The 18th National Congress of the Chinese Communist Party.

The 18th National Congress of the Chinese Communist Party.

After coming to power in 2012, Chinese President Xi Jinping began an anticorruption campaign that has been unparalleled in recent Chinese history. Xi has achieved a number of successes, cracking down on officials ranging from local government employees to generals in the People’s Liberation Army. In light of the widespread frustration around high levels of perceived corruption in the bureaucracy, Xi’s campaign is just one of many factors contributing to the president’s image as a strongman who won’t tolerate undisciplined party members.

But in trying to discipline the CCP bureaucracy, Xi may misunderstand the economic implications of corruption in China. Considering his country’s slowing economy, the president appears to be fighting corruption in the belief that it is a hindrance to economic growth. This view, the so-called “sanding-the-wheels” theory, has long been the mainstream in academia. Nevertheless, a notable faction of economists and political scientists have alternatively suggested that corruption can, at least in some cases, work in favor of economic growth. They make the case that corruption actually “greases the wheels” of economic growth by allowing people to circumvent the impediments imposed by an ineffectual or otherwise obstructive bureaucracy.

As China’s political and economic landscapes have changed over recent decades, the nature and impacts of corruption in the country have evolved as well. Although corruption may have had net positive effects some thirty years ago, Xi’s present-day campaign may be the right economic move after all.

Corruption in 1980’s China

In a 2007 paper, University of Kansas School of Business professor Douglas Houston developed an economic model that supports the “greasing-the-wheels” hypothesis. Houston found 12 countries in which the expansionary effects of corruption on an economy outweighed other harmful, restrictive effects. Speaking with the HPR, Houston explained that these states were very impoverished and had little social and political capital, low trust levels, and weak legal frameworks. He posited that in countries with such institutions, “it is very improbable that one can make any kind of economic transaction work unless one can get to the resources one needs, whatever they may be. The way to do that in such economies is what many might deem as corrupt behavior, because in some instances [entrepreneurs] must find a way through a nasty, corrupt bureaucracy that might otherwise foil one’s efforts.” In short, Houston believes that for entrepreneurs in such countries, “desperate times call for desperate measures.”

China was not among the 12 countries in which Houston found that corruption had net positive effects on economic development. But the China of the late 1970s and 1980s was much more similar to those countries than the China of 2007. Indeed, Yan Sun, a City University of New York political science professor and author of Corruption and Market in Contemporary China, suggested in an interview with the HPR that corruption bore fruit for Chinese economic growth in the 1980s. This expansion primarily occurred at the local level in township and village enterprises, commonly referred to as TVEs, which are market-based ventures collectively owned by rural agricultural communities. Sun argued that TVEs utilized bribery because they were largely left out of the government’s central economic planning. Even when Deng Xiaoping led the CCP to legalize the enterprises in 1984 as part of his economic reform regime, TVEs remained excluded from both market access and the allocation of state resources. As a result, bribery served as one of the only means by which TVEs were able to procure capital.

“Profiteering activities, which were also prevalent in the 1980s, could also be considered somewhat positive,” Sun further explained. “Under central planning, businesses could only sell or buy according to the plan. [But] because of the incentives of bribery, businesses were selling outside the market and outside the plan. In that way they expanded the range of economic activities [in the country].” Essentially, corruption opened the doors for non-state actors on both the supply and demand sides, thereby helping spur rapid growth and diversify the Chinese economy.

Sanding the Wheels

While corruption in China has significantly diminished in recent years, the country’s politics are still far from clean. In 2014 the watchdog agency Transparency International ranked China the 100th most corrupt state out of 175 on its Corruption Perceptions Index. Two decades ago, by contrast, the group labeled China the second worst in the world. But despite this substantial improvement, corruption remains integral to various sectors of the Chinese economy and a cultural norm that most Chinese see as an opportunity to get ahead.

CCP Secretary General Xi Xinping pictured in 2013.

CCP Secretary General Xi Xinping pictured in 2013.

However, the question remains whether corruption in China brings the same benefits today as it once did. Sun argued emphatically that it does not. She noted the rise of what she calls “princeling capitalism,” in which the heads of state-owned companies, many of whom are the children of high-level government officials, utilize their unique status and connections to reinforce their monopolies. There are many examples of this phenomenon, but Sun gave the example of former president Hu Jintao’s son, Hu Haifeng, whose company, Nuctech, was awarded a contract to install airport security implements throughout the country. Although these connections might have helped overcome bureaucratic red tape, Sun believes that this and similar cases are ultimately harmful. As the government awards deals to the children of its elite, it prevents other, less connected businesses from competing. These nepotistic forms of corruption entrench income inequality, thereby producing results that are antithetical to those of the 1980s, when corruption served to diversify economic activities and allow new players to enter the market.

The Good and the Bad

As the natures of both corruption and the economy in China have changed, the benefits of skirting regulations have likely evaporated. Xi’s anticorruption efforts, therefore, may be a boon after all. His campaign seems in congruity with the “sandingthe-wheels” theory held by the vast majority of political scientists and economists. Indeed, even those academics who recognize that corruption may have potential benefits are hesitant to defend such a proposition absolutely. Houston was quick to clarify the implications of his article noting, “I never meant that the conclusion … is that you should encourage, as a policy, corruption in very poor countries.”

Houston went on to say that “the title of the paper [“Can Corruption Ever Improve an Economy?”] is provocative and immediately can create a knockdown response that ‘this is just ridiculous.’ [But] if you get at the things underneath, it seems more reasonable.” The story of corruption in China certainly affirms that corruption could improve an economy, if only in situations where economic actors have little legal access to resources. Professors Jac Heckleman of Wake Forest University and Benjamin Powell of Suffolk University perhaps summarized it best in their 2008 working paper: “corruption is growth enhancing when economic freedom is most limited.”

There is no doubt corruption has myriad harmful effects. But the widespread view that corruption is always bad is likely inaccurate. The Chinese case, which has featured different flavors of corruption over time, demonstrates that both the “sanding-the-wheels” and “greasing-the-wheels” propositions have their merits. This validation of both theories brings more complexity to assessments of corruption and the already gray area of government interactions with the private economy.

Image source: Wikimedia / 天下文章一大抄 / Gabhksw

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