Chengze Simon Fan and Herschel I. Grossman

Corruption is losing its role in China

In China, corruption has provided incentives for local government officials in much the same way as methods of compensation in Western economies. There are increasingly good reasons, however, for the Chinese authorities to reconsider their policy of tolerating corruption.

The following story illustrates typical day-to-day corruption in China. When a junior bureaucrat from Beijing arrived at his new assignment as a middle-level local official in Sichuan province, his subordinates instructed him in the local norms for taking bribes. They told him how often he could become “ill” and how often he could accept invitations to ribbon cuttings, both occasions at which he could accept “gifts,” without worrying about being accused of corruption as long as he was politically loyal. Also, he learned that these gifts could amount to as much as $10,000 a year, which would be much more than his nominal salary.

As this story illustrates, economic reform in China suffers from an epidemic of corruption among local government officials. Surprisingly, it seems that tolerance of corruption together with the threat of punishment has been an effective way to induce local officials to promote economic reform. Equally importantly, this system has served the political objectives of the Communist Party.

There are increasingly good reasons, however, for the Chinese authorities to reconsider their policy of tolerating corruption.

Although the Chinese have allowed a market economy to develop, they have retained the existing “personal connections” system of guanxi, in which relationships with local officials are critical to ensuring the delivery of raw materials and resources, like electricity and water. The result has been a dual-track economy, shuang gui zhi.

Corruption has provided incentives for local officials in much the same way as methods of compensation in Western economies. Local officials who make the largest economic contribution extract the largest bribes or nepotistic favors.

But why use corruption rather than Western methods of compensation? Important political considerations work against an incentive system. For starters, the propaganda of Chinese communism has always claimed that every party member is a selfless “public servant of the people.” An explicit system of rewards for local officials would be inconsistent with this propaganda.

In addition, rewards for economic performance would undermine the standing of those officials and party members who are not involved in economic activities. Jealousy and discontent, especially in the army, would threaten to destabilize and to undermine the party’s cohesiveness.

Perhaps most importantly, using corruption as a method of compensation has enhanced control over local officials by creating a situation in which the party hierarchy always “has something” on everyone. As an astute student of China observes: “Because an individual knows that higher-ups could charge him with corruption at any time, lack of exposure is, in effect, special treatment for which the official gratefully exchanges his political support.”

Despite all of the bemoaning of corruption, until recently few corrupt officials have been punished. Nevertheless, the threat of punishment, used selectively, has been important. Party authorities have had to deter local officials from being excessively corrupt – appropriating more than the amount to which they are entitled. Also, party authorities must show that they are willing to punish any corrupt official whose political allegiance has become suspect.

The 15^th Congress of the Chinese Communist Party in September 1997, where the party announced its intention to privatize most state-owned enterprises, was a milestone in China’s accelerated transition to a market economy. The authorities have apparently recognized that the dual-track system, however effective in the early stages of reform, is now an obstacle to China’s further development. Many observers of the Chinese economy are calling the existing dual-track system the “First Reform,” with the ongoing and forthcoming large-scale privatization and the prospective entry into the World Trade Organization being the “Second Reform.”

As the market economy expands, guanxi and the role of local officials as economic entrepreneurs will become less important. In this transition, corruption is losing its role as a reward for economic performance and is becoming instead simply a way of stealing. As a result, in the last few years the anti-corruption campaign has become more serious. Recently, more government officials have been imprisoned or even executed for corruption.

The experience of Philippines and Indonesia surely has suggested to Jiang Zemin, Zhu Rongji and other Chinese leaders that in the Second Reform, corruption threatens to become a barrier to further economic progress. In contrast, Singapore, where an autocratic regime employs well-paid, efficient, and incorruptible bureaucrats, surely provides an attractive model for Chinese leaders. But, can a large country like China emulate a small city-state like Singapore? Most interestingly, could the Chinese Communist Party retain its monopoly on power in a system in which the hierarchy does not always “have something” on everyone?