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Does corruption limit China’s growth, or pose a threat to its existence?

11 December 2012

Summary:   Critics of China often cite its high level of corruption as a limiting factor to its growth, or a possible cause of its fall — or even disintegration. Like so many of American’s views about China, it’s false. Probably a way to diffuse awareness that a powerful rival has emerged on the world stage.  Here we compare China’s corruption to that of America’s past — and present.

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Contents

  1. China today
  2. Late 19th century America
  3. America today
  4. For More Information

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(1)  China today

Is Corruption in China ‘Out of Control’? A Comparison with the U.S. In Historical Perspective“, Carlos D. Ramirez (Assoc Prof Economics, George Mason U), 4 December 2012 — Abstract:

This paper compares corruption in China over the past 15 years with corruption in the U.S. between 1870 and 1930, periods that are roughly comparable in terms of real income per capita. Corruption indicators for both countries and both periods are constructed by tracking corruption news in prominent U.S. newspapers. Several robustness checks confirm the reliability of the constructed corruption indices for both countries.

The comparison indicates that corruption in the U.S. in the early 1870s — when it’s real income per capita was about $2,800 (in 2005 dollars) — was 7 to 9 times higher than China’s corruption level in 1996, the corresponding year in terms of income per capita. By the time the U.S. reached $7,500 in 1928 — approximately equivalent to China’s real income per capita in 2009 — corruption was similar in both countries.

The findings imply that, while corruption in China is an issue that merits attention, it is not at alarmingly high levels, compared to the U.S. historical experience. The paper further argues that the corruption and development experiences of both the U.S. and China appear to be consistent with the “life-cycle” theory of corruption — rising at the early stages of development, and declining after modernization has taken place. Hence, as China continues its development process, corruption will likely decline.

(2)  Late 19th century America

This unflattering comparison of modern China with late 19th century America should not surprise us. Post-civil war America (especially the Gilded Age) America was a horror show. Public and private force was used to suppress Blacks, American Indians, Asians, and workers (see the Wikipedia entry, also for the 1892 Homestead Strike and the 1894 Pullman Strike).  When the cavalry arrived, it was often to help the bad guys (or one of the groups of dueling bad guys, as in the Lincoln County War).

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Justice was for sale. Public resources were for sale through bribery. The government itself was for sale (or lease).  Only national amnesia makes this era a subject of pride instead of shame.

This makes our recovery during the next century even more impressive (1900 – 1970; the Progressive Era, the New Deal, and the post-WWII renaissance) .  We can learn must from our history; our amnesia is among our greatest weaknesses.

(3)  America today

We have come far from the Gilded Age.  But not as far as we think.

  • We boast about our fine accounting standards.  But the bursting of the tech and real estate bubbles resulting in massive restatements of corporate books — revealing massive fakery of the books of our leading corporations.
  • The real estate bubble resulted from massive fraud in the mortgage underwriting process (especially loan origination and property appraisals) and, later, the foreclosure process (eg, fraud and perjury by mortgage servicers in the documentation).
  • The defense industry is little but a on-going process of systematic corruption.
  • How Corruption Is Strangling U.S. Innovation“, Harvard Business Review, James Allworth, 7 December 2012
  • The FBI’s Abscam sting (1978-1980) proved how easily — and cheaply — Federal officials could be bribed. We can only imagine how many could be caught from a large-scale and sustained anti-corruption program.

Perhaps the key difference between China and the US is that we’ve normalized corruption.  Our representatives in Washington take money through their campaigns (easily converted to personal use) and spouses (rumors abound of the lavish incomes of Washington spouses from what are in effect bribes).  Mid-level and senior officials ride the revolving door from public service to personal profit.

This is yet another aspect of the odd parallels between China and America.  Two very different societies, yet in some ways oddly similar.  For more about this see Are America and China secret twins? The similarities are striking, but we don’t see them.

We must do better if we seek to remain a global hegemon in the 21st century.  The competition will be strong.

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(4)  For More Information about China

  1. China – the mysterious other pole of the world economy,
    22 July 2009
  2. Another big step for China on its road to becoming a great power, 27 July 2009
  3. Will China collapse?, 5 August 2009
  4. A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
  5. Update about China: a new center of the world, 13 December 2009
  6. China moves to the center of the world. America moves to the edge, 6 January 2010
  7. Why China will again rise to the top, and their most important advantage over America, 11 November 2010
  8. Will China become a superpower?, 9 September 2011
  9. What China Wants Us to Understand about China’s Rise, 12 March 2012
  10. Are America and China secret twins? The similarities are striking, but we don’t see them., 17 May 2012

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9 Comments leave one →
  1. underscore33 permalink
    11 December 2012 2:24 pm

    so… i have a big problem with the methodology of this paper. namely, is this measure of corruption (by looking at prominent US newspapers for stories over periods) at all meaningful? i am not sure section 3.2 answers that at all–are hits of articles with mentions of corruption count as important a measure as individual instances reported on (which might generate several articles)? are national dailies really that much more important than local papers (which might record more local corruption)? what defines major versus minor corruption and how under reported is the latter in Western China? the nature of disclosure of political scandals too, is different. stories about Chinese corruption, such as Bo Xilai, come to light precisely because he was angling for a seat on the politburo and purged because he was a threat to ruling cadres. stories of routine corruption, such of that of Wen Jiabao, are far less reported (granted, my methodology here is probably less sound). The TI methodology for corruption is taken at face value even though it is a survey of perceptions–thus, if reporting about corruption increases, it would follow that people might see their country as more corrupt, when in fact the explanatory factor might be greater enforcement. might that be why it correlates with increased reporting of corruption (or vice versa)? that’s not really addressed at all by 3.2.

    as for the larger picture of does public sector corruption matter when it comes to economic growth, sure, i’m willing to concede that it is not the retardant that many Western researchers believe stands in the way of economic development. that said, reasons why it may have declined in this country have to do with law enforcement, institutionalization & regulation (lobbying, for example, or closed procurement bidding), and culture change. politicians like Wilson sought to end machine politics. does this have anything to do with increased economic growth and social stability? and, implicitly, isn’t that something more important to measure before we start making conclusions about the impact of corruption and China’s future?

    incidentally, the paper and it’s conclusions are all about public sector corruption–private sector is not addressed. when we look at our current state of affairs, it is misleading to focus on the chicanery that takes place in corporate accounting. some of it, surely, comes with tacit approval of regulators and there’s a case to be made that regulatory bodies have been captured by private interests. but generally what’s reported is instances when they are caught and prosecuted, which i posit means that the public sector is less corrupt and law enforcement works. thus, i am not sure it’s really analogous to what the paper is investigating.

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  2. 11 December 2012 5:16 pm

    The FBI’s Abscam sting (1978-1980) proved how easily — and cheaply — Federal officials could be bribed.

    “What ABSCAM taught us was not that congressmen can be bought, but that you and I can afford one.” – Robert T Morris Sr.

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  3. 11 December 2012 5:17 pm

    “Critics of China often cite its high level of corruption as a limiting factor to its growth, or a possible cause of its fall — or even disintegration. Like so many of American’s views about China, it’s false. ”

    Wait…. you’re saying that the corruption doesn’t limit China’s growth? That seems counter-intuitive. I thought it was universal that growth in the long term was better served by less corruption.

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  4. 11 December 2012 6:13 pm

    I see corruption – either long-term (where it’s built into the very rules of the society as is the case in the US) or short-term (where it’s a target of opportunity in emerging technology) as an inevitable “friction” in the history of successful societies. What seems to happen is that, as a society succeeds, there is surplus, and parasitic humans position themselves to take advantage of that surplus – usually in the form of interest, a “handling fee” or a turnpike charge. “Turnpike charges” appear in the form of “my cousin is highly placed in the department of Big Round Things and unless you grease his palm, he’ll make sure your proposal winds up at the bottom of the stack.”* We in the US tend to think of “corruption” as the obvious “I help you win that bid and you give me some stock options” kind of thing but if you step back and look at it, you’ll realize that the various paths of corrupting a society work the same way. Is there really a difference between the revolving door at the top of The Pentagon/Defense Contractor/Congress/Lobbyist industry, and more “obvious” corruption? I don’t think so – and that truth is manifest when you see the occasional congressman with a freezer full of thousand dollar bills; the one of many that was stupid enough to get caught.

    From my perspective, any society that has an upper class is going to be corrupt; the methods that wealth and power use to sequester themselves and protect their gains are the mechanisms of corruption. Because, ultimately, corruption requires that certain people be treated preferentially – which is the same process/root cause as class division. That is a threat to any and every society and always will serve to limit their growth because of the inefficiency that occurs at the boundary layer between the bootlickers who want to get more privileged** and the bottom tier ci-devant who still see their position as vulnerable and who are trying to close the very same door that they just squeaked through. I see the current American focus on ‘illegal immigration’ as an example of this; the wanna-be middle class trying to slam the door in the face of the wanna-be working class while the rich (who own the door) are laughing their asses off.

    Every great society becomes corrupt. Rome, France, Britain, The US, China – hell, the Middle Kingdom, with its vast bureaucracy and wealth, practically raised corruption to an art-form. The corruption is like barnacles on the hull of a ship – inefficiency that can build up subtly over a very long time until finally the ship is no longer capable of sailing well. So far, no society has been designed with built-in attempts to defeat corruption***. And it shows. Certain political systems are inherently more prone to corruption and I’d guess, offhandedly, that it’s directly proportional to the amount of public interaction in the process. I.e.: democracies will tend to become more corrupt, faster, than monarchies because monarchies are already a centralized system of corruption (e.g.: kleptocracy) by their very nature. The more hands the money passes through, the less winds up finally making it into the cash register.

    (* These are particularly popular in China right now, apparently, because it’s impossible to verify if the threat was enacted, whereas positive corruption is easier to prove)
    (** In any corrupted society the only way to increase your privilege is to wheedle it from those above you, who have done whatever they can to lock others out of those privileges in order to secure them)
    (*** My constitutional anarchy system attempts to reduce the impact of corruption by having a built-in sunset clause for virtually every aspect of government, requiring periodic review and re-approval. The idea here is to raise the cost of corruption – you’d have to bribe new people all over again every couple years and the chance someone would blow the whistle increases)

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    • guest permalink
      11 December 2012 6:47 pm

      “reduce the impact of corruption by having a built-in sunset clause for virtually every aspect of government”

      All right, then the incentive to those who assume any position in a governmental organization is to intensify corruption to the maximum and squeeze as much as they can as rapidly as possible before they have to leave.

      Besides, your assumption that corruption is caused by or fundamentally associated with government is myopic: corporations are a major culprit — as the repeated, giant stock exchange and financial scams for at least the past decade demonstrate.

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    • 11 December 2012 8:26 pm

      Good point. (sigh)

      Corporations’ corruption seems to often establish a deadly embrace with government. The attempts to regulate corporations have been corrupted by the corporations corrupting the regulators. It seems that way, not the other way around.

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    • 14 December 2012 3:56 am

      One could make a good argument (following Paul Krugman) that the current “debt ceiling ‘crisis'” when the economy still needs job creation not austerity is a great example of how the corruption of the American political class by corporate interests is limiting the country’s ability to grow/recover its economy.

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  5. Thomas More permalink
    12 December 2012 5:23 am

    To follow up on Marcus Ranum’s point — isn’t it interesting that no academic economists are asking the much more important question: “Does corruption limit America’s growth, or pose a threat to its existence?”

    Silly question. After all, as everyone knows, American corporations or government officials are never corrupt — they simply reap the rewards of a highly networked “winner takes all” society. But when little yellow or brown people do the same thing, then, of course, that’s bribe-taking and filthy corruption and must be stamped out by any means at our disposal.

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