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A Center for Collaborative Research & Education on Greater China

Growth and Corruption in China

Post Series: 2012: Volume 11, Number 2
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Great Hall of the PeopleAfter the beginning of the post-Mao reform period in 1978-79, China experienced a marked worsening of corruption. The pre-reform period was not free from corruption, but a series of large-scale mass campaigns during the 1950s and 1960s had largely driven corruption underground. Bribes most often were paid not in cash but in kind, with cigarettes, liquor, and meat the common mediums. In the post-Mao period, the scale of corruption increased exponentially as officials cashed in on their ability to manipulate the allocation of valuable resources, including land and capital, in return for bribes valued at hundreds-of-thousands of Chinese renminbi. And whereas much of the corruption during the Maoist period happened at “street level,” involving relatively low-ranking officials, in recent years government ministers, senior bureaucrats, members of the provincial government and party apparatus, and even members of ruling Politburo have been prosecuted for corruption. Outside observers were so struck by the rapid spread of corruption during the 1980s and early ‘90s, in 1995 Transparency International (TI) ranked China the fourth most corrupt country in its Corruption Perceptions Index.

Stunning though the spread of corruption after the adoption of economic reforms may be, it is only half the story. At the same time corruption was increasing, China’s economy also grew rapidly. Between 1980 and 2010, Gross Domestic Product (GDP) per capita increased thirteen- fold, according to the International Monetary Fund. China, in fact, had the second-largest gain in per capita GDP globally during this period, two times more than the next-best performer (South Korea) and almost eight times more than the United States, where per capita GDP increased only 65% in these three decades. Equatorial Guinea, which was the only country to outperform China, grew not as a result of sustained economic expansion, but because it struck oil and went almost overnight from abject poverty to vast wealth – wealth that was being swiftly stripped away by a government far more corrupt than China’s. China thus not only experienced rising corruption as it moved from a command economy toward a market economy, it also experienced rapid growth, a combination that economists suggest is unlikely, if not impossible.

The worsening of corruption during the reform period thus confronts students of contemporary China’s political economy with a series of questions. First, why did corruption worsen? Second, what forms did this new corruption take? Third, why has worsening corruption not slowed or even retarded China’s economic growth?

In the pages that follow, I will address these questions to explain why China was able to experience concurrent rising corruption and rapid economic growth.

Rising Corruption

After seizing power in 1949, the CCP cracked down on corruption in a series of major campaigns. In late 1951, the party launched the Three Antis Campaign against corruption, waste, and bureaucratism. In January 1952, the Five Antis Campaign targeted bribery, tax evasion, theft of state property, bid rigging, and the theft of state economic information. The following year, the New Five Antis Campaign struck at bureacratism, commandism, and other violations of law and disciplinary regulations by state officials and party cadres. Subsequent campaigns, including the Socialist Education Movement (1963-66) and the One Strike, Three Antis Campaign (1970-72) attacked other forms of official malfeasance. By the late Maoist period, these repeated attacks on corruption and the political environment ushered in by the Cultural Revolution had largely eradicated most visible manifestations of corruption.

Corruption was, however, far from eliminated. On the contrary, during the 1960s and 1970s a new culture emerged in which individuals sought to cultivate personal relationships (guanxi) that would allow them to slip “through the backdoor” (zou huomen) to obtain scare commodities, get admission to schools, find work, and seek favors from bureaucrats and officials. At the time, money was of secondary importance because it alone could not buy rationed goods or access. More often, people seeking to build relationships and get favors relied on “gifts” of cigarettes, liquor, meat, and other hard-to-find commodities. Officials often peddled equally mundane goods – ration cards or a “chop” on a document. There were, of course, more egregious cases of corruption, including that of Wang Shouxin, a mid-level official whose position as head of a local coal supply unit enabled her to spin a web of illegal deals that netted her and her confederates the then-princely sum of Y500,000 (US$320,000).

In the early and mid-1980s, petty corruption flourished. Many goods remained in short supply and would-be buyers found that they still had to present officials with a carton of cigarettes and a couple of bottles of Chinese liquor (baijiu) to obtain ration cards. Would-be entrepreneurs and private businessmen seeking to establish new enterprises also found the only way to navigate the thickets of red tape was to use personal connections and, increasingly, cash. In the mid-1980s, the party decided to put off comprehensive price reform in favor of a hybrid system wherein commodity prices were fixed by the state based on whether they were being sold within the state-planned economy or in emerging markets. Because ongoing scarcity ensured that market prices were generally much higher than in-plan prices, officials found they could earn quick profits by diverting goods out of the planned sector and onto the market. Arbitraging between the two sectors created by the so-called “two track” price system, and fueled a wave of “official profiteering” (guandao) during the late 1980s. By the later 1980s, official profiteering had become so widespread and visible that the perception that corruption was enabling officials reap the lion’s share of \ gains from reform became a major factor intensifying support for the anti-government demonstrations that swept China in the spring of 1989.

Faced with rising corruption and evidence that corruption was undermining its legitimacy, the CCP cracked down, first in 1982, then again in 1986, and a third time in July 1989. In each campaign, the government announced it had substantially increased the number of officials charged with corruption, made a show of putting the “big tigers” it had caught on trial, and, in some cases, publicly executing corrupt officials. Despite these repeated crackdowns, the best available evidence suggests that corruption increased substantially during the 1980s. The Procuratorate “filed” 9,000 corruption-related cases in 1980, the 1989 anti-corruption campaign yielded some 77,400 cases. Thereafter, the average number of cases hovered around 60,000 from 1991 to 1997. Revision of the criminal code in 1997 resulted in the decriminalization of a range of lesser offenses, and dropped the average number of cases filed to approximately 32,000.

In the early 1990s, after a second round of reforms, corruption intensified. By the mid-’90s more senior-level officials had become corrupt; they were now “auctioning off” control rights for enterprises and real estate and receiving much larger illicit payoffs in return. In 1995, for example, the Party Secretary of Beijing, Chen Xitong, who was also a member of the party’s core leadership, was caught raking in millions of dollars in “commissions” from real estate developers. The number of cases involving senior officials (defined in Chinese law as those holding leadership positions at or above the county level) shot up from a dozen a year in the mid-1980s to an annual average of 2,500. The amount of money reportedly recovered per case jumped from Y4,000 (US$1,700) in 1984 to Y42,000 (US$4,900) a decade later. Four years later in 1998, the amount exceed Y121,000 (US$14,600), and in 2007 the Procuratorate reported it recovered funds averaging more than Y273,000 (US$35,800). Meanwhile, the party’s Discipline Inspection Commission, which has responsibility for maintain intra-party discipline, was sanctioning around 150,000 party members a year, one-third of them for corruption-related infractions.

As corruption got worse, the party fought back. But the effectiveness of China’s anti-corruption effort has been questioned. Official statistics, however, show that about 10,000 officials are sent to prison each year on corruption charges and an additional 20,000 receive lesser punishments. Among those sentenced to prison, roughly 5,000 received sentences ranging from five years to life. Almost 400 individuals are known to have been sentenced to death; an additional 240 got “suspended death sentences.” To date, there is no hard or convincing evidence the war on corruption has had a significant effect. Some evidence, however, suggests that corruption actually has worsened over the past decade. So it would appear the war on corruption has succeeded in the sense that it has brought corruption under control.

Assessments by outside experts also suggest some degree of improvement. According to Transparency International’s index (using a scale of 1 to 10, with 10 as the most corrupt), corruption in China dropped from a high of 7.57 in 1995 to either 6.4 or 6.5 between 2007 and 2011. In 2011 China ranked overall a middling 75th out of 182. A recent poll of Chinese citizens found that only 9% reported having had either firsthand experience with corruption or had known somebody who had paid a bribe in the preceding year. At that level, direct experience with corruption in China was actually the same as reported by citizens of Singapore, which was one of the five least corrupt countries, according to TI. More surprisingly perhaps, 5% of Americans surveyed reported that they had paid a bribe.

In sum, it is clear that China experienced a significant surge in the incidence of corruption during the 1980s and that in qualitative terms corruption “intensified” in the 1990s. Since then, evidence suggests that corruption has remained at about the same levels and hence has been brought under control in the sense that China’s “war on corruption” has prevented it from spiraling further out of control. Rising corruption, however, failed to retard economic growth. On the contrary, according to the IMF, GDP per capita grew at an average rate of almost 8% between 1980 and 1991, then shot up to an average of 12% between 1992 and 1995, and falling to a still torrid 8% between 1996 and 2004. Thereafter average growth rates jumped back up to greater than 11% during 2005-07 before settling back to 9% after the advent of the global recession in the summer of 2008. Since then, growth has slowed, but at 7.5% remains strong by global standards. Growth rates have thus remained robust even after corruption worsened and intensified.

Corruption with Chinese Characteristics

If worsening and intensifying corruption didn’t inhibit China’s economic boom, is there something “special” about corruption in China? In the 1970s, a number of scholars argued that given gross inefficiency in the allocation of resources by the state, bribery might allow would-be entrepreneurs to “buy” these resources and use them more efficiently. Others argued that bribes were often given to poorly paid government officials with the goal of getting them to cut through red tape. “Speed money,” some claimed, might not only lubricate the creaky machinery of government, but also might even give bureaucrats a profit-based motive to perform their duties more efficiently. Some have argued that corruption in China differed from that found elsewhere because it often involved “profit-sharing.” Businessmen cut officials in on their profits when officials helped them earn money. In some areas, local governments were said to have transformed themselves into entrepreneurial “local developmental states” by entering into partnerships with businesses and facilitating their operations in return for ad hoc taxes and other forms of illicit profit-sharing.

Although it does not appear that corruption in post-Mao China was qualitatively different, the nature of China’s economic reform did create conditions in which some corruption (not all) was compatible with rapid growth. In abstract terms, economic reform involved large-scale transfers of potential value from the state to the market. In the early stages of reform, for instance, the de-collectivization of the agricultural sector transferred control over production to individual households. Because they stood to reap substantial windfall profits from land transfers, farmers had incentives to pay bribes to secure particularly productive plots and control rights for “sideline” production. Local cadres were also often in a position to leverage “considerations” in return for providing farmers with access to state subsidized inputs such as fertilizer, pesticides, and diesel fuel.

As reform deepened in the 1990s and the state began to lease out land for industrial, commercial, and real estate development, would-be industrialists, businessmen, and developers stood to earn quick windfall profits. A plot of unused land attached to a state-owned factory, for example, could generate a very substantial windfall if it were redeveloped into high-priced condominiums, shopping malls, or luxury hotels. Quick profits could, in fact, be made by simply flipping a piece of land leased cheaply from the state and then selling the lease rights to others.

Rapid growth also created a high demand for capital. Because China lacked a developed capital market when the economy moved into high gear, government agencies were often important sources of investment loans. Most government agencies either controlled stocks of capital or had accumulated substantial slush funds (known in Chinese as xiao jinku – literally small golden treasuries) \ they could use to make under-the-table loans with interest rates above those for regular bank loans. Even if they lacked their own capital, government agencies and state-owned enterprises enjoyed better access to the state-controlled banking system and could profit from arbitrage borrowing and re-lending to private entrepreneurs who could not obtain bank loans. The windfall profits generated by reform and the demand for capital thus created a series of new opportunities for officials to cash in.

The reform period also witnessed a major expansion in infrastructure. Since the 1980s, the Chinese government has spent vast sums – upward of Y6 trillion (US$874 billion) from the state budget alone as of 2009 – building new highways, railroads, airports, ports, and urban infrastructure. Public works contracting is a notorious source of corruption worldwide and China has been no exception. The development of China’s much-touted high-speed rail system, on which the government will have reportedly spent Y3.5 trillion (US$532 billion) by 2015, has resulted in unprecedented cases of corruption. China’s Minister of Railways Liu Zhijun allegedly conspired with middlemen and major state-owned companies to skim about Y800 million (US$122 million) (BBC 2011). Zhang Shuguang, the deputy chief engineer for the project, was said to have stashed Y18 billion (US$2.8 billion) in overseas bank accounts.

China’s surge in corruption can be attributed to other factors as well. During the Cultural Revolution, China’s law enforcement institutions had been “pulverized.” Branded as bastions of “revisionism” and “counter-revolution,” the Procuratorate and the party’s Control Commission ceased to function or were taken over by the military. In 1979, these institutions were only in the early stages of reconstitution, and it was not until that year that China’s first criminal code was enacted. On a very fundamental level, therefore, China entered the reform era with a very rudimentary institutional capability to fight corruption.

The lack of a functioning judicial system staffed by trained investigators, prosecutors, and judges was a major impediment to fighting corruption because, unlike a street mugging in which you have an obvious victim, corruption is a hidden and “victimless” crime to which the actual victim – the public – is not a direct party. Corruption most often involves two offenders – an official who accepts bribes and a private party who pays them – both of whom stand to profit from their transaction. More critically, “properly” done, corruption is a subtle “art,” a careful “dance” wherein the parties never directly discuss exchanges of favors for bribes, use multiple subterfuges to hide payments, and conduct all transactions in cash to leave the most minimal trail. Corrupt relationships are best framed not in terms of quid pro quo “deals,” but rather as exchanges involving “diffuse reciprocity” wherein financial “considerations” are repaid indirectly and seemingly in the “normal course” of business. For example, an official might discuss a contract with a building contractor who might then engage the official’s son as a “consultant” for other “unrelated” matters or donate money to an “educational foundation,” which just happens to be funding the official’s daughter’s doctoral studies at an American university. High-level corruption of the sort that became increasingly common in the mid-1990s is, moreover, apt to be much harder to detect than street-level corruption. Street-level corruption is apt to take place in open view and create aggrieved victims willing to report unjust demands. But high-level corruption is more likely to take place behind closed doors and be mutually profitable for both parties, neither of whom are apt to report their illegal deals to the authorities. In addition, powerful officials can take advantage of their authority to create conspiratorial “protective umbrellas” that enable them to stonewall and even suborn investigators.

China’s emerging business culture also has contributed to China’s surge in corruption. All of the business fortunes in contemporary China were built in a rough and tumble environment in which new businesses frequently rested on questionable foundations, by bending the rules, very often by paying bribes, providing kickbacks, giving lavish gifts, and participating in a culture of “banqueting” involving not only expensive dishes and fine liquors but often the provision of prostitutes and other “favors.” In this environment, corruption only becomes a problem for those willing to pay when officials bought with bribes fail to “stay” bought or cannot deliver the benefits supposedly secured with under-the-table money. Otherwise, bribes can become nothing more than a quick means to obtain inflated profits and remove unwanted government impediments. And as corruption spread, many officials came to view it as “normal” and essentially an official perk enjoyed by “everybody.” A “culture of corruption” thus emerged in which embezzlement and bribery were not deemed sins, per se, but more of a fact of life.

Anti-corruption work in China thus faced considerable challenges from the beginning. In fact, what is perhaps most surprising is that corruption did not reach even greater levels and come to the point at which so many officials were engaged in corruption that the state’s emerging anti-corruption capabilities were simply overwhelmed.

Rising Corruption and Rapid Growth

If China experienced a significant worsening of corruption and corruption is negatively correlated with growth, why did the Chinese economy to manage grow so rapidly, even as corruption was worsening? Three factors help explain why this was possible. First, corruption was not a serious barrier to the initial acceleration of growth. Second, the most intense period of corruption coincided with large-scale transfers of value from the state to the emerging market economy. Third, despite a somewhat halting start and less than decisive results, China’s anti-corruption efforts managed to bring corruption under control by the early 2000s, albeit without significantly affecting its overall severity. The first two factors combined to create a situation wherein corruption fed off growth rather than stifled it. Even though corruption became much worse than it had been in the pre-reform period, it was kept at levels that are not necessarily extraordinary for a developing economy.

At an abstract level, corruption can be broken down into two major forms: “plunder” and “transactive” corruption. In the case of plunder, officials prey on the state, stealing tax monies, looting the treasury, privately selling off state property, and so on. Officials engaged in plunder often target the private sector, expropriating profitable businesses and real estate, extorting money from wealthy individuals, or even demanding cash at the point of a gun. Transactive corruption, on the other hand, involves exchanges of money and favors. Neither form of corruption is benign. Transactive corruption may, in fact, involve extortionary bribery that borders on plunder. Nevertheless, plunder is apt to have a much more debilitating effect than transactive corruption because while transactive corruption often involves exchanges that are mutually beneficial to those directly involved, plunder attacks the economy’s vitals by rendering property rights insecure and encouraging capital flight. Plunder wreaks economic destruction in much the same way that roving bandits destroy rural communities by driving off farmers’ cattle, destroying their crops, stealing their goods and savings, and burning their homes. In its most extreme form, anarchic plunder by official “bandits” can morph into “kleptocracy.” Best defined as a form of political system in which the state becomes an instrument for the extraction of plunder by the kleptocrat-in-chief and his inner circle of henchmen and cronies, kleptocracy generally results in a wholesale assault on an economy’s core structures and the systematic destruction of the formal economy.

As noted earlier, during the Maoist era, petty bribery predominated. Officials and workers in state-owned enterprises also pilfered state property, stealing goods either for their own consumption or sale on underground black markets. Large-scale bribery was uncommon because so long as the state monopolized the economy, there were few private parties in a position to use illicit means to influence officials. Reform fundamentally changed the dynamics of corruption by creating a set of actors, including not only private businessmen but also the managers of state- owned enterprises, who could leverage financial advantage by bribing officials. As the economy took off, this “demand side” for corruption grew quickly. Not only did the incidence of bribery increase, but it also began to displace plunder as the modal form of corruption. A growing economy and thus increasing profits and incomes caused the size of bribes to grow as the “returns” from bribery grew.

When the state began letting out many more valuable assets, including land, the amounts paid in bribes increased exponentially. More senior officials became involved because they, not street-level bureaucrats, were in a position to “auction off” assets that would yield entrepreneurs and developers large windfall profits in the form of sizable gaps between the state’s nominal valuation of assets and their actual market value. Rising corruption was an endogenous byproduct of economic reform; it was this reform, and the rapid economic growth it created, that fed rising corruption. Much of the “new corruption” that emerged during the mid-1990s can thus be linked to transactions involving the transfer of value-bearing assets from the state to the market. Because these transfers also spurred rapid growth, the result was a concurrent worsening of corruption and an acceleration of growth. This is not to say that corruption had a positive effect on growth. Instead, rising corruption imposed real costs. Inefficiency and misallocation, however, were what economists call “marginal costs” because they siphoned off a share of the total gains that might have been realized from investment.

The regime’s much-maligned anti-corruption campaign also played a role. As noted earlier, corruption becomes most destructive when it morphs into kleptocracy and state institutions are converted into instruments for corrupt gain. The fact that the regime fought back and brought to justice at least some of those who turned corrupt prevented such a transformation of the Chinese state. Thus, even though individual officials and agencies may have succumbed to the “silver bullets” of corruption, the state as a whole did not degenerate into a kleptocracy. This is not to deny that some localities became “mafia states” where corrupt officials freely and even openly connived with unscrupulous businessmen and even criminals. Nor is it to say that very senior officials, their wives, children, relatives, and cronies were not deeply involved in corruption. The result was a dynamic wherein corruption was “controlled” in the sense that the regime’s anti-corruption efforts were minimally sufficient to keep the aggregated level of corruption below the vaguely defined boundary that separates serious corruption and outright kleptocracy.

Conclusion

To some, economic reform in China is a miracle. To others, reform is a tale of ever-worsening corruption. There is no question that the latter version is true. Each new major corruption scandal seems to make those that came before pale in comparison. What was a “shocking” amount in the early 1980s was nothing compared to the corrupt monies being reported in the 1990s, and chump change by today’s standards. Today, a case such as that of the Wang Shouxin ring and its Y500,000 (US$320,000) take would hardly raise the eyebrow of a public that has witnessed the 1999 Yuanhua case wherein a ring of smugglers colluded with local, provincial, and central officials to run an estimated Y53 billion (US$6.4 billion) worth of goods through the port of Xiamen in Fujian province in broad daylight, or read reports on the wealth of Premier Wen Jiabao’s family, or heard to tales of corruption and murder involving Chongqing Party Secretary Bo Xilai and his wife Gu Kailai.

China’s experience with rising corruption and rapid growth does not necessarily contradict the existing economic orthodoxy that corruption is negatively correlated with growth and hence rising corruption causes growth rates to fall. As argued herein, rising corruption in China was actually the result of rapid growth. If China stands out, it is not because it is exceptionally corrupt, but rather because its growth rate has been exceptionally high. There is also nothing about corruption in China that somehow distinguishes it from corruption elsewhere. If anything, “corruption with Chinese characteristics” more closely resembles the sorts of corruption found in much of the developing world than the “structural corruption” found in nations such as Japan, South Korea, and Taiwan.

That China has managed to maintain high growth rates despite rising corruption also does not mean that corruption might not cause greater economic damage in the future. As argued herein, rising corruption was a function of the transition from the planned to market economy. Completing that transition and consolidating a functioning market economy requires that the Chinese government begin to make substantial gains in its fight against corruption. Ultimately, the regime has to implement administrative and political reforms that would increase transparency and accountability. Before now, progress on these fronts has been limited, and even though the regime seems to understand that corruption has the potential to kill the economy, many within the party and leadership seem to fear that fighting corruption will certainly kill the party. As a result, many within the party have resisted the sorts of structural reforms needed to deal with the root problem – the party’s monopoly on power and the resulting extensive discretionary power wielded by officials – rather than its overt manifestations. Nevertheless, the partial measures, such as mandatory disclosure of officials assets, documentation of the employment of their spouses and children, and requirement that officials account for the origins of property and assets or face prosecution under a new “unexplained assets” law may prove sufficient to keep corruption from getting substantially worse, and thereby may help ensure that the current combination of high levels of corruption and rapid growth continues for some time to come.

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