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The three-headed beast

26 November 2012 By John Foley

Corruption is to China what bad weather is to Britain – a source of constant complaint, and a fact of life. But the rise of the Internet and slowing growth mean China can’t continue along its old path. Incoming President Xi Jinping and his chief graft-buster Wang Qishan have a chance to slay the beast. Enforcement, education and the market will be their most effective weapons.

Thirty years ago, when China opened to foreign trade, corruption seemed a benign cost of development. Paying bribes helped private companies to get access to resources, credit and licences that the planned economy denied them. Former leader Deng Xiaoping argued that if you open a door, it’s only to be expected that flies get in. In fact, there is no such thing as benign corruption. What makes sense for one company is an economic drag when everyone is doing it.

China today hasn’t got one corruption problem – it has three. There’s bribery, which has grown endemic and sophisticated. The case of Han Guizhi, a senior official who sold party posts during her tenure in Harbin in 2005 for cash, now seems almost quaint compared with harder-to-trace modern tricks like putting a patron’s child through college in the United States, or depositing money in a London bank account.

Then there are official excesses. Those are as old as China itself – the last Shang emperor supposedly treated his cronies to a lake of wine and forest of roast meat until his empire collapsed, three millennia ago. In the modern day, new rules have targeted the “three public wastes” – trips, banquets and fast cars. But enforcement is lax and official salaries low. Black Audis and Rolexes have become symbols of a broken system.

The third – and possibly most corrosive – problem is nepotism. When laws and rules are unclear, connections command a high price. Consider the large sums amassed by the family of outgoing Premier Wen Jiabao, as documented by the New York Times. Wen’s family bought into insurer Ping An after the company was saved from a breakup by a government waiver, the Times said on Nov. 26.

Attracting investment opportunities isn’t illegal, and there’s no suggestion that Wen personally enriched himself. But concrete examples of top-level nepotism threaten the ruling party’s fiction that while local officials are on the take, those at the centre are basically clean.

China doesn’t want for anti-corruption rules: if an official’s assets seem out of whack with their official income, it’s grounds for an investigation. But most aren’t enforced: “House Uncle”, a Guangzhou official, was accused by netizens of acquiring 22 homes on an annual salary of less than $2,000. And though corrupt officials can be sentenced to death, they rarely are. When Ping An faced a breakup, its chairman set about buying golf clubs for high-ranking officials, the New York Times reported.

Tackling corruption is thus a question of adjusting costs and benefits. It’s important to increase the likelihood of getting caught for illegal acts, or exposed for unethical ones. At a high level, that means beefing up the party’s disciplinary commission, which currently needs top-level approval to pursue high-up officials. Greater press freedom is also a vital tool for exposing misdeeds.

At a lower level, the key is to enforce and educate. Neighbouring Hong Kong set an example when paralysed by corruption in the 1970s. It took a zero-tolerance approach to bribery, vowing to investigate every case no matter how small. A limited amnesty on prior offences below a certain size helped to create a whistleblower culture, and transformed Hong Kong into one of south-east Asia’s cleanest business environments.

Reducing the rewards of corruption is harder, however. China’s state-dominated economy still offers significant opportunity for shady deals. Local governments have discretion over allocating new land, granting licences, and staffing. Prices of resources like energy, water and credit are far below the market value for preferred users. China has a phrase that sums up the problem: “don’t look to the market, look to the mayor”.

The biggest challenge is that bending the rules in the Middle Kingdom has become culturally embedded. That leaves a Catch-22 situation. Ignore corruption and rule-bending and the ruling party could fall; deal with it too enthusiastically, and the same thing happens.

In the meantime, the financial impact rises. China wastes around 3 percent of GDP a year through graft and capital flight, according to U.S. scholar Minxin Pei – equivalent to around $250 billion in 2012. As the country outgrows its low-cost manufacturing past, it’s a sum that could be much better spent. The bribery, banquets and backslapping have got to go.


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