chaos and cool down the feverish economy, we must combat corruption and encourage honesty in politics’ Fubing Su and Dali Yang, ‘Political institutions, provincial interests, and resource allocation in reformist China’, Journal of Contemporary China 9(24), (July 2000), pp. 217–218. Corruption Threatens China’s Future MINXIN PEI Behind China’s dynamism, however, lurk many dangers that could derail the Middle Kingdom’s reemergence as a great power: environmental degradation, population aging, rising inequality, a tattered social safety net, and, above all, endemic corruption. The experi- ences of other developing countries show that runaway corruption undermines critical gov- erning institutions, fuels public resentment, exacerbates socioeconomic inequality, creates massive economic distortions, and magnifies the risks of full-blown crises. The failure to contain official corruption will inevitably en- danger China’s economic development. Based on the conservative assumption that 10 percent of the land lease revenues, fixed investments, and government spending is stolen or mis- used, the direct costs of corruption in 2003 could be 3 percent of GDP, roughly $86 bil- lion, an amount exceeding the government’s entire spending on education in 2006. Corruption in China is concentrated in the sectors with extensive state involvement: infrastructural projects, sale of land user rights, real estate, government procurement, financial services, and heavily regulated industries. A 2006 study of 3,067 corruption cases found that about half of the officials or individuals engaged in corruption related to infrastructural projects and land transactions. Kickbacks for loan approval, massive theft by insiders, misuse of funds, and large-scale fraud are routine in Chinese banks, brokerage houses, insurance compa- nies, and rural credit cooperatives. Endemic corruption in China originates in the country’s partially reformed economy, lax enforcement efforts by the government, and the CCP’s reluctance to adopt substantive political reforms. Yet appearances are deceiving. Despite severe punishment against officials in highprofile cases, official enforcement data indi- cate that Beijing punishes only a very small proportion of party members and government officials tainted by corruption. nearly 80 percent of the 130,000–190,000 CCP members disciplined and punished by the CCP annually since 1982 got at most a warning. Only 20 percent were expelled from the party. Less than 6 percent were criminally prosecuted. In recent years, half of those convicted of corruption received suspended sen- tences and did not serve any jail time. It is tempting to discount the deleterious effects of corruption on China. To many, China’s high economic growth despite rampant corruption proves that corruption does not always limit economic growth. Others may point to the re- cords of China’s East Asian neighbors—South Korea, Japan, and Taiwan. They all experienced varying forms of crony capitalism dur- ing similar stages of rapid growth but apparently suffered no serious consequences. One may even argue that corruption in the Chinese context might be the proverbial grease for the bureaucratic wheels of an otherwise unmotivated state: productive economic transactions might not have occurred without it. How does Pei respond to Shaomin Li? Is China’s corruption better than in other nations? Unfortunately, such views do not correspond with either Chinese reality or historical fact. First, the total costs of corruption in China are huge. The direct economic loss owing to corruption represents a large transfer of wealth—at least 3 percent of GDP per year—to a tiny group of elites. This annual transfer, from the poorer to the richer, is fueling China’s rapid increase in socioeconomic inequality and the public’s perception of social injustice. Second, the indirect costs of corruption—efficiency losses; waste; and damage to the environment, public health, education, the credibility of key public institutions, and the morale of the civil service—are incalculable. The high price China is already paying is ample evidence that the toll of corruption is not theoretical. But corruption has lowered the quality of China’s economic growth because its economic expansion has been accompanied by assorted social ills, many of which will require heavy investment to correct. With a lower level of corruption, China would have achieved growth of a higher quality, with much less damage to the environment, economic efficiency, public health, and social stability. High-quality growth is more sustainable than low-quality growth. South Korea, Thailand, and Indonesia experienced spectacular financial collapses during the Asian financial crisis a decade ago, in no small part because of the massive corruption in their financial and corporate sec- tors. Japan’s economy stagnated for a decade, also because of systemic corruption in its corporate sector and political process. Taiwan’s growth performance has lost its momentum in the past decade, and corruption scandals have caused financial strains in the banking sector and tainted almost the entire political establishment. True, corruption has not yet derailed China’s economic rise, sparked a social revolution, or deterred Western investors. But it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption. Economically, runaway corruption stifles commerce, investment, and innovation, as recent academic research has established. The most dangerous threat of corruption is actually invisible. Endemic corruption steadily increases a country’s systemic risks. As a result, its financial system is fragile, its environment degraded and vulnerable, its law enforcement establishment tainted and ineffective, its infrastructure insecure, its public health system irresponsive, and its regulatory system creaky. China’s Trapped Transition Are Chinese political elites seen by the Chinese people as: “irredeemably rapacious.”