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Why has China’s economy grown despite corruption? 

Published 11 April 2022 in Asian hub • 6 min read

The coexistence of high growth and corruption in China is not as exceptional as most people think, explains Yuen Yuen Ang, author of China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption. Its closest parallel is America in the late 19th century. The type of corruption that prevailed in both Gilded Ages spurred investment but also led to serious distortions and risks.  

 
 

 

In your book you explain – and provide a lot of evidence for – why China’s economy boomed despite serious corruption. How did that happen? 

The conventional wisdom tells us that there is a strong correlation between corruption and poverty. If you believe this, then naturally China appears puzzling. The Chinese president himself describes corruption as a “grave” and “shocking” problem and yet the economy has sustained a four-decade boom. This led some corruption experts to characterize China as a “gigantic outlier”. But is it, really?  

In fact, China’s paradox isn’t as exceptional as most people think. The conventional belief that all corrupt countries are poor is too simplistic. It doesn’t distinguish among types of corruption, and global indices of corruption fail to capture sophisticated, transactional forms of corruption that do exist in some rich countries – which I call access money.  

I unbundle corruption into four types: petty theft (for example, extortion), grand theft (embezzlement), speed money (petty bribes to bypass red tape), and access money (large rewards given to powerful officials not just for speed, but for access to lucrative privileges). While the first three types are directly growth-damaging, the fourth type can spur investment – even over-investment – and simultaneously produce distortions and risks.  

In China the structure of corruption evolved over decades toward the fourth type – access money – while the first three types were gradually brought under control. As the growth engines shifted away to investment and construction in the 2000s, the scale of access money exploded, and it also involved officials at higher ranks, who could give out super-valuable favors like cheap land and construction contracts.   

 

Why is there also less petty corruption in China than in other developing countries such as India? 

To be clear, there is still petty corruption in China. Relative to China, however, such corruption is even more prevalent in countries like Bangladesh and India. To correct the limitations and biases in conventional corruption indices, I piloted my own perceived corruption index – the Unbundled Corruption Index (UCI). In this index, instead of simplistically assigning a single corruption score to each country, I break down the score into four categories: petty theft, grand theft, speed money, access money.  

China and India make for an interesting comparison. The two countries have nearly identical aggregate levels of corruption, but once you unbundle the score, you find that speed money is the dominant mode of bribery in India, whereas in China, it is access money.  

Why the qualitative difference? First, state capacity building. From 1998 onward, the Chinese central government rolled out comprehensive administrative reforms to check embezzlement, misuse of public funds, and petty bribery. It’s boring, but it works.  

Second, China practiced a profit-sharing system, where the personal payoffs of political elites and rank-and-file bureaucrats are linked to their economic performance. In countries like India, bureaucrats often have little or no personal stake in collective outcomes.  

Third, regime type makes a difference too. In China’s developmental autocracy, powerful leaders can easily waive restrictions and open doors. By contrast, India’s fragmented democracy gives numerous authorities the power to block decisions but not to unilaterally take actions. In India, people pay bribes to override obstacles; in China, graft buys lucrative business deals. If the former is analogous to grease, then the latter is more like sludge. 

“Access money is the steroids of capitalism. Steroids are known as growth-enhancing drugs, but they come with serious side effects”

 

That’s an interesting model. Is that why you rarely hear foreign business people complain about corruption and can it also explain how MNCs can enter the market and function quite seamlessly without having to pay bribes? 

There are certainly some instances of corruption involving foreign businesses in China. But most corruption scandals involve private entrepreneurs. One reason is that there is a political hierarchy of companies within China (a point earlier made by political scientist Yasheng Huang), with state-owned companies at the top, followed by foreign companies, and private ones at the bottom. In order to win favors and compete, private entrepreneurs cultivate connections with government officials.  

On the whole, a key distinguishing feature of Chinese local governments is their fiercely pro-business attitude. They are driven to attract investments and build infrastructure even if they are corrupt. This is unlike the “grabbing hands” of predatory governments, where officials only extract from but do not help businesses. 

 

It all sounds rather successful. Aren’t there any downsides? 

I wouldn’t call it successful. Access money is the steroids of capitalism. Steroids are known as growth-enhancing drugs, but they come with serious side effects. It would be irrational to think of steroids as being “good for your health”! In an economy where government officials are enriched by access money, they will encourage investment and expansion in certain areas more than others – for example, real estate rather than manufacturing, and luxury mansions rather than affordable housing.   

This is why today we see China grappling with a real estate bubble and rising inequality. Evergrande, the second largest real estate developer, is on the brink of bankruptcy. Local governments have also accumulated massive debt during their building spree. If governments default, this could have broad spillover effects.  

Indeed, China’s political economy today is similar but not identical to the American Gilded Age more than 100 years ago. Beneath the dazzle of rapid economic growth, there was also corruption, inequality, and financial risks. That’s why my book is titled China’s Gilded Age. It’s not just a story about corruption, but more broadly, about the excesses of capitalism. I want to reflect on a particular stage of modernization that is, in Dickens’s words, “the best of times and the worst of times.”  

 

What about the future? Could Xi Jinping’s “common prosperity” campaign really help share wealth around the country more evenly?  

President Xi’s call for “common prosperity” encapsulates his mission to summon China out of the Gilded Age and deliver a “red” version of the US Progressive Era.  

Nobody would disagree with his goals of wanting to achieve common prosperity (which in global development, we call “inclusive growth”). The controversy surrounds the top-down methods he has used to achieve these goals. It is quite clear from the regulatory storm in the summer of 2021 that the government cannot simply order away the problems of capitalism. Capricious edicts will damage business confidence. Xi appeared willing to make course corrections, and in a speech that he delivered to bureaucrats in late 2021, he urged them to adopt a patient, flexible approach. I analyzed this in an essay in Foreign Affairs titled “Decoding Xi Jinping.” 

 

How should China’s experience prompt us to rethink the relationship between corruption and capitalism?  

We must recognize the first-world biases embedded in conventional concepts, metrics, and theories of corruption. As the economists Edward Glaeser and Claudia Goldin have noted: “To most Americans, corruption is something that happens to less fortunate people in poor nations.” This normative belief has led the conventional wisdom to deny the real history of capitalism.  

Contrary to popular beliefs, I argue, the rise of capitalism was not accompanied by the eradication of corruption, but rather by the evolution of the quality of corruption from thuggery and theft toward access money. Compared with countries that prospered earlier, China is still a relative newcomer on this evolutionary path. 

Confronting this fraught history is necessary for “fixing capitalism” in Western democracies today. A big reason why we see rising inequality is that the super-wealthy can exercise disproportionate influence in politics through legal means such as lobbying and campaign finance. The US Progressive Era involved putting limits on such activities to actualize a meaningfully accountable government.  

China’s experience should not be perceived as exotic and unique to China. It should force a rethinking of the problems of capitalism – and how to fix them – everywhere.   

Expert

Yuen Yuen Ang

Professor of Politics, University of Michigan

As well as China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (Cambridge University Press, 2021), she is the author of How China Escaped the Poverty Trap (Cornell University Press, 2016). 

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