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Corruption Threatens China’s Future

November 12, 2009

Corruption Threatens China’s FutureMartin McCauley writes: Worldwide, the level of corruption depends on the state’s involvement in the economy. The greater the involvement of the state, the more corruption there is. How does one eliminate it? Take the state out of the economy. However, this is no longer feasible after the financial meltdown of 2008-09. Indeed, the state is becoming more involved in regulating market economies. Hence corruption is a growing problem in democracies and authoritarian states alike.

China is a prime example. Corruption over there is linked to patronage. If one needs permission to do something the person who gives the permission becomes a patron. You become the client. In turn, if you obtain the permission you seek you acquire power. You can then act as a patron and acquire others as clients. In other words, a social network develops. It is in everyone’s interest to protect one another.

These networks operate at all levels in China. The most pervasive are those involving Communist Party officials. They can collect ‘rents’ from a wide range of businessmen and women. They act as a ‘red hat’ for those who are acting illegally. The most lucrative regions are those in which there is foreign investment. Officials can ask and get offshore accounts, luxury holidays and other aspects of the good life.

Another lucrative source of income involves creaming off state funds. This is done, for example, by overstating the number of staff, dipping into special funds, setting up slush funds and collecting bribes.

Corruption is stealing from the state. The amounts of money now being stolen in China are astronomical. In the 1990s it was rare for a corruption scandal to involve a million yuan. China’s National Audit chamber tried to calculate the cost of corruption between 1996 and 2005. It came up with a figure of 1.29 trillion yuan ($170 billion).  This was about 8 per cent of budget spending for these years.

Nowadays the amount of money being embezzled is astonishing. Even a low level official can amass a fortune of millions of yuan. One Party secretary in Sichuan province squirreled away 34 million yuan. Another Party official had 32 million yuan when arrested in 2006. One of his colleagues, ironically the head of the anti-corruption bureau, was ‘worth’ over 30 million yuan.

The authorities deal with huge numbers of cases every year. On average, since the 1980s, over 150,000 cases come before the courts. About a third of those sentenced are found guilty of ‘harming the social order’ and one is six of engaging in ‘economically corrupt’ behaviour.

A rule of thumb is to assume that 10 per cent of government contracts and other expenditure goes on bribes or is simply stolen. If 10 per cent of the government’s procurement budget is misappropriated, this would come to about 0.7 per cent of the Gross Domestic Product (GDP). The government leases land. About 20 per cent of the revenues generated (about 1 per cent of GDP) are pocketed by local officials. State investment in fixed assets is another source of income. One can assume that 10 per cent is creamed off. Adding it all up, the direct costs of corruption came to about 3 per cent of GDP in 2003. The sum involved was $86 billion. This was greater than state expenditure on education in that year. Since the economy has grown since then at about 8 per cent annually, one can now assume that corruption, at least, has kept pace.

Corruption in China is concentrated in those sectors in which the government is most involved. These include infrastructural projects, government procurement, financial services, sale of land licences and closely regulated state industries.

The lack of a competitive political system and a free press renders these sectors especially vulnerable to corruption. A 2006 survey of over 3,000 corruption cases revealed that over half were involved in infrastructural projects and land deals. Transport and urban planning are other areas where officials succumb to bribery and other crimes. Astonishingly, over half of provincial officials responsible for transport have been found guilty of corruption over the years. Some have even been executed.

Land is very valuable and, consequently, is the source of much crime. Local officials use violent means to acquire land at low prices and then sell it on to developers at high prices. In one survey in sixteen cities in 2005 found that half the development land had been acquired by extra-legal means. The authorities uncovered over a million cases of illegal land acquisition in the six years up to 2005.

Are the above cases the tip of the iceberg? If so, it reveals that the Communist Party’s authority is gradually being eroded by its own cadres.

– End –

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