Reform of China's economic system has been anything but a linear transformation. There have been many twists, turns and U-turns on the road toward a market-like economy. Throughout, the overriding desire for the Communist Party to maintain undiminished power makes it all seem faint-hearted or wrong-headed. However, the worst flaws in the execution of the reforms are the result of crass selfishness of individual cadres than a mere failure of philosophy.
Two of the most significant policy initiatives are the multi-billion yuan commitment to encourage investors to "go west" and reforms of the financial sector. Unfortunately, both of these proposals are likely to fail. On the one hand, Beijing will eventually feel threatened by the expansion in the autonomy of the private sector that is necessary for them to be successful. On the other hand, corrupt officials will fight rear-guard actions to ensure they can skim off funds or take bribes.
`Go west'
China's western provinces could benefit greatly from expanded participation of the private sector and an efficient domestic capital market would boost the economy. These areas contain 70 percent of China's landmass and 30 percent of its population. They are also the poorest areas in China even though many are blessed with ample natural resources including hydropower, large deposits of gas, oil and minerals.
The uneven development of the 10 western provinces, autonomous regions and the municipality of Chongqing can be explained by mismanagement, over-harvesting of natural resources, and inadequate transportation. They remain impoverished despite the fact that some have hydropower, large deposits of gas, oil and minerals.
Unfortunately, greedy cadres in the less developed areas in the west want to insure they have access to the sort of state-funded largesse that has been enjoyed by their counterparts in the richer maritime provinces. Highly publicized campaigns and show-trials ending in executions have apparently done little to halt the inexorable rot of corruption among China's bureaucrats.
Indeed, China's Auditor-General, Li Jinhua, admitted to the National People's Congress Standing Committee that government departments continue to misappropriate public funds. The most egregious offences by cadres involved the diversion of funds from special budgets.
For example, officials in the water resources departments had pilfered about 10 percent of the funds for resettlement of families displaced by the building of water facilities, poverty-relief projects and the construction of new dams and reservoirs. Instead, funds earmarked for the Ministry of Water Resources were diverted to unauthorized projects, including stock market speculation. Another significant finding was that officials of the Industrial and Commercial Bank and the Construction Bank had put over 10 billion yuan (US$1.2 billion) into off-budget lines.
This logic suggests that China's public officials cannot resolve the tough economic problems because their personal self-interest overwhelms their commitment to social goals. Beijing is struggling with finding ways to induce officials to cooperate with policies that can make the rest of the community better off. Apparently there is hope that sufficiently strong incentives and sanctions will inspire proper behavior. The propensity to stage widely publicized executions of a few corrupt officials suggests this is the preferred approach. But this is not at all surprising. After all, social engineering is a hallmark of communist ideology and old habits, if not old cadres, are slow to die.
The present generation of Chinese rulers seems unable to recognize that unnecessarily extensive regulations and inappropriate rules provide irresistible incentives for corruption. It is apparently too much to ask that they mend their own ways and reduce their power over the lives of their citizens. Invocations of protectionism or refusal to reduce the role of the state and Party in the economy, they undermine the community benefits that arise from win-win outcomes associated with exchange in a free market setting.
Corruption feeds on controls. The old socialist system spawned an inefficient regulatory regime that raised transaction costs and wedded a corrupt bureaucratic system with a newly-emergent political system that thrives on rent seeking and guanxi. Wealth-consuming public officials either stifle wealth-creating entrepreneurs or connive with them to bilk the public.
Salaries of government employees are not commensurate with their status. The relative deprivation of material rewards experienced by civil servants has tempted them to seek ways to transfer public money to their own pockets.
Consequently, the ongoing political culture of institutionalized bribery provides incentives for greedy bureaucrats to interact with a new generation of entrepreneurs willing to offer bribes. Businesses receiving public protections or privileges that expand their market power distort and disrupt markets because of their inefficiency.
For example, high-ranking officials in Hebei province are being investigated for their role in a corruption case related to bribery, tax evasion and money laundering that involved billions of yuan. Similar multi-billion yuan probes for graft and smuggling incidents are underway in Xiamen in Fujian province and in Shantou in Guangdong province.
Legacy of central planning
In the Xiamen case, about 50 billion yuan was smuggled by corrupt officials. Implicated in this case is Major-General Ji Shengde, former director of the PLA's Intelligence Department. He alone is believed to have acquired more than 100 million yuan through illegal means.
Meanwhile, discriminatory policies continue to exist at all levels despite repeated commitments to promote and protect the private sector. The simple fact is that remnants of a central planning mentality are anathema to the development of a market economy.
Meanwhile, continued central and local government support for bankrupt state enterprises means that private firms have difficulty raising funds either through the banking system or share markets. As it is, Beijing interferences have resulted in "capital markets with Chinese characteristics" that deliver a small fraction of their capacity to fuel long-term economic growth.
Assessment of the interference by China's bureaucrats in impeding economic progress inspires a post-Marxian class analysis. A modern form of class struggle is alive and well in China. Instead of landlords pitted against peasants, a parasitic class of bureaucrats and party apparatchiks operate within an incentive structure that is thwarting a productive class of potential entrepreneurs and workers.
This modern ruling class uses the tools of the state (violence and coercion) to maintain power and it enriches itself as well as its supporters at the expense of others. The productive class relies upon market processes (cooperation and exchange) to improve the lot of others while enriching themselves. Dealing with bureaucrats in China and elsewhere can be a Procrustean nightmare where people are fitted to the rules rather than the reverse.China must replace its culture of corruption with one of accountability before it can become stable and prosperous to continue on its road to modernization. As was the case with China's imperial past, the central authorities are sapping the potential of the Chinese people and holding back progress that would make the masses better off. Marx would readily see through this charade and condemn Beijing's power elite for their disingenuous claim to legitimacy as the vanguard of the proletariat.
Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century. His E-mail address is: CLINGLE@eConoLytics.com.
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