The Truth About Chinese Corruption

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The Truth About Chinese Corruption

What are the economic causes and what are the prospects for real reform?

The Truth About Chinese Corruption
Credit: China Stringer Network, Reuters

A generation from now, historians may look back at Chinese President Xi Jinping’s tenure as marking a break with the past; rather than defining a “new normal” for the Chinese economy, the time will be remembered for XI’s crusade against corruption. Thus far, China’s leadership appears to be more aggressive in dealing with corruption than in addressing economic reforms. The current corruption campaign has the strong support of the public, but its immediate economic implications are more mixed. Officials appear hesitant to make decisions and conspicuous consumption has declined – all of which have accentuated the current economic slowdown.

Some observers are optimistic that these efforts will eventually succeed in curbing rent-seeking activities and establishing a more efficient and sustainable growth path. Others see these actions through a political lens, with the objective of eliminating more egregious behaviors and restoring the sense of fairness that is needed to preserve the legitimacy of the Communist Party. These concerns raise questions about the role that corruption has played in shaping China’s development path over the past several decades.

Corruption in China

The discourse on corruption in China is wide ranging and often confusing. How does one define corruption? What is its impact on the economy? And what are sustainable remedies?

To simplify these issues, let’s define economic corruption as the use of public office for personal gain. Thus illegal or immoral acts solely between private individuals may be bad but they are not examples of corruption. Corruption, under this definition, is therefore clearly more pervasive when the state plays a major role in the economy through ownership or control of resources that are needed to facilitate profitable activities. This is the case in China, but corruption can be just as pernicious in other economies where the state’s interventions are less prominent. Despite a steady increase in the role of the private sector in China, corruption has been increasing.

In discussing the economic implications of corruption, three issues stand out. First, most of the academic studies based on cross country experiences have shown that corruption retards economic growth. But China is the outlier. This raises an obvious question of whether China managed to grow so rapidly because of or in spite of rampant corruption. Second, the more a country develops, the more likely it is that corruption diminishes – but in China’s case the opposite seems to be happening. And third, many studies conclude that by contributing to an economic decline, corruption leads to political instability. This in turn has encouraged speculation that corruption in China might eventually lead to political liberalization.