“Corruption Threatens China’s Future”

Just read Dr. Pei Minxin’s article titled Corruption Threatens China’s Future published under the auspices of the Carnegie Endowment for International Peace. This comprehensive piece details the extent, causes, impact of corruption in China.

A. Extent of corruption in China

People generally know that corruption is rampant in China, but how bad is it? How much does it cost China? According to Dr. Pei’s research, China’s National Audit Agency measured misused governmental funds at a whopping $170 billion (yes, that is in U.S. dollars) from 1996-2005, representing about 8% of “on-budge spending for this period.” While acknowledging the difficulty of accurately measuring the exact dollar amount of corruption, Dr. Pei did come up with a unique formula to arrive at a concrete number.

To estimate roughly the direct cost of corruption, we can suppose that 10 percent ofgovernment spending, contracts, and transactions is used as kickbacks and bribes or is simply stolen. The Chinese government’s procurement budget in 2005 was 300 billion yuan. The so-called administrative spending in China’s official budget, about 20 percent of the total spending (470 billion yuan in 2003), is another juicy target. If 10 percent of the procurement budget and administrative spending is stolen or misused, this would amount to
0.65 percent of gross domestic product. Sales of land user rights by the government generated 580 billion yuan in 2005. Bribes to local officials could easily amount to 10–2percent of the revenues generated (58–116 billion yuan, or 0.5–1.0 percent of GDP). In 2003, the state-owned entities spent 2.1 trillion yuan (19 percent of the GDP) on fixed asset investments. If 10 percent were stolen, it would cost nearly 2 percent of GDP. Based on the conservative assumption that 10 percent of the land lease revenues, fixed investments, and government spending is stolen or misused, the direct costs of corruption in 2003
could be 3 percent of GDP, roughly $86 billion, an amount exceeding the government’s entire spending on education in 2006.

Based on his formula, the direct cost of corruption in 2003 to $86 billion, an amount larger than the Chinese government’s entire spending on education in 2006 (emphasis added). [all I can think of is how many schools could have been established, how many teachers in rural China could have been paid on time, and how many first rate research labs could be set up…]

B. Causes of corruption in China

Dr. Pei then pointed out some characteristics of corruption in China, to wit:

Corruption in China is concentrated in the sectors with extensive state involvement: infrastructural projects, sale of land user rights, real estate, government procurement, financial services, and heavily regulated industries. The absence of a competitive political process and a free press in China makes these high risk sectors even more susceptible to fraud, theft, kickbacks, and bribery.

In other words, wherever governmental control and interferences are the greatest, corruption is likely to result for lack of political transparency. In addition, a “partially reformed economy”, lack of enforcement of laws and regulations, and the government’s inability to adopt an effective regime to combat corruption all contribute to the festering of corruption in China. His analysis on the root causes of corruption in China is the most incisive that I have read so far.

C. Impact of corruption

Dr. Pei argues that corruption affects China and the rest of the world. Domestically, corruption fuels “China’s rapid increase in socioeconomic inequality and the public’s perception of social injustice.” And, “the indirect costs of corruption—efficiency losses; waste; and damage to the environment, public health, education, the credibility of key public institutions, and the morale of the civil service—are incalculable.” Additionally, the impact of corruption in China could spill over to foreign countries, and it could be manifested in areas such as global public health and the environment. Therefore, Dr. Pei calls on western countries to assist China in fighting corruption, specifically by urging it to reform its political and legal systems, sharing information with China, and increasing legal cooperation with China.

A great read if you care about this stuff, but I doubt that the situation will improve unless fundamental changes occur within China’s political system. Until then, anything done by the Chinese government is like a band-aid on a malignant tumor. For example, the newly established cabinet level—The National Corruption Prevention Bureau of P.R. China.