I wrote recently about how Corruption threatens the Chinese economy. Jonathan Fenby, former editor of the South China Morning Post, argues strongly for more government action on the matter in this week's issue of The Business: The stench of state corruption threatens China’s global march:
Statistics in China have a way of boggling the imagination, not least when it comes to the less savoury side of the world’s fastest-growing big economy. So it may seem par for the course to learn that no fewer than 30,000 officials have been found guilty of corruption in the past three years and that 32 government ministries and departments have been affected.
A study by the Organisation for Economic Co-operation and Development (OECD) estimates that last year corruption ran to 683bn yuan ($84.4bn) – the equivalent of up to 5% of gross domestic product (GDP). As much as $50bn is thought to have been syphoned out of the country and thousands of officials have fled abroad with their gains.
A separate report by China’s Audit Office at the end of last month uncovered cases of ministries maintaining secret bank accounts and evading audits. The National Sports Administration was found to have held on to sponsorship funds and the Ministry of Education to have levied charges for non-existent services.
Corruption may be seen as an inevitable side effect of 9% annual growth in a country where corruption has always flourished and wealth creation takes precedence over the law. ...But, two decades on from the launch of the economic revolution by Deng Xiaoping, this is a phenomenon which China needs to take seriously if it is to maintain its growth with stability.
Last year, grassroots discontent – often fuelled by official corruption – produced 74,000 local protests involving more than 3.7m people. By one estimate, China sees up to 400 protests each day in towns and villages across the country. The problem is so big that special police assault squads have been formed to break up threatening demonstrations – more than 1,800 police are reported to have been injured dealing with the demonstrations and 23 killed.
Many of the protests involve land and taxes. But corruption, in one form or other, is usually present. The OCED report concludes that the scale of sleaze by officials and the political elite is such that it is “seen as seriously endangering the stability of the government and the Communist Party”.
The leadership round President Hu Jintao is certainly worried:
How to deal with rampant corruption is a recurrent theme at top Communist Party gatherings, such as the party plenum now meeting in Beijing to start drawing up the next five-year plan. At the end of September, China’s Supreme Court felt the need to remind lower courts that they were not part of the bureaucracy and should not act as enforcers for local authorities or involve themselves in business. “Some local leaders in villages and towns see the people’s courts as subordinate units and take the liberty to order judicial officials around,” the Supreme Court Vice-President, Huang Songyou, said.
Corruption is both a deterrent to foreign investment, and to political stability:
The problem has two faces – and the Hu administration has to get to grips with both. Corruption and lack of legal safeguards acts as a deterrent to foreign investment. While western and Japanese companies still feel the need to establish themselves in the world’s most heavily populated nation, there are growing signs that the practical difficulties of operating in China are dimming their enthusiasm.
The executives concerned never want to be quoted on the record, if only for fear of upsetting the Chinese. But a number have told me they believe China has to clean up its act if it is to maintain its attractiveness as a place to do business.
...Internally, corruption is recognised by the country’s leaders as a potential danger to Communist rule. ...Popular anger is fanned by conspicuous consumption by corrupt local officials in a country where the wealth divide is growing steadily between the booming coastal regions and the 800m living in the interior.
While there is a clear need for Chinese authorities to clean up the country’s act, however, Fenby is not overly optimistic about their chances:
The underlying danger is that, for all the fine words from top-level meetings in the capital, the government will find its hands tied by its own fears of ceding power. Despite recurrent anti-corruption campaigns, the conviction rate of officials is, at most, 20% and, according to mainland experts, only 6.6% of those found guilty are punished under the criminal code.
This is an issue that will not go away.
China is a fertile ground for corruption...
• A large, developing economy: China is a large country with a population of 1.3 billion. Its economy has growth by about 9 per cent per annum since 1978. The Chinese economy is open with low tariff barriers, a developing infrastructure and a large workforce.
• A state-led economy: Half of the productive capacity of China is in state hands. State Owned Enterprises dominate the economy, and represent the majority of potential and actual overseas inward investors. All of China’s 11 Fortune 500 companies are state-owned.
• A diverse nation with many sub-economies: China is often mistakenly considered as a uniform entity, whilst in reality it is very diverse – there are 31 provinces and 656 cities. There are seven major dialects, and 80 languages spoken. Economic development and growth has not been uniform. Economic and investment opportunities are not uniform. Despite the appearance of a strongly centralised state, decision-making is highly decentralised.
The power of central government is much exaggerated. Local governments have much power. And they are largely corrupt. Its an enormous challenge to address corruption in China. Impossible I would say. What is often forgotten is that in existing and former Communist states, corruption was endemic too. Trying to reverse 50 years or more of this in China, Russia, Ex-Soviet Union is proving extremly hard/ nigh impossible. The whole system of public administration, armed forces, law and order etc has corruption as an integral part.
Posted by: Angry Economist | Thursday, October 13, 2005 at 11:11 AM