Why China’s Anti-Corruption Campaign Has To Continue

Business, China, Economics

GiniCoefficient23Sept2014

By John Richardson

CHINA’s anti-corruption campaign is now more than two years old and continues to generate a great deal of criticism.

These criticisms include claims that it sometimes targets the wrong individuals – and that the campaign might end up being all about China’s senior leadership cementing their positions, rather than tackling the underlying issues.

But we think that the overall objectives  of the campaign add up.

Here are just some of the reasons why:

  • China has become an incredibly unequal society. As a result, a small rich elite has benefited the most from economic growth. This has suppressed consumption growth. Only by reducing this inequality can China successfully rebalance its economy away from investment and towards consumption.
  • A good measure is the Gini co-efficient (see the above slide, with the latest available, which is for 2012. A Gini coefficient of zero represents absolute equality, while one represents absolute inequality). China’s Gini co-efficient has steadily worsened since 1981, as the chart above indicates.
  • According to some analysts, societies that have a Gini coefficient of more than 0.40 are at increased risk of widespread social unrest. China was above 0.40 in 2012, which was the latest data available.
  • Government officials, including those who work for the state-owned enterprises (SOEs), haven’t wanted “to do the right things” because the temptations of making money on the side were just too great.
  • This encouraged poor management of the SOEs, leading to weak returns on capital employed.
  • The SOEs have also played a big role in degrading China’s environment, resulting in chronic air, soil and water pollution.
  • The anti-corruption campaign seems to therefore be linked to reforms of how SOE officials are paid and otherwise incentivised.
  • China’s overall objective with the SOEs appears to involve creating more of a meritocracy, where genuinely valuable talent rises to the top, rather than just the politically well connected.

People will, of course, quite rightly say that corruption has long been a problem in China – and that it is a problem in many other countries. They will add that despite corruption, China’s growth has still been terrific.

But corruption has become much worse since 2009, as Andrew Wedeman, professor of political science at Georgia State University, points out in an article for the September 2014 edition of the China Economic Quarterly.

He writes:  So the important question is whether Xi’s renewed anticorruption campaign will do enough to help keep economic growth on track [“Xi’ refers to Xi Jinping – China’s president). To answer this, we need first to understand the nature of corruption in China today.

One reason rampant corruption could coexist with sustained rapid economic growth in the 1990s and early 2000s was that much of it was not simply stealing or plunder: instead it involved a distribution of the windfall profits created by the transfer of state-owned assets to private hands.

Corruption was thus a side-effect of a broadly beneficial economic reform process.

In recent years, though, corruption has begun to look more and more like outright looting. One cause was the 2009 economic stimulus programme, which funnelled hundreds of billions of dollars into poorly supervised infrastructure projects, creating vast new opportunities for embezzlement.

The resurgent power of state-owned conglomerates created incentives for managers to skim off profits. The real estate boom spawned a class of developers who paid handsomely for land rights and access to capital.

And “princeling” entrepreneurs related to officials with regulatory power over booming sectors like energy and real estate could make quick fortunes by getting preferential access to deals. Very little of this activity qualified as grease needed to keep the economic engine humming, and the amounts involved were staggering.

What other choice does China therefore have? The anti-corruption campaign, surely, has to continue.

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