Once, when a bureaucrat from Beijing arrived in Sichuan Province, his subordinates advised him on the local standards in bribe-taking. He was told how often he could be "ill" and how often he could accept invitations to ribbon cuttings, both occasions at which he could accept "gifts" without fearing charges of corruption, that is, so long as he remained politically loyal and did a good job. Such "gifts" could equal US$10,000 a year, far more than his salary.
Much of the success of China's reforms of the last two decades can be attributed to a transformation of local government officials from unproductive political entrepreneurs to productive, if corrupt, economic ones. Tolerance of corruption, together with the threat of punishment and selective enforcement of this threat, appears to have induced local officials to support reform and, equally important, served the political objectives of the Communist Party as well.
Why is corruption economically useful? Although China's authorities realize the efficiency of markets, they cling to a dual-track economy, in which markets co-exist with the old guanxi (
connections.
Under guanxi, managers sustain good relations with government officials, as well as managers of other firms, in order to ensure the provision of resources (electricity, water, etc) and delivery of raw materials and intermediate goods. The ability of local officials to keep the guanxi system working has been critical to the functioning of China's dual-track economy, and corruption is the oil that greases the wheels.
Why do local bureaucrats become economic entrepreneurs? The incomes of local officials are nominally fixed and are unrelated to performance. Moreover, local officials are forbidden from moonlighting as formal employees in private firms. So firms which need official aid compensate officials for their assistance through bribery and nepotistic favors, and bureaucrats expropriate public property or public funds for their personal benefit.
The intriguing thing about Chinese corruption is that it functions in similar ways to the compensation methods used in the West. Corruption mitigates the problem of measuring and monitoring economic performance because local officials who make the biggest contribution to the economy get to extract the biggest bribes or nepotistic favors, or appropriate the most valuable public property. The compensation that local officials obtain corruptly, particularly through bribery, is paid directly by local firms, which have the best information as to how effectively local officials perform. The best -- ie, those who are corrupt in ways that generate wealth -- are rewarded more highly than the others.
Why favor corruption instead of Western methods of compensation? Political considerations matter here. Communist propaganda continues to portray every cadre as a selfless "public ser-vant." An explicit system of material incentives and rewards for local officials, most of whom are Party members, would openly expose this propaganda as a sham.
In addition, although many government officials and Communist Party members play im-portant economic roles in China's dual-track economy, many others, including many connected with the Peoples' Liberation Army, are responsible only for political, military and other non-commercial activities. An explicit system of material incentives and rewards would undermine the political and social standing of those party members cut off from economic activities. Because the Communist Party, like any political organization, is a fragile coalition, jealousy and discontent, especially in the army, could destabilize and under-mine its cohesiveness.
Besides maintaining unity, using corruption as compensation creates a situation where party higher-ups always "have something" on everyone below them, enhancing their control. Because high officials could charge lower officials with corruption at any time, low level bureaucrats offer steadfast political support to those above them. In this way, corruption serves the party's goal of maintaining cohesiveness and absolute power. Indeed, until recently, few corrupt officials were ever punished.
The threat of punishment, together with selective enforcement of this threat, was enough to maintain control. Of course, local officials need to be deterred from being excessively corrupt, that is, from grabbing for themselves more than they are entitled to. But it is usually only when the political allegiance of local officials becomes suspect that
crackdowns on corruption begin.
It was at the 15th Congress of the Chinese Communist Party, in September 1997, that the central authorities recognized that the dual-track system, despite its effectiveness in the early stages of reform, was becoming an obstacle to development. As the mar-ket's role expands, guanxi and the associated role of local officials as economic entrepreneurs is becoming less important. Corruption is losing its role as a way to reward economic performance and is, instead, increasingly seen as outright theft.
So anti-corruption campaigns are becoming serious, with many government officials imprisoned, even executed, for corruption. Moreover, the media is now officially encouraged to monitor local officials and uncover corruption.
Recent events in the Philippines and Indonesia have demon-strated to China's leaders that corruption can retard economic progress and incite instability. Singapore, where an autocratic regime employs well-paid, efficient and incorruptible bureaucrats, provides an attractive model for China to emulate. In seeking to model themselves on Singapore, however, China's leaders risk losing a key lever in their machinery of control. How long can they maintain power if they no longer "have something" to hold as a sword over every-one's head?
Chengze Simon Fan is an assistant professor of economics at Hong Kong's Lingnan University and Herschel Grossman is a professor of economics at Brown University.
Copyright: Project Syndicate, June 2001
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