Costs of corruption outweigh benefits even in China

Chinese President Xi Jinping’s anti-corruption campaign, which has already brought down many high-ranking “tigers” in the government, has been widely touted as a key component of the deep structural reforms that China needs if it is to build a more sustainable, inclusive, and market-based economy. But worries abound that, in a country where government officials play a major role in promoting economic growth, rooting out corruption might undermine prosperity.

Some have cited the recent struggles of luxury hotels and restaurants (which, in China, are supported largely by government spending) as evidence that the anti-corruption campaign is discouraging growth-enhancing activity. But the decline is likely to be temporary, with new customers emerging after a period of adjustment.

A more credible concern is whether efforts to root out corruption weaken the incentive for government officials to promote growth. After all, high levels of growth translate into large rents that can, through corrupt practices, be distributed to the officials themselves, as well as to their friends and protégé. Eliminate such practices, the logic goes, and officials will be unable to reap large rewards from economic growth – and thus will be less motivated to encourage it.

But this argument is far from airtight. Among the most common forms of corruption is the “sale” of government positions – a practice that has little to do with growth, especially when it is conducted by high-ranking officers in the army, such as the Peoples’ Liberation Army generals who have been arrested during the campaign for trading promotions for bribes.

Another major concern is that, if businesses are no longer able to “grease the wheels” – that is, bribe officials to allow them to circumvent excessive regulations – their performance could suffer. And, indeed, even after 30 years of reform, China’s economy remains bound by red tape, which drags down productivity considerably.

But there are holes in this logic, too. Most important, for such bribery to boost economic growth in any significant or sustainable way, it would have to be conducted by a wide range of businesses – not just the wealthiest and best connected. That is not the case today; most Chinese officials who have been charged so far have taken bribes from a single businessman, thereby allowing his business to acquire a monopoly position.

So, while bribery in China may facilitate growth to some extent, it does not produce the kind of competitive business environment that supports long-term gains. Indeed, the reality is that corruption imposes a large, often random, tax on businesses, not least by discouraging officials from cutting red tape for all firms – a move that really would boost growth.

The conclusion is clear: the costs of corruption far outweigh the benefits – and not only in China. Since World War II, many countries have attempted the transition from low- to high-income status, but only 13 have succeeded – and all had relatively low levels of official corruption.

Given this, one might ask how China managed to achieve such impressive growth over the last 20 years, despite rampant corruption. The answer probably lies in its “selectocracy.” Unlike in a democracy, where citizens elect their government officials based on whatever criteria they choose, in China’s selectocracy, the Chinese Communist Party chooses officials for promotion based on their ability to advance the party’s main objectives – especially growth.

Of course, political connections and loyalty also factor into promotion decisions, especially at higher levels of government. But, as the US-based political scientist Pierre Landry and his colleagues have observed, economic growth is key, particularly among officials at the county and municipal levels, where much of the government’s growth-enhancing activities – such as infrastructure investment – take place.

Promotions provide officials with a strong positive incentive to boost growth. Consider Liu Zhijun, the former railway minister, who propelled China’s frenzy of high-speed rail construction. His yearning for professional achievement – and, especially, his desire to be promoted – motivated his significant contributions to China’s GDP growth.

But Liu also engaged in massive abuses of power – including accepting more than $10 million in bribes by the time he was arrested in 2011 – that resulted in significant economic losses for the state. His (suspended) death sentence should help to deter other officials from choosing the same path.

If corrupt officials can make such significant contributions to growth, imagine what law-abiding officials could do. All they need are strong incentives to be proactive. In this sense, China’s “selectocracy,” which promises promotions to the officials who prove most effective in promoting growth, could be the key to explaining the country’s impressive economic track record.

By Yao Yang- This article reproduced from Project Syndicate

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